January 13, 2022

Debtors May Object to Claims and Modify Confirmed Chapter 13 Plans

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It is important to understand that even after confirmation of a Chapter 13 plan, the debtor’s ability to object to previously filed proofs of claim and modify the plan exists indefinitely.  Oftentimes, plans are confirmed quickly—and even the most carefully drafted plan can’t address all of life’s variables.

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In November of 2021, the U.S. Bankruptcy Court for the Eastern District of Wisconsin (Court) issued its ruling in the case of In re Terrell, highlighting circumstances in which the debtors maintained the ability to object to a proof of claim even after confirmation of a Chapter 13 plan.¹ Per the confirmed plan, debtors were obligated to make payments to the trustee for five years. The payments were supposed to approximately equal debtors’ net disposable income over the five-year period. The payments comprised the funding for the plan’s distributions to creditors holding: (1) secured claims, (2) priority tax and child support debt, and (3) administrative expenses. One such creditor was the Wisconsin Department of Children and Families (Department), which was originally named as a creditor in a section of the plan listing domestic support obligations (DSO) owed to governmental entities entitled to priority under 11 U.S.C. §507(a)(1)(B). 

After confirmation of the Chapter 13 plan, debtors petitioned the court to modify it—decreasing the five-year term to three years. The Department objected to the modification, emphasizing that it was entitled to 11 U.S.C. §507(a)(1)(B). However, in September of 2021, the Court determined that the assertion of priority was not supported by the 2019 Seventh Circuit holding, In re Dennis,²  wherein overpayment of public assistance was determined to be outside of the parameters of a DSO. At that point, although the trustee withdrew her objection to the plan modification, the Department continued to object and maintain that it was entitled to priority and that “the debtors cannot shorten the plan term because they do not propose to pay the Departments’ claim in full.”³

Ultimately, the court sided with the debtors, stating that the debtors are authorized “to modify the plan to shorten the plan term and reduce plan payments, and neither the Bankruptcy Code nor the preclusive effect of the confirmed plan prevents them from doing so.”⁴

We want our clients to know that a Chapter 13 confirmation does not eliminate potential objections and adjustments during the five-year plan and that we remain vigilant over our clients’ changing situations allowing equitable plan execution. Contact our team at (410) 497-5947 or fill out our brief contact form to schedule a confidential consultation to discuss your situation.

Footnotes

  1. No. 18-28674-gmh, 2021 BL 423465 (Bankr. E.D. Wis. Nov. 3, 2021).
  2. 927 F.3d 1015 (7th Cir. 2019).
  3. In re Terrell at 1.
  4. Id. at 2.
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