How Debtors and Creditors Use Proofs of Claim in a Bankruptcy Case

Blog

Aug 10

One of the purposes of bankruptcy is to provide creditors with distributions (made up of the debtor’s assets or income). Creditors must file proofs of claim to receive their share of the distributions. Surprisingly, many creditors do not file proofs of claim, thereby foregoing their shares of the distributions.

How Proofs of Claim Work
In most instances the debtor does not likely care, and may even benefit, if the creditor fails to file a proof of claim sharing in the distribution. Sometimes, though, the debtor wants the claim filed so that a certain creditor will receive some payment. A common example of this situation might be debt owed to a close relative.

  • The debtor’s asset will be liquidated and the proceeds will be distributed to creditors.
  • Those creditors share pro rata (proportionately) and will not be paid in full, in any event. If the debtor’s relative files a claim the relative will share in the distribution.
  • If the relative does not file a claim, the other creditors will get all of the proceeds. In this instance the debtor may well wish to see the relative get paid.

Other examples might be creditors whose debts will not be discharged in the bankruptcy case. These might be student loans or certain taxes. If these creditors file proofs of claim the amounts the debtor will have to pay after bankruptcy will be reduced.

How Debtors Can File Claims

The Bankruptcy Rules provide a mechanism for debtors to file proofs of claim for creditors who fail to do so. The debtor has the right to file proofs of claim for any creditors who have not timely filed. The creditor must file a proof of claim by the determined bar date. If they’ve not done so, the debtor has 30 days following the bar date within which to file any proofs of claim it chooses.

The debtor need not file proofs of claim for all non-filing creditors, but can pick and choose whether or not to do so.

This ability can be of great benefit to debtors. Yet we consistently see debtor’s counsel who fail to take advantage of this opportunity. Just this past week I overheard an experienced and very well-respected bankruptcy attorney state that this process was not available to debtors in Chapter 7 cases.

That is not accurate, but the error is quite understandable. The bankruptcy code is complicated and has many nuances. When I overheard that experienced bankruptcy lawyer make that statement, I had to consult the rules to verify that my own thoughts were accurate.

The policy in our office is to calendar bar dates and review every file for any possible creditors for which our client may want to file claims. Over the years we have saved clients hundreds of thousands of dollars in this fashion. Because we have systems and processes for doing so, we have achieved these results at very little cost to our clients.