What Happens if a Claim is Disallowed in My Bankruptcy Case? It the Claim also Discharged?

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If you filed a Chapter 13 or Chapter 11 bankruptcy case then you know that the claims process is an important part of reorganizing your debts. What is the result if you object to the allowance of a claim and the claims is disallowed in its entirety? Is the claim therefore discharged when the plan of reorganization is completed? Does the creditor have a right to seek payment of the disallowed claim after you receive your discharge and the case is closed? The answer is it depends upon the type of claim that was disallowed. Make sure you give your bankruptcy lawyer as much information as possible prior to objecting to a claim.

The first case to discuss involves student loans. Student loans are not dischargeable pursuant to Section 523(a)(8). In Cruz the debtors objected to the claim of Educational Credit Management Corporation (“ECMC”.) ECMC did not respond to the objection and the court entered an order that said the claim was disallowed in its entirety and the claim was paid in full. After the debtors completed their chapter 13 plan and obtained a discharge ECMC intercepted the debtors’ post-discharge tax refund to satisfy the student loan held by ECMC. The debtors bankruptcy attorney reopened the bankruptcy case and filed a motion for sanctions against ECMC. The court found that ECMC’s claim was not discharged and ECMC had a right to intercept the debtors’ tax refund.

The disallowance of a claim does not necessarily mean the underlying debt is discharged. See Bell v. ECME 236 B.R. 426 (N.D. Ala. 1999) or In re Shelbayah 165 B.R. 332, 335 (Bankr. N.D. Ga 1994) holding that the allowance or disallowance of claims is unrelated to the dischargeability of those claims under section 523. In the Cruz case the underlying debt was not dischargeable, a student loan. Therefore even though the claim was not allowed the underlying debt was not discharged.

General Unsecured Claims

What if the underlying claim was that of a credit card company? If you object to a credit card claim and the claim is disallowed in its entirety is it also discharged? A general unsecured claim should be discharged upon completion of the plan of reorganization.

Vehicle Loan Lien

What about a car loan company that believes it has a valid lien on your vehicle at the time you file for bankruptcy? In National Capital Management v. Gammage-Lewis, No. 12-2286 (June 6, 2013) the court held that a car loan companies lien was extinguished when the debtor’s received their discharge given the car loan companies failure to provide the appropriate documents to prove it had a perfected security interest. The disallowance of the claim of a lien made the lien void under Section 506(d) of the Bankruptcy Code. The court held that the objection to the claim was sufficient to provide the car loan company the necessary notice and opportunity to be heard regarding their claim. In most circumstances an adversary proceeding must be initiated to determine the validity, priority or extent of a lien.

The bottom line whether a claim that is disallowed is also discharged depends upon the type of claim and the circumstances under which it was disallowed.