The Seventh Circuit Court of Appeals recently released a ruling that has cleared up inconsistencies in bankruptcy court rulings across the country when secured creditors file a notice of claim in a debtor’s Chapter 13 bankruptcy after the deadline set by the court for filing a notice of claim. In the case of Pijian v. Lisle Savings Bank, the Seventh Circuit decided that all creditors, secured or unsecured, must file their notice of claim before the deadline.
This ruling reversed the lower court’s ruling that the deadline only applied to unsecured creditors, which had allowed the bank to add a $330,000 debt to the debtor’s Chapter 13 plan, even though they filed the notice of claim over three months after the 90-day deadline set by the court.
The Lower Court’s Ruling
Edward Pijan filed for bankruptcy in Illinois in June 2013. After he filed, the bankruptcy court sent a letter to all of his creditors, notifying them that he had filed for bankruptcy and of a deadline to file their own notice of claim to be included in the proceedings and receive some of the monthly payments as part of the bankruptcy plan. Lisle Bank did not file their notice of claim until three months after the deadline, but it was accepted by the court. The bank successfully argued that as a secured creditor (the bank owned a mortgage on a piece of commercial property that the debtor owned), they were not subject to the deadline because they had an interest in a piece of real property. Many bankruptcy courts across the country have come to the same conclusion, although other courts have ruled that the deadline applies to all creditors.
The Seventh Circuit Court of Appeals Clears up the Confusion
The debtor appealed the ruling to the Seventh Circuit Court of Appeals, and the Court disagreed with the bankruptcy court’s ruling. The Court ruled that the deadline was intended to create consistency and move the bankruptcy along as quickly as possible. If secured creditors are allowed to submit claims after the deadline, the bankruptcy plan will need to be modified to fit their debt into the calculations. The Court ruled that such an interpretation would frustrate the purpose of the deadline. The Court of Appeals went on to note that creditors with debts secured by property remain able to foreclose on the property if they don’t participate in a debtor’s Chapter 13 bankruptcy, so their interest is not being unjustifiably ignored. This ruling helps bankruptcy debtors to know which debts will be included in the plan after a certain date, and it prevents the process from being delayed unnecessarily.
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Recently Released Analysis from Federal Reserve Research and Statistics Group Demonstrates The Pitfalls of Not Filing for Bankruptcy, Kentucky Bankruptcy Lawyers Blog, published March 14, 2015.