Bankruptcy: Amended Proof of Claim for Added Interest and Fees Disallowed in a Chapter 13 Case

     In the case of In re: Michael K. Hedrick, the United States Bankruptcy Court at Alexandria held that in a Chapter 13 case, converted from a Chapter 7 case, a credit union may not amend its proof of claim for a debt from an auto loan.

     Prior to filing for bankruptcy, the debtors defaulted on their auto loan.  The vehicle was repossessed and sold.  There was a deficiency balance due after the sale.  The credit union filed a proof of claim for the joint deficiency claim of $5,693.00, as of the date the case was filed.  Three months after the confirmation of the debtor’s modified chapter 13 plan, the credit union filed an amended proof of claim, increasing its claim by $2,430.00, for post petition interest and attorney’s fees.

     The credit union argued that a Chapter 13 plan must pay unsecured creditors at least as much as under the Chapter 13 plan as they would receive if the case were under Chapter 7.  If this case had been under Chapter 7, joint unsecured creditors - but not individual unsecured creditors - would be paid in full together with interest because of the equity in the jointly owned house.  The credit union used the contract rate of interest.  It treated its post petition attorney’s fees the same as post petition interest.

     The Court noted that even though the proper allowed claim is the original claim filed by the credit union, the credit union may actually be paid more than its allowed claim if the estate is a solvent estate.  The Court “shall confirm” a Chapter 13 plan if all of the requirements of Bankruptcy Code Section 1325(a) are satisfied.  One requirement is that the distribution to unsecured creditors must be at least as much as they would have received had the case been a Chapter 7 case.  The provision for interest on allowed claims in solvent estates is a part of this calculation.

     The Court ruled, though, that the interest rate is the federal judgment rate, not the contract rate or the applicable state rate.  There is no similar statutory provision for attorney’s fees or for other reasonable fees, costs or charges provided for under the agreement which the claim arose.

     The Court ruled that the credit union’s first proof of claim is the proper proof of claim.  The allowed claim of an unsecured creditor in a solvent estate is the same as in an insolvent estate.  It is determined as of the date of the filing of the petition and does not include post petition interest, attorney’s fees costs or other contractual charges.

     The Court ruled that if the terms of a confirmed Chapter 13 plan include post petition interest, the Chapter 13 trustee will pay that interest as provided in the plan.  If the plan does not provide for post petition interest, the trustee may not pay post petition interest.  In this case, the confirmed plan contains no such provision.

     The Court concluded that the proper construction of the Chapter 13 plan was that the allowed joint unsecured claims would be paid 100 percent of the amount allowed joint unsecured claim without interest.  Had the matter been brought to the Court’s attention at the confirmation hearing, the plan would not have been confirmed without a provision for payment of post petition interest on allowed joint unsecured claims.  It was not and the plan was confirmed.

     The lesson of Hedrick: read Chapter 13 plans very carefully and object timely.