Proofs of Claim in Bankruptcy
Introduction to Proofs of Claim in Bankruptcy
There are many moving parts in the bankruptcy proceeding, and there are many active players. There is the debtor who is actively involved. The debtor may have an attorney, who will be actively involved as well. The court will appoint a bankruptcy trustee to the matter who will oversee the liquidation process of a Chapter 7 bankruptcy and the reorganization matters of a Chapter 13 bankruptcy. Finally, the creditors also play an active role during the bankruptcy. Proofs of claim in bankruptcy is very important for creditors.
A proof of claim is a written statement that notifies the bankruptcy court, the debtor, the trustee, and other interested parties that a creditor wishes to assert its right to receive a distribution (pay out) from the bankruptcy estate.i In most Chapter 7 and Chapter 13 bankruptcy cases where there are assets to distribute, creditors must file proofs of claim in bankruptcy in order to get paid.
Generally, bankruptcy is a process that individual consumers and business can enter into in order to either erase or restructure a payment plan for some or all of their debts under the protection of the federal bankruptcy court.ii There are two branches of bankruptcy that can be taken, depending on the individual or business who is filing.iii Those two branches include liquidation and reorganization.
Chapter 7 bankruptcy is the branch that is referred to as the liquidation bankruptcy.iv It has been coined this name because a bankruptcy trustee is assigned to the case and is in charge of liquidating all assets of the debtor that are not exempt.v The proceeds from that liquidation sale are then applied to the debts that have been listed for the bankruptcy. This is where the proofs of claim become important.
Chapter 13 bankruptcy is the branch that is referred to as the reorganization bankruptcy.vi A Chapter 13 bankruptcy typically lasts between three to five years and often times it is a business who files for this type of bankruptcy. During that time span, the business will reorganize their debts and create a payment plan for their creditors during the process.vii The benefit of this type of bankruptcy is that the business has the ability to stay operational during the bankruptcy and work toward a more successful future post-bankruptcy.
Who Needs to File Proofs of Claim in Bankruptcy?
In Chapters 7 and 13 bankruptcy cases, all unsecured creditors must file proofs of claim in bankruptcy for their claim to be allowed. So, what exactly is an unsecured creditor? An unsecured creditor is the owner of an unsecured debt.viii An unsecured debt means the creditor was provided to the individual without any collateral.ix Collateral is something that the creditor could take from the individual if their bill was not paid. For example, when an individual purchases a vehicle from a car dealership, the dealership will take an interest in the car and it will be considered collateral. So, if that individual does not pay their monthly bill, the dealership can take the car to satisfy the debt.
It is crucial for these type of creditors to file proofs of claim in bankruptcy. The proof of claim does not guarantee payment from the estate, but it puts everyone on notice that the creditor wishes to be paid out. Examples of unsecured debts include the following: major credit cards, department store credit cards, medical bills, personal loans (payday loans), utility bills, and club memberships.x
Certain secured creditors, however, do not have to file proofs of claim to participate in a bankruptcy case.xi For example, lien holders and other secured creditors do not have to file a proof of claim to preserve their liens in a bankruptcy case.
Deadline for Filing a Proof of Claim
The deadline for filing a proof of claim for non-governmental creditors in a Chapter 7 or Chapter 13 bankruptcy case is 90 days after the first meeting of the creditors.xii Government entities must file a proof of claim within 180 days after the date of the order for relief.xiii The exact date of the deadline will typically be sent to the listed creditors with the first notice that is sent to the creditor.xiv A lot of other information will be included in this notice as well.
Although the court generally does not permit extensions once the deadline has passed, the court has the power to extend the filing time if a creditor shows extenuating circumstances or excusable neglect.xv
What Has to Be Included in a Proof of Claim?
There are both formal and informal requirements for a proof of claim. A proof of claim must conform substantially with Official Bankruptcy Form 10.xvi This form can be found on the U.S. Court website at: www.uscourts.gov. The form must be submitted with an original signature.xvii
The basic information on this form will include the following information:
- Identification of the debtor and its bankruptcy case number;
- Identification of the creditor and the mailing address for receipt of notices whether or not the claim is filed as an original claim or an amended claim;
- The amount owed as of the petition date;
- The basis for the claim, and
- Identification of the type of claim (secured or unsecured).
Some courts will accept an informal proof of claim from a creditor if the following give requirements are met:
- The proof is in writing;
- The writing includes a demand against the bankruptcy estate;
- The writing demonstrates the intent to hold the estate liable;
- The writing is filed with the bankruptcy court, and
- Allowing the claim would be fair under the circumstances of the case.
Whether or not this informal proof of claim will be accepted is within the discretion of the bankruptcy judge for the case. Other parties to the action, including the debtor, other creditors, or the trustee can object to a proof of claim if:
- The amount is incorrect;
- The claim includes improper interest or other penalty charges;
- The claim indicates that it is a priority or secured claim when it is not;
- The creditor filed the claim with the purpose of harassing the debtor, or
- The creditor did not attach supporting documentation.
In order to object to a creditor’s claim, the party objecting must file a written objection with the bankruptcy court and serve a copy and any notice of hearing on the creditor, the debtor, and trustee at least 30 days before a scheduled hearing.xviii
Conclusion to Proof of Claims in Bankruptcy
A proof of claim can be a critical piece of the bankruptcy for a creditor. If an unsecured creditor does not provide a proof of claim, it is possible that the debt (which would have otherwise gotten paid) would be overlooked. While this does not really affect the debtor, it is a crucial process for an unsecured creditor who wants any chance at recovery. Always consult experienced attorneys to file claims properly.
i See What is a Proof of Claim in Bankruptcy NOLO Legal Encyclopedia (Accessed May 15, 2017) http://www.nolo.com/legal-encyclopedia/what-proof-claim-bankruptcy.html
ii See What is Bankruptcy NOLO Legal Encyclopedia (Accessed May 15, 2017) http://www.nolo.com/legal-encyclopedia/chapter -7-13-bankruptcy-basics-29829.html
vii See What is Bankruptcy NOLO Legal Encyclopedia (Accessed May 15, 2017) http://www.nolo.com/legal-encyclopedia/chapter -7-13-bankruptcy-basics-29829.html
viii See What is an Unsecured Creditor in Bankruptcy NOLO Legal Encyclopedia (Accessed May 15, 2017) http://www.nolo.com/legal-encyclopedia/unsecured-creditor-bankruptcy.html
xi See What is a Proof of Claim in Bankruptcy NOLO Legal Encyclopedia (Accessed May 15, 2017) http://www.nolo.com/legal-encyclopedia/what-proof-claim-bankruptcy.html
xviii See What is a Proof of Claim in Bankruptcy NOLO Legal Encyclopedia (Accessed May 15, 2017) http://www.nolo.com/legal-encyclopedia/what-proof-claim-bankruptcy.html