Page 88 - Bankruptcy Volume 1

ment must not result in unfair prejudice to other holders of unsecured claims against the estate. Third,
the need to amend must not be the product of bad faith or dilatory tactics on the part of the claimant (see
Gens v. RTC, 112 F.3d 569, 575 (5th Cir. 1991)). The courts have allowed the IRS to amend the proof of
claim if the adjustments are reasonable and relate to a year for which a claim was filed. However, at-
tempts by the IRS to amend a proof of claim after the bar date for a year not listed on the original proof
of claim have not been successful. fn 1 See Stavriotis, 977 F.2d 1202 (7th Cir. 1992), in which the court
disallowed the IRS’s attempt to add taxes for a different year through an amendment to its proof of
claim.

Excluding administrative expense claims which are incurred for postpetition obligations, the debtor’s
prepetition obligations, in order of payment priority, are secured claims, unsecured priority claims, un-
secured nonpriority or general unsecured claims, and equity interests. Given the priority of payment and
the fact that in many cases there are not enough assets to pay all claims, there are often fights over not
only the amount of a claim but the priority of that claim in the order of payments.

Secured Claims and Their Treatment

The Bankruptcy Code refers to creditors as holders of either secured or unsecured claims. The Bank-
ruptcy Code considers a claim secured to the extent of the value of the collateral. Section 506(a) of the
Bankruptcy Code states, in part, the following:

An allowed claim of a creditor secured by a lien on property in which the estate has an interest,
or that is subject to setoff under Section 553 of this title, is a secured claim to the extent of the
value of such creditor’s interest in the estate’s interest in such property, or to the extent of the
amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the val-
ue of such creditor’s interest or the amount so subject to setoff is less than the amount of such al-
lowed claim.

Thus, an undersecured creditor’s allowed claim is separated into two parts. A secured claim exists to the
extent of the value of the collateral, and the balance is unsecured. As discussed in the following para-
graphs, an undersecured creditor will have two separate claims against the estate unless it makes an elec-
tion under Section 1111(b) of the Bankruptcy Code.

Priority Unsecured Claims

The Bankruptcy Code and subsequent amendments establish that certain unsecured claims have a pay-
ment priority over each other and over all general unsecured claims. In a Chapter 11 case, a plan is not
confirmable, absent agreement of the affected creditors, unless the debtor has provided for payment in
full of all priority claims. Section 507 of the Bankruptcy Code provides for the following priorities:

1. Certain domestic support obligations

2. Administrative expenses under 11 USC 503

fn 1 Grant W. Newton and Robert Liquerman, Bankruptcy and Insolvency Taxation, 4th ed. (Hoboken NJ: John Wiley & Sons, Inc.,
2012), section 10.3.

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