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Special Class of Creditors Disallowed in Chapter 13 Bankruptcy Case

Posted By admin || 15-Jul-2009

In the Chapter 13 bankruptcy case of two Texas debtors, the bankruptcy court dismissed the debtors' repayment plan because it made special provisions for a "special class" of creditors. These special class creditors would receive their payments in full at the expense of the other creditors.

The bankruptcy case said:

"The debtors' plan is a sixty-month plan with Hancock and HSB designated as "Special Class Creditors" and thus classified separately from other unsecured creditors. The debtors' payments under the plan to the trustee are $624 per month. From this sum, the trustee makes monthly distributions to Hancock and HSB, to certain secured creditors of the debtors, and to the IRS and the Texas Workforce Commission (which are classified as "Priority Creditors"). Hancock's claim is in the amount of $1,400; HSB's claim is in the sum of $5,292.11; the monthly payments to Hancock and HSB are $23.33 and $88.20, respectively. In addition to the trustee distributions, the plan provides for the debtors' direct payments (i.e., payments that are made by the debtors and not by the chapter 13 trustee) on their home mortgage with Countrywide Home Loans on a claim in the amount of $130,274.83, and to the Potter and Randall Counties taxing districts for ad valorem taxes. If confirmed and successfully completed, the plan will, over the five years, pay Hancock and HSB in full and bring current the debtors' home mortgage loan, car loans, and taxes. The debtors' other unsecured creditors, which are owed in excess of $37,800, receive no payments under the plan, and their claims will be discharged upon completion of the plan."

The provision to pay some creditors in full while others received no payment was challenged by the bankruptcy trustee as being patently unfair. The debtors argued that it was not unfair because if they did not repay the debts to HSB and Hancock, they could possibly go to jail due to contempt of court.. The HSB claim is the result of overdrawing their checking account via a "check-kiting" scheme and the Hancok claim is the result of a judgment that is a nondischargeable debt. Furthermore, the bankruptcy court said that while the proposed plan would allow the debtors with the best fresh start possible, the bankruptcy code could not allow patent discrimination between creditors especially since the need to do so is the result of the debtors' wrongdoing.

The bankruptcy court said:

"Finally, there is simply no evidence before the Court that the underlying nature of the claims of either Hancock or HSB can or will result in further contempt or criminal proceedings against the debtors. Even assuming such a risk, it does not override the unfairness of the overwhelmingly disparate treatment proposed to similarly situated creditors...The full payment to two unsecured creditors while others receive nothing is patently unfair. The Court will deny confirmation of the debtors' plan."

Categories: Chapter 13 Bankruptcy
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