Creditor Claims In A Bankruptcy Case

When a bankruptcy case is first filed, notices are mailed out to all of the listed creditors. The notices contain information about deadines for filing “proofs of claim”, and lists objection deadlines for issues a creditor may have with a case, or for the filing of an adversary proceeding (these are not common).

It is the creditor’s responsibility to see that its proof of claim is filed on time and in the right format with the bankruptcy court.  Its failure to do so can mean that it will not share in any assets of the bankruptcy estate.  If a claim is not timely filed, a creditor would have to show the court that its failure to file on time was due to some “excusable neglect.”  This is not easy to show.

In deciding whether to allow the claim, the bankruptcy court would ask these questions:  Would the late filed claim prejudice the debtor?  How long was the length of time in delaying the filing of a claim?  Why was the claim filed late, and was this due to circumstances beyond the control of the creditor?

Is the creditor acting in good faith?  In rare circumstances, courts can permit “informal” proofs of claim in the form of other pleadings that a creditor may have timely filed in the case.  This is basically an equitable remedy.  Disputes over late filed claims are not common, though.

In Chapter 7 and 13 cases, creditors will not receive anything unless they file a timely claim.  Even if they do file a timely claim, they may still receive nothing.  Most Chapter 7 cases are “no asset” cases, since there is nothing to give the creditors.  And even Chapter 13 cases often distribute little or nothing to the general unsecured creditors.  However, every case is unique, and it occasionally does happen that assets are recovered.  A prudent creditor will file a claim anyway, since there is always a chance that assets may be discovered.  In Chapter 11 cases, it is not required for a creditor to file a claim, unless the creditor disagrees with what the debtor has listed on his or her schedules.  It is almost always a better idea for a creditor to file a claim anyway, to ensure that its rights are adequately protected.

A valid proof of claim must conform to the federal rules of bankruptcy procedure, as well as any local rules that may be in effect.  Typically, a creditor will need to attach documentation to their claim demonstrating that they are, in fact, owed the amount they claim to be owed.  The proof of claim form must also be filled out clearly and correctly.  Again, failure to do this can result in the debtor or trustee objecting to the claim.  Filed claims are stored in the court’s claims register, and can be accessed by anyone wanting to know who has filed what, and what amounts have been claimed.

When a claim is filed, a debtor (or a trustee) has the right to object to the claim if they believe they have grounds for doing so.  When an objection to a claim is filed, the burden shifts to the creditor to prove that its claim is valid.  There can be a huge number of reasons for a claim being objected to, but typical objections center around a claim being late, improperly classified, improper valuation of collateral, insufficiently documented, a duplicate claim.  This list is not exhaustive.  Creditors are also informed that deliberately filing a false or fraudulent claim can be a criminal offense.

When all is said and done, it is vitally important for creditors to track the progress of a bankruptcy case in which they are involved.  They should file their claims in time and in appropriate format, and be aware of any other deadlines in the case.  They should also be reading the debtor’s plan of reorganization (in a Chapter 13 or 11 case), in case something in the plan affects their rights.  A creditor’s failure to pay attention to these issues can have serious consequences for them in many situations, and this is something we have seen in our many years of practicing law in this area.  If you are a creditor and need help with knowing what do do in a bankruptcy case, please feel free to call us to find out your legal options.  

Read More:  Chapter 7 Discharge In Bankruptcy In Kansas City