When most people hear someone is filing bankruptcy, they often think the debtor has virtually no assets to speak of. While that may be true in some cases, that is not true in others. There are some chapter 7 cases where there are some assets that are recovered by the bankruptcy trustee. In all chapter 13 cases, the debtor must make monthly plan payments of disposable income to the chapter 13 trustee, who then distributes the money among the creditors according to the chapter 13 repayment plan.
This begs the question of how the trustee in the case knows how to pay a particular creditor and in what amount?
The answer is bankruptcy claims are not paid out unless a creditor has filed a proof of claim. Without the filing of the proof of claim form with the bankruptcy court, the creditor has not proven that it is entitled to any money out of the debtors bankruptcy estate, even regardless of the fact the debtor might have acknowledged the owing of the debt in the debtors own bankruptcy petition.
When the debtor files bankruptcy, notice of the filing goes out to all creditors on the creditor matrix. The creditors receive notice of the meeting of creditors (341 hearing, as well as an Official Form 10, otherwise known as a Proof of Claim form. The notice states the deadline when the form must be completed for the creditors claim to be accepted by the trustee.
The proof of claim form requests that the creditor identify their claim as one of three categories- either secured, unsecured or priority claims. It also states the creditor should provide some proof of the debt, which could mean a signed contract, deed, email, etc.. Once filed with the court, the claim is presumed valid unless the debtor objects. The debtor can object to the creditors claim, in which case it will be set for a hearing no earlier than 33 days after the objection is filed. The debtor will want to object if the creditors claim is invalid or is for an incorrect amount, or else the creditor might get paid more than they are entitled.
Will the creditor definitely be paid something by the trustee if it fills out its claim form? The answer is no, not necessarily. If for instance this is a chapter 7 no asset case, then there are no assets to distribute to any creditors, regardless of whether the form was filled out. Another scenario where a creditor could fill out the form and not be paid is in a chapter 13 where the unsecured dividend is 0%. If the creditor filling out the form is an unsecured creditor and the confirmed plan calls for them to get 0%, the unsecured creditor who filled out the form will get $0, just like the unsecured creditor who did not fill out the form.
Debtors might be wondering if there are any circumstances where they should fill out a form on behalf of a creditor who has not yet filled out their proof of claim form by the deadline. The answer is unequivocally yes. Below are circumstances where it behooves the debtor to fill out a proof of claim form on behalf of a creditor. This does not cover every circumstance whereby the debtor might want to fill out the form:
- The debtors relative is a substantial creditor of the debtor and there is a distribution owed to the debtors chapter 7 creditors. The debtor would prefer the relative receive as much of the proceeds as possible from the trustee rather the debtors other creditors, of whom he/she has no relation.
- The debtors chapter 13 repayment plan calls for the debtor to pay his/her unsecured creditors $15,000. The debtor has a non dischargeable student loan, which is considered an unsecured claim. Since the student loan will survive the debtors bankruptcy discharge, the debtor would prefer the student loan receive as much of the proceeds as possible during the chapter 13 to reduce the balance owed at the end of the plan.
- The debtors chapter 13 repayment plan calls for the debtors car to be paid off in full through the plan. The debtor needs the car lender to have a filed proof of claim or else the debt will not be paid off. While the debt will ultimately be discharged if the debtor completes the plan, the secured lender will not have been paid without a proof of claim, and the debtor would then not receive title to the vehicle.
The above examples show that while a lot of proof of claim filings ultimately do not affect the debtors discharge status, they do have a crucial impact. The last thing a debtor wants to deal with after going through bankruptcy is to find out that he/she is not in as nearly a positive financial situation as possible because a simple proof of claim form was not filled out.