Creditor Claims in Bankruptcy
If you are considering filing for bankruptcy, you have likely been inundated with demands for payment from your creditors. Your creditors have likely tried many methods to collect these debts, starting with harassing phone calls and threatening collection letters. At some point, if the debts are unpaid, creditors will commence lawsuits to collect the debts. If a creditor obtains a judgment against you, it can enforce the judgment by freezing your bank account or serving what is called an income execution (wage garnishment) on your employer.
Bankruptcy can provide relief from debts, judgments, and creditor harassment. Once a bankruptcy case is filed, all attempts to collect debts must stop. Creditors seeking to collect debts owed to them must do so only through the Bankruptcy Court.
If you file for bankruptcy, it is important to understand how the claims of your creditors will be considered.
Information on Creditor Claims
- Proof of Claim
- Objections to Creditor Claims
- When Should a Debtor Object to a Claim?
- Debtors Can File Claims on Behalf of Creditors
- Creditor Claims in Chapter 7 vs. Chapter 13
The debt which a debtor owes a creditor is called a claim in bankruptcy parlance. A ‘Proof of Claim’ is a form which contains a variety of information so that the Court, the trustee, the debtor, and debtor’s counsel can make a determination as to whether the claim of indebtedness is proper.
Form 10 is the form that creditors use to file their proof of claim with the Court. The form contains information regarding the identity of the creditor, the amount of the claim, the nature of the claim, and whether the claim has any priority or secured status.
The creditor is required to attach relevant supporting documentation to its proof of claim. Such documents may include promissory notes, purchase orders, invoices, contracts, or judgments.
If a claim is based on an open-end or revolving consumer credit agreement (e.g. credit card), a statement must be filed with the proof of claim that includes the following information:
- the name of the entity from whom the creditor purchased the account;
- the name of the entity to whom the debt was owed at the time of an account holder’s last transaction on the account;
- the date of an account holder’s last transaction;
- the date of the last payment on the account; and
- the date on which the account was charged to profit and loss.
The Bankruptcy Rules allow the debtor to file an objection to a claim. The filing of a proof of claim form by a creditor is prima facie evidence that the claim is valid. This means that it is presumed to be correct, and it then becomes the debtor’s affirmative burden to object to the claim.
If the debtor is successful in objecting to the entire claim, it will be disallowed, meaning that the creditor will not be eligible to receive any payment from the bankruptcy trustee. Alternatively, if the debtor can show that the amount of the claim is incorrect, then the claim will be paid at a reduced amount.
A claim may be invalid or incorrect for many different reasons. The amount claimed can be incorrect; the interest rate may be wrong; the claim may be improperly categorized as a secured or priority claim when it should be a general unsecured claim; or the debt that forms the basis of the claim is no longer enforceable because the applicable statute of limitations had passed.
The validity of a claim is a combination of both bankruptcy and substantive state law. The Bankruptcy Court will look to state law in order to decide many issues related to creditor claims, including those for spousal support, child support, contracts, and torts.
Even when a debtor believes that a claim is improper or incorrect, it may not be necessary to object to the claim. For instance, in a Chapter 7 case where the debtor’s assets are insufficient to pay all creditors in full, the debtor will generally not care how much each creditor receives. In this situation, there would be no reason to object to a claim.
However, if, for instance, the debtor’s assets were enough to pay all creditors in full, the debtor would want to object to a claim, or claims, if there are grounds to do so. This would preserve the debtor’s assets for the debtor, as opposed to being paid to creditors with invalid claims.
Similarly, in a Chapter 13 case in which unsecured creditors will be paid in full, a debtor would seek to object to any improper claims, in order to reduce the amount to be paid into the Chapter 13 plan.
In the event that a creditor fails to file a claim, the debtor may wish to file a claim on behalf of the creditor. Why would a debtor file a claim for a creditor? An example would be in a Chapter 7 or Chapter 13 case where the debtor owes a non-dischargeable, priority debt, such as a debt for child support. In this situation, it would benefit the debtor to have this debt paid in full, before other, dischargeable debts are paid. If the creditor, e.g. an ex-spouse, who may not be familiar with the bankruptcy process, fails to file a claim, then the debt would not be paid, and the debtor would still owe this debt after the bankruptcy case was closed. By filing the claim, the debtor can ensure that this debt is paid out of the debtor’s assets (in Chapter 7), or through the payments made to the Chapter 13 trustee (in Chapter 13).
Creditor Claims in Chapter 7 vs. Chapter 13
The vast majority of bankruptcy cases are what are known as “no asset” Chapter 7 cases. In a no asset Chapter 7 case, no distribution is made to any creditors. In a no asset Chapter 7 case, the debtor does not own any non-exempt assets with which creditors could be paid. There are many property exemptions in both the Bankruptcy Code and New York State law that protect a debtor’s assets to a certain degree. In most cases, a debtor’s assets fall within the exemption limits, thereby leaving nothing that can be used to pay creditors. Read more about property exemptions in bankruptcy here.
Upon the commencement of a Chapter 7 case, the Clerk of the Bankruptcy Court issues a notice, which is sent to the debtor and to all scheduled creditors. A standard Chapter 7 notice instructs creditors that they should not file a claim until they receive notice from the Court to do so.
If the bankruptcy trustee notifies the Clerk of the Bankruptcy Court that the debtor may have assets with which creditors can be paid, the clerk issues a “Notice of Discovery of Assets” to all creditors, instructing them to file a proof of claim.
In a Chapter 13 case, the procedure is somewhat different. Here, the initial notice of the bankruptcy filing provides creditors with a deadline by which to file their claims. This is because Chapter 13 plans always provide for at least some payment to creditors. In a Chapter 13 case, the filing and allowance of a claim is a prerequisite to payment under the Chapter 13 Plan.
If a Chapter 13 plan provides for the repayment of mortgage arrears, it is important to scrutinize the proof of claim filed by the bank, in order to make certain that it is accurate. In particular, the proof of claim should set forth the correct amounts for principal, interest and escrow; the correct interest rate; and that the fees and costs sought to be recovered are proper.
The Law Office of Andrew M. Doktofsky, P.C. | Long Island Bankruptcy Attorney
Bankruptcy provides important protections against the claims of creditors. If you are considering bankruptcy, Long Island bankruptcy attorney Andrew M. Doktofsky can help you. Contact The Law Office of Andrew M. Doktofsky, P.C. today at 631-812-7020 to set up a free consultation.