February 20, 2012
Lerch Early's Legal Update
When a creditor receives a notice of the bankruptcy of one of its debtors, there is often a reflex to treat the claim as uncollectible, and to refrain from participating in the bankruptcy process. This can be a costly mistake. Depending on the type of bankruptcy that was filed by the debtor, a creditor may be able to recover at least a portion of its claim by taking a simple step: filing its claim on time with the bankruptcy court.
Typically, creditors face bankruptcies filed under one of three Chapters: 7, 11 or 13. Chapter 7 cases are generally mere liquidation of the debtor’s assets. Where the liquidation of the assets generates funds to pay creditors, the only creditors who are entitled to participate in any distribution (even if that distribution is less than payment of all debts in full) are those that have filed their Proof of Claim forms with the bankruptcy court in a timely manner. Chapter 13 cases involve multi-year structured repayment plans utilized by consumers only. In Chapter 13 cases, there almost always will be some money paid to creditors, even if it is not 100%. Once again, payment to creditors in Chapter 13 cases is limited to those who have filed their Proofs of Claim on time.
Chapter 11 cases pose a different situation for creditors. As part of the bankruptcy process, the debtor is required to file Schedules of Assets and Liabilities. This typically is done at the time of filing or within two weeks of the filing of the bankruptcy case. In a Chapter 11 case, when a debtor has listed a creditor’s claim in the correct amount, and has not designated the claim as disputed, unliquidated or contingent, the creditor is not required to file a Proof of Claim in order for it to be entitled to participate in distributions under a Chapter 11 Plan of Reorganization. On the other hand, if the debtor has listed the creditor’s claim in the wrong amount, or in the wrong category (such as identifying a creditor’s secured claim as a general unsecured claim), or as disputed, unliquidated or contingent, then the creditor must file a Proof of Claim in order to participate in any distribution under a subsequently approved Plan of Reorganization.
Thus, when a creditor receives notice of a Chapter 7 or 13 filing by someone who owes the creditor money, a timely filing of a Proof of Claim will entitle the creditor to participate in any distributions that may be made in those cases. In Chapter 11 cases, the filing of a Proof of Claim is not necessary if the debtor properly has listed the creditor’s claim, and has not contested the validity of the claim in its Schedules.
The deadline for filing Proofs of Claim is established when the debtor files its case. Notice of that deadline, also known as the “Bar Date,” is given in the formal notice of the bankruptcy filing issued by the bankruptcy court clerk shortly after the case is filed. In some Chapter 7 cases, when it is determined initially that there will be no money to distribute to creditors, that notice affirmatively will tell creditors not to bother filing their Proofs of Claim. Proofs of Claim not filed by the Bar Date usually are not considered in any distribution from the bankruptcy process. The same formal notice of the filing of the bankruptcy case, and of the Bar Date, usually will be accompanied by the Proof of Claim form itself, along with instructions on how to complete the form and where to send it in for filing.
The process of completing the Proof of Claim form and filing it with the correct clerk’s office in a timely manner is relatively simple and straightforward. Doing so can significantly reduce a creditor’s loss arising from a debtor’s bankruptcy.
Jeff Sherman is a creditors’ rights and bankruptcy attorney who advocates for creditors and debtors of all types, trustees, committees and third parties affected by bankruptcy proceedings, including related bankruptcy and non-bankruptcy litigation. For more information on filing Proofs of Claim, contact Jeff at (301) 841-3843 or firstname.lastname@example.org.