A creditor must file a document called a proof of claim to get paid during a debtor’s bankruptcy proceeding. The proof of claim contains information about the nature of the debt and the amount of the debt. Upon receiving this document, the bankruptcy trustee will determine how much to pay the creditor. Regardless of whether the debtor filed under Chapter 7, Chapter 13, or Chapter 12, virtually any secured or unsecured creditor must go through this process. Private creditors must file within 70 days from when the debtor files the bankruptcy petition, while government creditors have 180 days from the bankruptcy filing date. Extensions are very rare but can be granted in extreme circumstances.
If the trustee has determined that a Chapter 7 debtor has no assets, they will notify creditors that they will not receive any repayment, so there is no need to file a proof of claim. However, if the trustee later finds out that the debtor has assets that were initially undisclosed, they will contact creditors at that stage to inform them to file a proof of claim.
Formal and Informal Proofs of Claims
Form 410 provides the official proof of claim. A creditor will need to identify itself and state the debtor’s name, the case number, the type of claim, the nature of the debt, and the amount of the debt. It should include additional documents to support the information on the form, and the creditor’s representative must sign the form.
In some cases, a bankruptcy judge may accept an informal proof of claim. This must be a written document filed with the bankruptcy court, and it must make a demand against the debtor’s bankruptcy estate. If the document shows an intent to hold the bankruptcy estate liable for the debt, and it would be fair to accept the document under the circumstances, the judge will have discretion to accept it. They are not required to accept it, though, so a creditor should go through the formal process if possible.
Objections to a Creditor’s Claim
Anyone who has a financial stake in the outcome of the proceeding can make an objection to a claim. This is usually the bankruptcy trustee, but sometimes the debtor or another party will object as well. They must make their objection in writing and file it with the bankruptcy court. The objection and a notice of hearing must be served to the creditor, the debtor, and the trustee 30 days before the hearing.
An objection to a claim might arise if the trustee or the debtor believes that the amount of the debt is excessive, the creditor has classified a claim as secured when it is unsecured, the claim lacks supporting documentation, or the creditor is improperly seeking interest or penalty fees. The objecting party has the initial burden of production, which means that they need to provide evidence to support disallowing the creditor’s claim. If they meet this burden, the eventual burden of proof lies on the creditor.
In a Chapter 7 bankruptcy, a debtor will surrender all of their non-exempt property to the trustee to be liquidated. This might suggest that only the bankruptcy trustee would be able to make an objection. However, there are some situations in which a debtor might object. Debts based on child or spousal support, student loans, or unpaid taxes usually will not be discharged in bankruptcy, so the debtor might challenge the amount of these priority debts to reduce the amount that they owe after the discharge. In other cases, the debtor might object if they believe that the trustee has unreasonably failed to object to a claim.
Issues for Secured Creditors
A secured creditor who fails to file a proof of claim still may have a lien on the asset attached to its debt. As a result, a debtor will be able to keep that asset only if they keep up with their payments under the loan. This is true even if they filed under Chapter 13 or Chapter 12, which technically allow a debtor to keep all of their assets if they can pay their debts under a repayment plan. To address this problem, the debtor can file a proof of claim on the creditor’s behalf. The bankruptcy trustee then will set aside funds from the debtor’s monthly payments to pay off the secured creditor. Or the debtor can make payments directly to the creditor, but this is uncommon because a debtor usually has no money left over to cover anything beyond necessities and plan payments.