When a creditor is owed money by a debtor (or claims to) and the debtor files for Chapter 7 or Chapter 13 bankruptcy, the creditor retains legal rights within the bankruptcy process.
The foremost of these rights is to make itself and its claim known to the Chapter 7 and Chapter 13 bankruptcy Trustees and Judges associated with the bankruptcy case.
While not every bankruptcy case results in some of the money owed to a creditor actually being paid, some do. If the creditor has not “registered” its claim with the Bankruptcy Court, it will not receive its fair share of the proceeds.
How do creditors then make themselves known in a Chapter 7 or Chapter 13 case?
They file something called a Proof of Claim with the Bankruptcy Court.
BANKRUPTCY PROOFS OF CLAIM: EXACTLY WHAT THEY SOUND LIKE
A Proof of Claim is an Official Bankruptcy Form that is completed by a creditor in a Chapter 7 or Chapter 13 bankruptcy process and filed with the Bankruptcy Court, ideally with sufficient documentation to prove that the amount owed by the Debtor is actually owed.
This is often not the case! But we will return to that point in greater detail, below.
The Proof of Claim form requires the following information from creditors:
- The name of the current creditor (“current” because the claim may have been purchased from an originating creditor, as is common);
- Whether the claim has been acquired from someone else;
- To which addresses payments and/or notices from the Court should be sent;
- The amount of claim in dollar value terms;
- The basis of the claim (money loaned, goods sold, lease, etc.);
- Whether the claim is “secured” (with collateral, like a home mortgage or car loan), or if some or all of it is “priority” under the Bankruptcy Code (i.e., recent tax debt, child support, etc.);
- Whether the claim is subject to a lease or a “right of setoff;”
- Whether the individual signing it is the creditor or an employee of the creditor, or an attorney or other agent;
- And other information.
The Federal Bankruptcy Rules of Procedure require that documentation itemizing fees, interest, expenses, and other such charges be attached to the form.
Profuse but scattered judicial decisions arising from the Eastern District of Michigan Bankruptcy Court and the Sixth Circuit Court of Appeals require that, at a minimum, documentation evidencing the ownership of the debt be attached, including copies of any assignments or other such agreements.
Creditors will often argue that a certain Bankruptcy Rule only requires a short “summary” print-out with the amount owed and a few other basic, bare bones bits of data.
This is not correct. However, it is always an ongoing point of litigation in Bankruptcy Court.
PROOFS OF CLAIM IN CHAPTER 7 BANKRUPTCY
In a Chapter 7 bankruptcy, a Proof of Claim may only be filed be filed when the Chapter 7 Trustee issues a Notice setting a deadline for doing so.
Creditors in Chapter 7 bankruptcies only receive funds from the bankruptcy process when the Chapter 7 Trustee has recovered cash from the Debtor’s Bankruptcy Estate (created legally by the filing of the bankruptcy case) by way of liquidating the Debtor’s property or from unwinding other transfers.
The vast majority of Chapter 7 bankruptcies do not result in assets being liquidated for the benefit of creditors. Thus, Creditors generally have no need to file a Proof of Claim.
A Proof of Claim filed by a Creditor before being invited to do so by the Chapter 7 Trustee will be ignored or struck from the Court’s docket by the Court Clerk.
When there is cash available for distribution by the Chapter 7 Trustee to creditors and Proofs of Claim are properly filed, Secured and Priority Claims will be paid by the Trustee in full ahead of any unsecured Claims, such as those for credit card debts or medical bills.
Unless there is so much cash available for distribution that, after all creditors who have filed Proofs of Claim by the set deadline have been fully paid and after the Trustee’s expenses and fees are paid, there is still money remaining, the Debtor does not have “standing” to file an Objection to a Proof of Claim in a Chapter 7.
If there is enough for the Debtor to receive a last-in-place distribution from the Trustee from the pool of available funds, the Debtor would have standing in that case to Object to a Creditor’s Proof of Claim.
PROOFS OF CLAIM IN CHAPTER 13 BANKRUPTCY
In a Chapter 13 bankruptcy, Debtors do repay some percentage of their debts through a 3-5-year-long Chapter 13 Payment Plan. Creditors must file a proof of claim by a given deadline date, or they will not receive any distribution from the Payment Plan.
In a Chapter 13 bankruptcy, Debtors do have standing to Object to Proofs of Claim if they are fraudulent, incorrect, filed by the wrong party, or deficient in terms of the information or documentation provided, among other reasons.
It is one of the primary duties of a bankruptcy attorney to carefully review each and every Proof of Claim filed by a Creditor in a Chapter 13 for defects and to file an Objection when appropriate.
Further, it is, for some Chapter 13 Plans, crucial to have certain Proofs of Claim filed in a timely manner. While a debtor may not care whether a Citibank credit card debt holder files a proof of claim as unsecured debts are simply discharged in full at the end of a successful Chapter 13 Plan, that same Debtor may care very much whether their mortgage holder files a Proof of Claim.
If the entire point of a Chapter 13 bankruptcy is, for instance, to save a home from foreclosure because the payments are 9 months in arrears, the Proof of Claim for that mortgage debt must be filed by the required deadline or the Chapter 13 Trustee will distribute no payments to the mortgage creditor.
Thus, if a holder of claim fails to file a Proof of Claim by the required deadline, a Debtor in Chapter 13 may then, within 30 days, file a Proof of Claim for that Creditor.
A final point about Proofs of Claim in Chapter 13 Bankruptcy processes is that, here, in the Eastern District of Michigan, the Chapter 13 Trustee will pay a creditor according to what is claimed in their Proof of Claim, not according to the text of the Debtor’s Chapter 13 Plan.
Thus, if you have a non-priority garden-variety, unsecured debt to a dentist, for example, and the dentist files a priority Proof of Claim, the Trustee will pay that debt as a priority debt, in full, even if the dentist might only have received pennies on the dollar as a low priority creditor in the Debtor’s Plan.
This is another reason why Chapter 13 Proofs of Claim must be aggressively monitored by a Debtor’s bankruptcy attorney.
CREDITORS IN BANKRUPTCY & PROOFS OF CLAIM: THE BOTTOM LINE
The bottom line is that, if you are considering filing for bankruptcy, it pays to retain an experienced bankruptcy attorney to assist you. Your odds of successfully arguing with a Creditor who has filed a bogus Proof of Claim are significantly lowered without professional assistance.
The Law Offices of Walter A. Metzen & Associates offers free consultations for those interested in the bankruptcy process and is experienced in determining and advising as to the best course of action when filing Chapter 7 or Chapter 13.