For Debtors, Chapter 7 Liquidation is the ultimate relief, while Chapter 13 and 11 Reorganization offers an opportunity to reduce their Debtor’s payments in light of their income. In either type of case however, the Creditor is not entitled to anything until it has filed is Proof of Claim.
What Is a Proof of Claim?
The Proof of Claim or “PoC” is the means by which Creditors state:
- How much they are owed by this Debtor;
- Why they are owed that much to begin with; and
- Whether debt is secured by property of the Estate.
Different types of cases contain strict deadlines for filing a PoC, and each PoC should be accompanied by supporting documentation such as a calculation of sums due, a copy of a Judgment Order, etc.
Will The Claim Be Paid?
Once filed, the Creditor’s PoC represents what could be paid to it, presuming:
- The Debtor has sufficient assets to liquidate in order to pay the Creditor’s Claim; or
- The Debtor’s Reorganization provides for full payment of creditors – a “100% Plan.
But in the overwhelming number of cases the reality is:
- The Debtor has few if any assets to liquidate, resulting in a “No Asset” finding; or
- The Debtor’s Plan of Reorganization involves paying only a small fraction of debts.
What If The PoC Is Wrong?
If a Debtor believes that a Creditor filed a materially false or inflated Claim, that Debtor may file an Objection to Proof of Claim. The Objection will require the Creditor to support, clarify, or defend its Claim. Creditors that fail to do so may lose their Claim altogether. As in the case of the PoC, there is a strict time limit in which to file Objections. Failure to do so is fatal to the Objection and permits the Creditor to pursue whatever amount it seeks.
For Creditors whose Debtors file Bankruptcy, the key to collecting is diligence and proactive planning. For Debtors whose Creditors continue to pursue them even past a Bankruptcy filing, it is critical to know what a Creditor can legitimately seek, what it cannot, once a Bankruptcy has been filed.
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