Proof and Allowance of Claims in Bankruptcy
For a creditor to receive payment from the bankruptcy estate, it must file a Proof of Claim. A claim is a right to payment, even if it is not fixed in value, or becomes due in the future, or is contingent or disputed. In a chapter 13 bankruptcy, all creditors who want to be paid must file a proof of claim; in a Chapter 7 bankruptcy, the trustee will generally inform unsecured creditors to file a proof of claim only if there are sufficient assets left after paying priority payments and secured claims. If it is a secured claim, then the creditor must provide evidence of that security, including a copy of the agreement providing the security interest and evidence of a perfected lien, which can be a mortgage or trust deed, auto lien, or a UCC-1 statement on inventory or business equipment. Furthermore, the lien must be filed with the appropriate authorities, such as the County Clerk's office for real estate, the Department of Motor Vehicles for liens on motor vehicles, or a UCC-1 statement filed with the Secretary of State for the state in which the business is located. If the lien is not officially filed, then the debt is considered unsecured.
Obligations can be a claim if they can give rise to a payment as an alternative to performing the obligation. However, if the obligation does not give rise to the possibility of a payment, then the obligee cannot be a creditor of the bankruptcy estate, and the obligation is not discharged by the proceedings.
Unliquidated, Unmatured, Contingent, and Disputed Claims
Many claims have a specific value and are clearly owed by the debtor. However, some claims have unknown parameters at the time of the bankruptcy filing or become due only after the filing.
An unliquidated claim is one for which there is a definite liability but where the value has not been set. For instance, in the case of a debtor who was involved in a car accident where he was judged to be at fault, but for which an amount of damages has not been set, the victim would have an unliquidated claim.
An unmatured claim comes due sometime in the future — in a bankruptcy case, it would be a claim that becomes due after the filing date. An unmatured claim is either accelerated in a liquidation bankruptcy so that it may be paid, or may be extended in a payment plan under a rehabilitative bankruptcy to make it affordable for the debtor.
A contingent claim is one where liability depends on a future event. For example, if the debtor co-signed a loan for his son, then the debtor does not incur a liability for the debt unless his son defaults on the loan.
A disputed claim is one where the liability for the claim is being disputed. For instance, in a car accident, it may take a court case to settle who is responsible and, thus, liable for the accident.
A claim against the bankruptcy estate can also include claims to the debtor's property even though the debtor did not directly incur the underlying debt.§102(2) Common examples include statutory liens, such as a mechanics lien that attaches to the debtor's real property because the worker was not paid by the contractor.
Estimating Unliquidated and Contingent Claims
In the normal course of events, unliquidated debts eventually are set at a specific value, either by negotiation or litigation and either the trigger event happens or doesn't happen before the contingency expires or becomes moot. However, bankruptcy cases are conducted within a specific period, and if it seems that the value of these claims will only be fixed later, causing an undue delay to the bankruptcy case, then §502(c) stipulates that the court must estimate the value of these claims. Sometimes, the estimation is provisional so that the creditor can be apportioned voting rights in a Chapter 11 payment plan, but the estimate will be replaced later by an actual value if the liability becomes concrete before the close of the bankruptcy case.
To estimate unliquidated claims, a court may conduct a trial or submit the query to arbitration, appraisal, or negotiation. To estimate a contingent claim, the court must estimate the likelihood of the contingency, and the value of the claim, if it is not already liquidated.
Interest on Claims
Interest on claims have the lowest priority of all claims. Since most debtors do not have enough to pay the full amount of their debt, there is generally no payment for claims of interest. Only if there is enough money to pay all other claims in full will any go toward interest.
However, an exception exists for oversecured creditors. If the value of their collateral exceeds their claim, then any accrual of interest will be covered by their lien, up to the value of the collateral. Any accrual of interest above the value of the collateral will be treated as unsecured interest.
Note that the interest on claims is not treated the same as the present value of claims paid under the rehabilitative bankruptcies. Under Chapters 11, 12, and 13, the payment plan must pay creditors at least as much as the present value of what they would have been paid in a Chapter 7 liquidation. Since these claims are paid over time, the amount of the claims is increased by an applied interest rate over that time period to compensate the creditors for the delay in payment.
Prepetition and Postpetition Debts
Most claims are for prepetition debts — those that arose before the bankruptcy filing date. Any debts incurred after the filing date in a liquidation case are considered part of the debtor's fresh start estate and are not dischargeable.
However, under the rehabilitative chapters of bankruptcy, especially Chapter 11, the debtor or the trustee needs to obtain new credit to manage the estate so that the debtor's business can continue operating. These postpetition debts become superpriority claims against the estate, which are usually paid before any other claims that arose before the bankruptcy. This superpriority status is conferred on postpetition debt so that creditors will be more willing to lend money to the bankruptcy estate.
Postpetition Claims in Chapter 13
There are 2 specific postpetition debts that are treated as allowable claims under Chapter 13, both provided by §1305(a). Subsection (1) provides an allowable claim for taxes that become payable to a governmental unit while the case is pending.
Subsection (2) allows a claim for postpetition debt that is for property or services necessary for the debtor's performance under the payment plan. Generally, the debtor must obtain permission from the trustee to incur new debt while the case is pending. If the creditor extends credit to a debtor that did not get permission, then the claim will not be allowed if the creditor knew or should have known that prior approval by the trustee was practicable, but was not obtained.
However, if a subsection 2 creditor files a claim against the estate, it may not be repaid in full during the pendency of the case. The creditor does not need to file a Proof of Claim against the estate — it can choose not to file a claim so that the debtor remains liable for it even after the close of the case, since the debt will not be discharged.
Proof of Claims
Unsecured creditors and priority creditors who want to be paid by the trustee must submit Form B-10, Proof of Claim, to the bankruptcy clerk of the court in which the bankruptcy was filed within 90 days of the first creditors meeting if they expect to be paid from any distribution. A Proof of Claim is a written statement by the creditor setting forth the details of the claim. It gives the trustee a chance to review the claim and object to its allowance, if there are any grounds for it.
If the case is a liquidation, especially under Chapter 7, and the debtor has no nonexempt assets, then the trustee will notify the creditors that there are no assets to sell for their benefit, hence they do not need to file a claim. If it later turns out that the debtor did have assets to be distributed, the trustee will notify the creditors so that they can submit their Proof of Claim.
Because most Chapter 11 debtors are large businesses with many creditors, a Proof of Claim is deemed filed in a Chapter 11 case if the creditor is listed in the bankruptcy petition. However, if the claim is unliquidated, contingent or disputed, then the creditor must file a Proof of Claim.
Fully secured creditors do not need to file a Proof of Claim since their lien remains on the property, but if the value of the collateral is less than the debt, then a Proof of Claim must be filed for the unsecured portion.
Filing a Proof of Claim in Chapter 13 on Behalf of Certain Creditors
Secured creditors and some priority creditors may not file a Proof of Claim, since their debt is not dischargeable, but if the debtor wants to keep the property, or to pay arrearages on the debt, or to include priority creditors in a chapter 13 repayment plan, then he must file a Proof of Claim on their behalf, no later than 30 days after the creditors' deadline for filing a Proof of Claim.
Objecting to a Proof of Claim
A debtor can object to a creditor's claim if there is a costly error, such as a creditor claiming more than the debt; a secured creditor that has overstated the value of the collateral; or the creditor has attempted to characterize the debt as secured but the creditor has not attached the required documentation to the Proof of Claim, proving that it is entitled to the lien, such as the original promissory note or security agreement, or any assignments to those original documents.
A debtor can also object to a Proof of Claim if it is defective. For instance, a Proof of Claim for credit card debt can only be valid if it identifies the debtor and account number; the amount of the debt before the bankruptcy filing date; and itemizes charges, such as interest, late fees, and attorney's fees. If a Proof of Claim lacks this information, then the creditor must prove its claim, or provide documentation of the transference of the debt from an originating lender.
A debtor can also object to a claim that was filed late, and most courts will disallow late claims. However, the creditor may succeed in filing a Proof of Claim late if it can show cause.
Because each creditor gets a portion of the debtor's disposable income, it may not be beneficial to object to a creditor's claim, since the debtor will be paying out the same amount of money, regardless of which creditors are paid.
To be paid from the bankruptcy estate, a claim must also be allowed. A proved claim is also considered an allowed claim unless a party in interest objects within the required time. The grounds for objection are listed in §502, and includes many special circumstances. However, a major ground for objecting to the allowance of a claim is a requirement that the claim be enforceable outside of bankruptcy; if it is not, then the claim is disallowed. Other grounds include claims by a transferee who failed to return property to the estate after the transfer was avoided, and limits on claims from rejected contracts of lessors of real estate and of claims by employees.
The allowance or disallowance of a claim can be reconsidered later if new evidence points to a different treatment, such as fraud of the opposing party.