When a company files for bankruptcy and it owes you money, it means you have a “claim” in the debtor’s bankruptcy proceedings. A claim, in short, is a right to payment. A creditor with a claim must often take affirmative action by filing a “proof of claim” form in order to preserve and protect its rights to payment.
Filing a proof of claim can be a relatively simple process involving the submission of a short form. But it’s often not that easy, and the negative consequences of doing it wrong can be severe.
Experienced legal counsel can help you to avoid the common pitfalls inherent in filing a claim. While the information below provides a general overview of many of the most salient issues, there are many nuances and considerations that should be taken into account with all of these issues, and an attorney can help you to identify and weigh them.
Do You Have to File a Claim?
If you’re owed money by a bankrupt debtor, you likely have to file a claim. The technical definition of a “claim” under Section 101(5) of the Bankruptcy Code is: “(A) a right to payment, whether or not reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured; or (B) a right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured.”
The only instance when you would not have to file a claim for money you are owed is if your claim is accurately reflected on the debtor’s schedules (which must be filed shortly after a case is filed) and is not listed as disputed, contingent or unliquidated. A creditor must take care to ensure that the claim amount listed on the debtor’s schedules is accurate and the claim is scheduled against the right debtor (in cases involving more than one debtor entity). Even when a claim is scheduled, and assuming there are no reasons not to (see below), a creditor may choose to file a claim to guard against a debtor modifying or removing its scheduled claim.
By When Must You File a Claim?
The bankruptcy court will establish a deadline, or “bar date,” by which claims must be filed. That said, a claim can be filed well in advance of the bar date. Often, it’s best to strike the right balance when it comes to timing—not so early that all information related to your claim isn’t captured, but not so late that you’re bumping up against the deadline. It’s important to follow all procedures set forth in the Federal Rules of Bankruptcy Procedure, local rules, and orders issued in the case when it comes to the timing of the submission of your claim form. Don’t put yourself in a position of having to petition the court to late-file a claim due to an avoidable mistake or misunderstanding regarding the applicable rules.
What Supporting Documentation is Required to Assert a Claim?
Federal Rule of Bankruptcy Procedure 3001 provides that proofs of claim must conform to the applicable proof of claim form. Rule 3001 states that when a claim is based on a writing, “a copy of the writing shall be filed with the proof of claim.” In the event the writing has been lost or destroyed, “a statement of the circumstances of the loss or destruction shall be filed with the claim.”
In practical terms, this means that a proof of claim form should include supporting documentation such as relevant contracts, invoices, and correspondence sufficient to support the claim. While the supporting documentation need not be exhaustive, it should be inclusive of all pertinent information necessary to demonstrate the basis of the claim.
In some cases, a creditor will need to file a “contingent” or “unliquidated” claim—meaning a claim is open-ended or the claim amount has yet to be determined—and explain the basis for doing so. The filing of contingent and unliquidated claims is permitted, but it’s a good idea to discuss the risks (and potential benefits) with legal counsel before doing so.
What Happens if the Debtor Objects to My Claim?
The debtor has the opportunity to object to claims filed in the case. The bases for claim objections vary, from disputes as to the amount asserted to arguments that the claim was filed against the wrong entity. A creditor must be served with an objection and has an opportunity to respond.
Often, claim objections are resolved without the parties having to resort to extensive litigation in the bankruptcy court. The lawyers for a creditor and the debtor will typically attempt to reach a resolution of the objection through negotiation and additional information sharing.
Depending on the dollar amount at stake, and the differing viewpoints of the parties as to the merits, some claim objections will not be capable of resolving and it will be necessary to litigate to a resolution. In such instances, additional discovery and a trial before the bankruptcy court may be necessary.
Are There Risks to Filing a Claim?
One of the primary risks that must be considered before filing a claim is that the act of filing a claim constitutes a creditor’s consent to the jurisdiction of the bankruptcy court. The consent is not only to jurisdiction to adjudicate the claim, but also extends to related matters including claims that the debtor may have against the creditor. Accordingly, before filing a claim, a creditor should consult with legal counsel to determine whether there is any risk that, by filing a claim, the creditor will put itself at risk of being sued in the bankruptcy court.
Protect and Preserve Your Rights With a Proof of Claim
Increasing numbers of businesses being affected by the economic fallout from COVID-19 are filing for bankruptcy protection, which means that an increasing number of businesses will be forced to pursue claims for prepetition debts through bankruptcy court. The consequences of not properly preparing and filing a proof of claim can be severe, so it’s important to consult with legal counsel to ensure that your rights are protected. For questions or assistance, please contact Fraser Trebilcock attorney Jonathan T. Walton, Jr.
This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.
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Jonathan T. Walton, Jr.’s legal practice focuses on cases arising from commercial transactions, the Uniform Commercial Code, the federal and state securities laws, banking laws and bankruptcy litigation. In the areas of banking, commercial, construction and real estate litigation, he represents lenders, contractors and owners on construction-related claims, and lenders and borrowers in commercial and residential foreclosure matters, large loan defaults and collections, lien priority disputes, and title insurance company liability. He can be reached at (313) 965-9038 or jwalton@fraserlawfirm.com.