Chapter 13 Postpetition Debt

Generally, bankruptcy reorganization is applicable to prepetition debt, which refers to liabilities arising prior to the bankruptcy filing, not postpetition debt. Chapter 13 bankruptcy provides an exception to that rule. A Chapter 13 debtor, under certain circumstances, can include postpetitition consumer debt and taxes in the Chapter 13 plan. This requires trustee approval and that the postpetition creditor files a claim.

Consequences

There are important consequences for a creditor who files a postpetition claim. If the creditor does not file a postpetition claim, the debt will not be subject to discharge upon plan completion and the creditor can collect from the debtor upon completion of the Chapter 13 case. If the creditor files the postpetition claim, it may be subject to discharge if approved and not paid in full upon completion of the plan. To accomplish this, a creditor may be required to file a postpetition claim as a condition necessary to secure the trustee’s approval to incur the debt.

Type of Postpetition Debt Allowed

Postpetititon Chapter 13 debt subject to a plan can be either tax debt or consumer debt. Other debt would be considered basic postpetition debt not subject to the bankruptcy court.

Any entity holding a claim for taxes that become payable to a governmental unit while the case is pending has the option of filing a postpetition proof of claim in the debtor’s bankruptcy case. The timing depends on the type of tax. For income taxes, they becomes “payable” when due. Other types of taxes, such as sales tax, property tax, and state income taxes, may have different due dates. Local schedules and tax laws would determine the proper dates.

The second type of allowed postpetition claim is consumer debt necessary for the debtor’s performance of the plan. The Bankruptcy Code defines “consumer debt” as debt incurred by an individual primarily for a personal, family, or household purpose. The debt could be for medical expenses, vehicle repairs, or the purchase of a vehicle necessary to get the debtor to and from work. Regardless of the specifics, it must be incurred to assist the debtor in the performance of the plan.

Creditor Caution

An creditor extending credit to a chapter 13 debtor and files a postpetition claim must proceed with caution to ensure that any resulting claim will be allowed and paid in full under the plan. First, although incurred postpetition, the Bankruptcy Code is clear that such a claim will be treated as if the claim had arisen prepetition. Second, the Bankruptcy Code imposes a requirement that the debt must be for “property or services necessary for the debtor’s performance under the plan.” Third, trustee approval is required. As such, if the creditor knew, or should have known that approval of the debt by the trustee was practicable and was not obtained then the Bankruptcy Code makes clear that the postpetition claim will be disallowed.

Because the trustee is familiar with the debtor’s financial circumstances, the trustee in the best position to determine whether the debtor needs to borrow postpetition and is financially able to handle the new debt and plan payment. The payment postpetition debt under a plan affects other prepetition unsecured creditors who rely on the debtor’s postpetition income to fund the plan. The allowance of such debt may result in a smaller distribution under the plan since the postpetition claim may be paid prior to or contemperanious with other unsecured claim holders. This results in a difficult situation for the other unsecured creditors: does the debtor’s infusion of cash help or hurt? On the one hand, an infusion of cash can help the debtor repay under the plan. On the other hand, an infusion of cash means another creditor to split the plan’s proceeds. Thus, when dealing with a chapter 13 debtor seeking postpetition debt, a creditor should insist on trustee approval prior to the extension of credit.

Extraordinary Circumstances

With that said, the approval of the trustee is not always practicable in every circumstance. A debtor may have an urgent medical situation that cannot wait for the trustee’s approval. A creditor may be inexperienced and not realize approval of the chapter 13 trustee is necessary and lend the money to the debtor. Though the debtor should attempt to get the chapter 13 trustee’s approval for the debt, under such circumstances the Bankruptcy Code may allow the added debt due to extraordinary circumstances.
If you are in serious debt and earning a wage, Chapter 13 bankruptcy may be able to provide you with a fresh start. Chapter 13 is flexible but also complex. Turn to Melanie Tavare, a reliable and seasoned bankruptcy attorney in the Bay Area. Contact her today.