Chapter 13 Bankruptcy is Binding Once Approved

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The Binding Effect of Chapter 13 Confirmation

Under the legal doctrine of judicial estoppel, once a Chapter 13 bankruptcy plan has been confirmed, all issues relating to the confirmation of that plan have been resolved. 11 USC § 1327(a) states:

“The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan.”

This means that if a party neglects to raise an argument or make an objection relating to the bankruptcy prior to confirmation, then that party has forfeited the ability to later raise such an argument or objection. The case of In re Crum presents a nice illustration of how this rule functions, and also the effect it can have on your bankruptcy case.

In re Crum

In the case of In re Crum, 479 BR 734 (S.D. Ohio 2012), Mr. and Mrs. Crum were a husband and wife involved in bankruptcy. The Crum’s were both named on the mortgage of their home, which was issued by CitiMortgage. The mortgage was for approximately $113,000, and the home was valued at approximately $105,000. A mortgage is a form of secured debt, meaning that the house acts as collateral in the event the debtor defaults on payments. Thus, even in bankruptcy, a creditor can still foreclose the home if the debtor is unable to make timely payments.

See also: the automatic stay and corporations

The Crum’s Chapter 13 Payment Plan

Accordingly, as part of their Chapter 13 payment plan, the Crum’s agreed to surrender their home to the creditor, CitiMortgage. The Chapter 13 plan stated that the home would become the property of CitiMortgage, and that any remaining balance owed on the mortgage would become an unsecured claim. Secured claims take priority over unsecured claims, which means that the unsecured claims only get paid in bankruptcy if there is enough money left over after paying off the secured claims.

The Crum’s still owed $20,000 on the home. However, the Chapter 13 plan contemplated no money to be left over for unsecured claims. Thus, when the Chapter 13 plan was confirmed, the home became the property of CitiMortgage, and the $20,000 balance became an unsecured claim that CitiMortgage would be unable to recover. CitiMortgage then sold off the property with the intention of keeping the money as satisfaction of the debt owed.

The Trustee vs. CitiMortgage

Later, however, the trustee discovered that Mrs. Crum may not be a party to the mortgage after all. Yet, Mrs. Crum still held title to one-half interest of the property. Thus, the bankruptcy trustee hypothesized that Mrs. Crum’s one-half of the interest in the property was actually an unsecured debt that could not be taken by the creditor, CitiMortgage. Accordingly, the trustee initiated a lawsuit against CitiMortgage, arguing that because the home became a part of the bankruptcy estate upon confirmation, CitiMortgage is only entitled to one-half of the money raised by selling the home, with the other half remaining part of the bankruptcy estate. The half that remained with the estate could then be used to pay off other debts.

The Court’s Decision

The trustee, the Crum’s and CitiMortgage had already accepted the Chapter 13 payment plan, and the bankruptcy court had already confirmed the plan. Because confirmation of the Chapter 13 plan is binding on all parties, the only way that the trustee could now have Mrs. Crum’s one-half interest in the property reclassified as an unsecured debt would be to modify the Chapter 13 payment plan.

However, as the court noted, the Chapter 13 plan can only be modified in a limited number of situations, most of which involve redressing some form of fraud. In this case there was no such fraud. In looking to the above-mentioned doctrine of judicial estoppel, the court decided that once an issue has been determined, it cannot later be altered. The trustee sought to allege that Mrs. Crum’s debt was unsecured, but because the parties had failed to make such a demonstration prior to confirmation, they had lost their ability to make that claim now. Thus the plan in this case could not be modified because the parties had failed to object to the fact that Mrs. Crum was classified as a party to the mortgage.

See also: Ohio Foreclosure Laws: What You Need to Know

Image from Flickr user Tax Credits

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