Delinquent Property Taxes and the EDKY Chapter 13 Plan

Where should fully secured delinquent property tax claims be listed in the new chapter 13 plan form?  Debtors’ attorneys and attorneys representing mortgage creditors need to make sure these claims are listed in the plan in such a way as to ensure they are paid in full.

For a refresher on property taxes under Kentucky law, how they should be paid in a chapter 13 case in general, and interest rates on the claims, click here.  For this post, we’re only looking at where in the plan fully secured delinquent property tax claims held by third-party purchasers should be listed.

The logical place to list the claims is under Section 3.2 of the plan: “Request for valuation of security, payment of fully secured claims, and modification of undersecured claims.”  It’s interesting that the heading includes “payment of fully secured claims,” but that’s easier said than done.

Start by reading the text of section 3.2:

The debtor(s) request that the court determine the value of the secured claims listed below.  For each non-governmental secured claim listed below, the debtor(s) state that the value of the secured claim should be as set out in the column headed Amount of secured claim. . . .  For each listed claim, the value of the secured claim will be paid in full with interest . . . .

The portion of any allowed claim that exceeds the amount of the secured claim will be treated as an unsecured claim under Part 5 of this plan . . . .

This plan limits the amount to be paid on each secured claim.  If Tax Purchaser #1 files a proof of claim for $5,000, I see no choice but to pay it as a $2,900 secured claim.  The remaining portion will be treated as an unsecured claim.

When we did training on the new plan last fall, we discussed the pro’s and con’s of entering the collateral value ($150,000) as the amount of the secured claim.  This would indicate that the claim is fully secured, and I would pay no more than the actual amount of the proof of claim.  However, the software providers don’t see it that way, and I also understand that it could cause confusion and perhaps lead to unintended consequences.   It probably works for a claim secured by a car, but not a first-priority, fully secured property tax claim.

So how should you list delinquent property tax claims to ensure they are paid in full?

Option 1:  Type “fully secured,” “pay in full,” “pay 100%,” “in full,” or similar words under in the column “Amount of secured claim.”  That gives me the flexibility to set up the claim after it has been filed so that it will be paid in full.  (Make sure you designate 100%, not $100).

Option 2:  In the Nonstandard Provisions (Part 8) of the plan, state something like this:  “Any creditor holding a claim secured by lien for delinquent property taxes shall be paid in full with interest in accordance with applicable state law and 11 U.S.C. § 511.”

If property tax claims are owed to the sheriff, the county attorney, the county clerk, or other governmental entity, we don’t have this problem because the amount of the secured claim of a governmental unit cannot be determined in the plan.  I would pay the claim as filed.

Debtors’ attorneys, be aware that third party purchasers often are content not to file claims.  They will let their lien ride through and continue to accrue interest.  Make sure you file proofs of claims on the creditors’ behalf if they don’t file their own claims.  See New Bar Date After December 1, 2017 – Have You Remembered to File Claims?