When a consumer debtor files a bankruptcy petition, a notice is mailed out by the court to all of the debtor’s scheduled creditors. In most bankruptcy courts, the notice contains the debtor’s filing date, case number, and other pertinent information meant to aid a creditor in identifying the debtor. In addition, the notice typically contains several important dates and deadlines.
For purposes of this article, the most relevant date is the deadline to file proofs of claims, often referred to as the “claims bar date.” That date marks the last permissible point for a creditor to file a proof of claim. A proof of claim is just that—a document filed with the court which is offered to make the bankruptcy court aware of a creditor’s claim and the particulars of that claim.
This article will discuss, from a bird’s eye view, when it makes sense to file a proof of claim, how to file a proof of claim (and the necessity of including documents in support of the proof of claim), and issues related to an objection being raised against a claim.
When to file a proof of claim.
It typically only makes sense to file a proof of claim in a bankruptcy case when it appears that monetary distributions to unsecured creditors will be made by the bankruptcy court. For instance, if a consumer debtor files a chapter 7 bankruptcy petition and has no assets for a chapter 7 trustee to liquidate for distribution, then a creditor really has no incentive to file a claim. In contrast, if a consumer files a chapter 13 bankruptcy petition and proposes a plan into which he or she commits income for the next three to five years with a proposed pay out of 30 percent of unsecured claims, then it probably makes more sense to file a claim. Those examples are simplified and do not take into account some of the necessary nuances. Other important considerations are whether a debt is secured, and in that case, whether the debt is over-secured or under-secured compared to the value of the collateral. Likewise, as highlighted by the example above, the particular bankruptcy chapter under which a debtor chooses to file influences the likelihood of potential distributions. In the end, a careful review of a bankruptcy debtor’s petition and schedules is necessary to assess the merits of filing a proof of claim.
How to file a proof of claim and the necessity of documentation.
A proof of claim can be filed with the clerk of a bankruptcy court in any particular form; however, the vast majority of claims are filed using a pre-drafted, fill-in-the-blank “official form.” That form, form B10, can be obtained online via most every bankruptcy court’s website, and the “United States Courts” webpage also contains a link to form B10 within its “Forms and Fees” section. Form B10 requires a creditor to indicate the debtor’s name and case number, along with the creditor’s name, address, address for payment distributions, claim amount, claims status (secured, unsecured, priority, etc.), and asks a creditor to attach any supporting documentation. Notably, the proof of claim must be signed under penalty of perjury. If a creditor happens to be filling out form B10 without the assistance of an attorney, it contains some pretty specific instructions in order to accomplish the task.
One item referenced above warrants discussion: the necessity of including documentation. The complexity and type of a claim dictates the amount of documentation that is necessary; but, as a general rule, it makes sense to attach any supporting documentation that a creditor has to its proof of claim. Typical attachments include pay histories, loan documents, contracts, powers of attorney, copies of judgments, and the like. In some circumstances, it makes sense to include a summary or breakdown of certain amounts included in the claim—think fees or arrearage amounts. In other circumstances, like with residential mortgage claims in chapter 13, such summaries are required. Attaching documentation is important for a couple of reasons. First, speaking generally, a proof of claim which is filed in accordance with form B10’s suggestions is entitled to prima facie validity. A claim which enjoys prima facie validity can withstand an initial attack from an objecting debtor or trustee. Second, it lessens the likelihood that a claim is objected to in the first place.
Objections to claims.
The Bankruptcy Code and the Bankruptcy Rules give any “party in interest” the right to object to a filed proof of claim. At its base, an objection to claim is really just a statement by the objecting party that the amount or some other relevant aspect of the claim is disputed. For instance, objections to claims often concern the amount of debt that a creditor asserts. In that circumstance, resolution of the claim often involves analyzing pay histories, bank records, and cancelled checks. In other instances, an objector questions the secured status of a creditor’s claim. In that case, resolution of the objection usually requires consideration of loan documents and issues related to perfection and security. Sometimes, an objection concerns the value of a claimant’s secured interest when compared to a piece of collateral. In many jurisdictions, objections of that sort require the filing of an adversary proceeding.
Objections to claims are typically filed by debtors or bankruptcy trustees. The filing of the objection creates what is known as a “contested matter.” A contested matter is a proceeding in bankruptcy court which acts like a lawsuit but does not include many of formalities of a lawsuit like the filing and serving of a complaint and answer. Even so, the rules of discovery apply in contested matters, and a court can, and often must, conduct full evidentiary hearings in order to resolve objections to claims. Moreover, all sorts of issues can be raised in objection to claim proceedings as long as those issues do not come in the form of a demand for affirmative relief by an objector (i.e., a claim for the recovery of money or property). For those reasons, objections to claims can be costly to defend. However, a creditor who puts the work in on the front end by filing a thoroughly supported claim potentially saves money down the road by simply avoiding an objection.
As referenced above, a properly filed proof of claim enjoys prima facie validity as to amount. That means that the claim is presumptively allowed when filed, shifting the burden to rebut the presumption onto the objector. To rebut the presumption, the objector must present evidence against the creditor’s claim which is of equal force to that included in support of the proof of claim. After that, the burden shifts back to the creditor claimant to prove its claim. That evidentiary shift highlights the importance of correctly completing form B10 when filing a proof of claim and of including clear and understandable documents and information in support of the proof of claim. For example, if a creditor files a proof of claim evidencing a secured debt in the inventory and receivables of a small business debtor, and the creditor includes the signed loan documents, an updated pay history, and a filed UCC-1 in support, an objecting party is going to have a hard time overcoming the evidentiary presumption when faced with all of that proof.
As a bottom line, issues related to proofs of claim can range from very simple to highly complex and expensive. An experienced bankruptcy attorney can take the mystery out of the process and guide you down the right course.