The Problem with Late Claims in Chapter 13

The Problem with Late Claims in Chapter 13

Journal Issue: 
Column Name: 
Journal Article: 
The failure of a chapter 13 debtor to notify a creditor in time to file a proof of claim creates a myriad of problems for the debtor and the creditor alike. The debtor's failure to give timely notice will likely result in the creditor retaining its claim after entry of the discharge.2 In turn, the late-notified creditor who files an untimely proof of claim will be precluded from participating in the bankruptcy proceeding and will not receive distributions from the chapter 13 trustee. In short, both lose.

Recent cases have addressed the issue of whether a bankruptcy court may consider a late-filed proof of claim from a late-notified creditor. Courts being what they are, the decisions on this point have been anything but consistent. Thus, two schools of thought have emerged: In the view of the majority, a bankruptcy court cannot accept a late-filed claim from a late-notified creditor, period. The minority disagree, and cite notions of fundamental fairness and equity for the proposition that a bankruptcy court may entertain a late-filed proof of claim under these circumstances. This article examines the two views and argues in favor of the minority.

The Majority Rule

The majority rule holds that bankruptcy courts lack authority to consider late-filed proofs of claim under any circumstances. Its adherents contend that bankruptcy courts have no authority under either the Bankruptcy Code or Federal Rules of Bankruptcy Procedure (FRBP) to extend the deadline for filing a proof of claim in a chapter 13 case.

Support for this position is based on a literal reading of the law. A proof of claim may be filed upon the commencement of a bankruptcy proceeding.3 The deadline for filing a proof of claim in a chapter 13 proceeding is 90 days after the date of the order for relief.4 Although a bankruptcy court may extend many deadlines, a literal interpretation of the Rules preclude it from accepting untimely proofs of claim.5 This is a departure from the general rule that permits an act to be done out of time upon a showing of excusable neglect.6 Read together, Rules 3002(c) and 9006(b) establish an immutable deadline for filing proofs of claim in chapter 13 proceedings.7 Courts adhering to the majority view subscribe to the belief that by failing to include a provision under which late-notified creditors could file claims out of time, Congress "...had in mind the purpose of chapter 13 and its framework—to allow debtors to commence repayment as soon as possible of some or all of their debts."8

Clearly, this approach has the potential for inequity—a point not lost on at least one majority-view court. In the case of In re Brogden,9 one of the few to address the fundamental fairness issue, the court balanced the disallowance rule in §502(b)(9) against "at least six remedies, almost all of which offer substantial advantages...over participation in plan payments." The alternative remedies identified by the court are (1) relief from the automatic stay, (2) dismissal for cause, (3) conversion to chapter 7, (4) relief from the confirmation order, (5) revocation of confirmation and (6) exception to discharge. The court concluded that the availability of these remedies temper the harsh impact of the disallowance rule, thereby preventing it from offending traditional notions of fundamental fairness.

The Minority View

Courts that adhere to the minority view have a less rigid adherence to the literal language of the Bankruptcy Code and Rules while focusing on the equitable nature of bankruptcy. Perhaps the most cogent discussion of the minority view is contained in the case of Internal Revenue Service v. Hildebrand III Trustee, 245 B.R. 287 (M.D. Tenn. 1999), appeal dismissed for lack of jurisdiction, 248 F.3d 484 (6th Cir. 2001). In that case, the bankruptcy court disallowed claims in three unrelated chapter 13 cases because they were filed after the §502(b)(9) claim deadline. In overruling a prior reported decision of the bankruptcy court,10 the district court held that "[t]o deem the claims barred under this circumstance would be fundamentally unfair. It would reward debtors who failed to fulfill the statutory requirements of listing all creditors and relieve the court system of its obligation to ensure that appropriate notice is provided."11

Argument for Allowing Late Claims

The majority view's straightforward application of the statutes and rules results in late-notified creditors receiving fundamentally unfair treatment in an equitable proceeding.

It is well-settled that creditors are entitled to appropriate notice. Bankruptcy Code §342 requires that all claim-holders be given notice of the order of relief. Depriving a creditor of the right to participate in a chapter 13 proceeding is a deprivation of enormous magnitude. The bankruptcy court's acceptance of a proof of claim permits a creditor to receive several valuable benefits, and to exercise a battery of very important rights. For instance, under §§1322 and 1325, priority creditors are entitled to full payment of their claims, and secured creditors are entitled to receive an amount equal to the value of their claims as of the effective date of the plan. All creditors are entitled to object to the confirmation of a plan on several different bases, including lack of feasibility, the failure to file in good faith, and the failure to meet the "best interests of creditors" or the "disposable income" tests (§§1324, 1325). Creditors also have the right to request modification of a confirmed plan (§1329) and to object to entry of a discharge (§1328). Additionally, and perhaps most important, the right to receive uncoerced payments today from a debtor with the income and inclination to make such payments is far more valuable than the opportunity to attempt to wrest payments from that debtor tomorrow.

None of the alternative remedies set forth in the Brodgen decision restore these lost rights to a late-notified creditor whose proof of claim has not been accepted, nor do they provide an alternative remedy of equal value. Simply stated, being allowed to forcibly collect a debt from a debtor with limited assets is simply incomparable to being paid without having to resort to enforced collection.

The doctrine of equitable tolling also provides bankruptcy courts with the authority to accept late-filed proofs of claim from late-notified debtors. Under the doctrine of equitable tolling, a court may make narrow exceptions to a limitations period when equity so requires.12 All that need be shown is that by the exercise of reasonable diligence, the party who seeks the extension of time could not have discovered essential information bearing on the claim.13

In Young v. United States, ____ U.S. ____, 122 S.Ct. 1036, 152 L.Ed.2d 79 (March 4, 2002), the Supreme Court recently applied the doctrine of equitable tolling to the three-year look-back provisions utilized in determining priority status and dischargeability of federal tax claims. In applying the tolling doctrine, the unanimous court noted that "it is hornbook law that limitations periods are customarily subject to equitable tolling...unless tolling would be inconsistent with the text of the relevant statute." Thus, "Congress must be presumed to draft limitations periods in light of this background principle."14

It is clear that Congress has not expressed any intention to deny the application of equitable tolling to the claims filing process in bankruptcy. Indeed, the existence of §105, as well as the bankruptcy system as a whole, reveals Congress's intent that it be an equitable process. Moreover, equitable tolling is entirely consistent with §501. Indeed, its application is but a slight modification of FRBP 3002(c)(1), which permits the enlargement of the claims filing deadline as long as the request is made prior to the filing deadline. These considerations lend weight to the conclusion that the otherwise harsh impact of the claims filing deadline is tempered by the doctrine of equitable tolling, as recently espoused by the Supreme Court in the Young decision.

Implementing the equitable tolling approach to the issue of late-filed claims involves a relatively simple case-by-case analysis. Courts should consider the size and nature of the claim, as well as the stage of the proceeding in deciding whether to permit its allowance. Courts are free to deny the application of equitable tolling when, in light of all of the other factors then known to it, acceptance of the claim would undermine the rest of the proceeding. For example, it is appropriate to deny equitable tolling when the case is only a few months from completion and the claim cannot be appropriately treated within the remainder of the plan. Under such a scenario, it is much more appropriate to deny the creditor the right to participate in the proceeding and allow it to retain its non-discharged debt. Alternatively, if the proceeding is in its infancy, and the proposed claim can be adequately treated during the remainder of the plan, then fundamental notions of equity and the principles underlying the bankruptcy system auger in favor of permitting the claim to be filed and accepted.

Under the majority view, late-notified creditors are unquestionably denied the right to payment on untimely proofs of claim through no fault of their own. Further, the remedies to which they are relegated are insufficient to the task of making them whole or something close thereto. Traditional notions of fundamental fairness and the doctrine of equitable tolling provide bankruptcy courts with the authority and flexibility to make appropriate exceptions to this otherwise harsh rule. In light of the Supreme Court's decision in Young, it appears that the minority view cases had it right all along.


1 The views expressed in this article do not necessarily reflect the views of the Department of Justice or the United States of America. Portions of this article were drawn from briefs of the United States filed in federal courts. Return to article

2 It is widely held that the discharge of a claim without reasonable notice is violative of the Fifth Amendment. See Reliable Elec. Co. v. Olson Constr. Co., 726 F.2d 620, 623 (10th Cir. 1984); In re Avery, 134 B.R. 447, 448 (Bankr. N.D. Ga. 1991). In chapter 13, courts have held that a claim cannot be considered to have been "provided for by the plan" if a creditor does not receive proper notice of the proceedings. See United States v. Hairopolous (In re Hairopolous), 118 F.3d 1240 (8th Cir. 1997); In re Cash, 51 B.R. 927, 929 (Bankr. N.D. Ala. 1985). Return to article

3 11 U.S.C. §501. Return to article

4 F.R.P.B. 3002(c). Return to article

5 Compare Rule 9006(b)(3), F.R.B.P. with In re Miranda, 269 B.R. 737, 740 (Bankr. S.D. Texas 2001). Return to article

6 See F.R.B.P. 9006(b)(1); In re Nyeste, 273 B.R. 148 (Bankr. S.D. Ohio 2001). Return to article

7 Of course, an enlargement of the time within which to file a proof of claim may be granted if the request is made before the filing deadline. F.R.B.P. 9006(b). Return to article

8 In re Bennett, 278 B.R. 764, 766 (Bankr. M.D. Tenn. 2001). Return to article

9 274 B.R. 287, 293 (Bankr. M.D. Tenn. 2001). Return to article

10 In re McQueen, 228 B.R. 408 (Bankr. M.D. Tenn. 1998). Return to article

11 245 B.R. at 291. See, also, In re Smith, 217 B.R. 567 (Bankr. E.D. Ark. 1998). Return to article

12 Holmberg v. Armbrecht, 327 U.S. 392, 397 (1946). Return to article

13 In re United Insurance Management Inc., 14 F.3d 1380, 1386 (9th Cir. 1994). Return to article

14 Young, 122 S.Ct. at 1040 (citations omitted). Return to article

Journal Date: 
Sunday, September 1, 2002