Cite as: Keith M. Lundin, Lundin On Chapter 13, § 89.6, at ¶ ____, LundinOnChapter13.com (last visited __________).
Contingent or unliquidated debts are not counted for purposes of eligibility1 but must be scheduled in Official Bankruptcy Form 6 and provided for in the plan if the debtor is to accomplish discharge upon completion of payments.2
A contingent or unliquidated claim may be quite large if, for example, the debtor was involved in an automobile accident and the potential liability to an injured victim is great. Removing the contingency or liquidating the claim typically requires other litigation, the passage of time or the occurrence of events outside the bankruptcy case. Separate classification for treatment different than other creditors is a sensible technique for managing contingent or unliquidated claims in the Chapter 13 plan.
That a creditor’s claim is contingent has been accepted as a fair basis for discrimination.3 Though there are few reported decisions on the subject, unliquidated claims could be separately classified for much the same reason as contingent claims—that other litigation in the bankruptcy case or in another forum is necessary to allow the claim.
The holder of a contingent or unliquidated claim might argue against unfavorable separate classification on the theory that 11 U.S.C. § 502(c) provides a statutory framework for the estimation of any contingent or unliquidated claim. Allowance of such claims is simply a matter of timing—it may take longer to determine the allowed amount of a contingent or unliquidated claim, but once known, it would be unfair to discriminate against the holder merely because the claim was once contingent or unliquidated.
Discrimination in this context means delaying payment of a contingent or unliquidated claim until allowance can be finally determined. But delay will not always be fair. For example, in In re Weiss,4 the debtor litigated the dischargeability of taxes, lost in the bankruptcy court and appealed. During the appeal, the debtor filed a Chapter 13 plan that separately classified the nondischargeable tax claims for payment “contingent on the outcome of the appeals.” The bankruptcy court held that deferring payment of the claims on appeal was discrimination and the possibility of success on the appeal did not constitute a reasonable basis for the separate class.
Applying the four-part test,5 one court rejected separate classification of a contingent claim for less favorable treatment when the only basis offered was that the debt was contingent.6 The court observed, “Contingency may be a reasonable basis for delayed payment or payment only after certain events occur, but, without further evidence, it is not a reasonable basis for total disallowance of a claim.”7 This is a sensible outcome. When the liquidation of a claim will require time-consuming litigation, separate classification to delay commencement of payments may be a fair discrimination for purposes of § 1322(b)(1). Using separate classification to preclude a contingent or unliquidated claim holder from participating in distributions under the plan is disallowance of the claim without the ordinary protections of the claims allowance process and would be unfair discrimination.
2 See § 349.1 [ Claims Not Provided for by the Plan or Disallowed under § 502 ] § 158.5 Claims Not Provided for by the Plan or Disallowed under § 502.
3 In re Brown, 7 B.R. 529 (Bankr. S.D.N.Y. 1980) (Debtors could deal with their contingent, “undetermined” car collision claims in a separate classification.).
4 251 B.R. 453 (Bankr. E.D. Pa. 2000).
5 See § 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1 Power to Classify Unsecured Claims: Tests for Unfair Discrimination.
6 In re Riggel, 142 B.R. 199 (Bankr. S.D. Ohio 1992).
7 142 B.R. at 205. Accord In re Burnip, 229 B.R. 904, 906 (Bankr. S.D. Ohio 1999) (Unfair discrimination to unfavorably classify unliquidated, disputed and contingent claims for repayment of commissions received by the debtor for soliciting investments in a partnership. “While separate classification of partnership or other contingent and unliquidated debt may be allowable, discriminatory treatment is not necessarily a reasonable result of that separate classification. . . . [T]he unliquidated and contingent nature of claims, while possibly providing a reasonable basis for delay in payments, or payments subject to the satisfaction of a condition precedent, do not provide a reasonable basis for discriminatory treatment. . . . Mr. Burnip’s liability as a partner of Cornerstone would be analogous to having co-obligors (i.e., the other partners) for the relevant obligation. This factor would support the contingent nature of the partnership claims, but in the event of default by the partnership, the remaining claim would be entitled to receive identical treatment as proposed for other unsecured creditors. Section 1322(b)(1) does not allow for less favorable treatment of co-signed claims, although more favorable treatment may be permissible.”).