What is a Bankruptcy Proof of Claim?

a man showing empty pockets

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If you've received a notice from a bankruptcy court about someone who owes you money, do you know what you need to do to get paid?

In many Chapter 7 cases, there may not be anything left to pay creditors because the debtor can exempt quite a bit of property. Exempt property isn't sold or auctioned off during a bankruptcy. The non-exempt property is sold by the court-appointed trustee and distributed to creditors as cash payments. How does the trustee determine how much to pay each creditor? That is where the Proof of Claim comes into play.

Proof of Claim in a Bankruptcy Case

Before a creditor can be paid in a bankruptcy case, he has to fill out and file a Proof of Claim form with the bankruptcy court. The form is almost always available on the bankruptcy court's website. Or you can download a copy of the official form on the website for the United States courts. 

The form requires that the creditor indicate the name of the debtor, the case number, the creditor's name and address, and the amount of the debt. The creditor must also indicate whether the claim is secured—protected by collateral such as a home or car—or unsecured.

The creditor must also fill out a few other details, including if the claim is entitled to priority payment over other creditors (domestic support obligation such as child support would qualify). Finally—and this is very important—the creditor must attach any documents that support the claim. The form must be completed and filed by a deadline established by the court.

Trustee's Notice to File Proof of Claim

Generally, a proof of claim will only be filed by a creditor if the bankruptcy trustee declares the case an "asset" case. In a "no-asset" case, there are no funds available to disperse. If it is an asset case, the court will send out a notice to this effect and will include information about how to file and the deadline.

The Creditors Who Are Paid First

The trustee pays himself a small percentage of anything he collects from the debtor. So this means that the trustee pays himself before all creditors. After that, priority debts are paid. Priority debts include domestic support obligations; wages, salaries, or commissions up to a certain amount and earned within 180 days of the bankruptcy; contributions to employee benefit plans; a certain amount of deposits for the purchase or rental of property; and taxes and penalties owed to the government. Once all the priority debts are paid, whatever's left goes to the unsecured creditors (those without collateral), on a pro-rata or proportional basis. 

Claims Trading

A secondary market has sprung up for the buying and selling of bankruptcy claims, called claims trading. A creditor not involved in the bankruptcy may buy the claim of a creditor that is owed money by the debtor. If this occurs, a document indicating the claim trade must be filed with the bankruptcy court.

What Creditors Should Do in a Bankruptcy Case

If you are a creditor in a bankruptcy, you need to be aware of any deadlines to file a proof of claim. Deadlines vary according to the chapter that governs the case.

In Chapter 7, as described above, the court will send a notice of the claims deadline after the trustee determines that there may be assets to liquidate and use to pay creditors. In Chapter 13, the deadline is 90 days after the first date set for the meeting of creditors. In a Chapter 11 case, the court will set the claims deadline. 

Therefore, you need to be very careful about reading all of the documents that you receive regarding the case. The best thing to do is to hire a bankruptcy attorney to help you navigate the bankruptcy case and to protect your rights as a creditor.

You'll likely need professional guidance, even it's simply to have an experienced attorney review the form after you've filled it out. Remember that just filing a proof of claim does not guarantee a creditor will be paid. In fact, in Chapter 7 bankruptcies most creditors will get nothing.

– Updated by Carron Nicks