What is a Proof of Claim in Bankruptcy?

A proof of claim is what creditors are required to submit to the bankruptcy court before they can receive any money from the bankruptcy trustee. It’s the creditors’ way of saying, “I’m owed money, and here is how much, and why.” The trustee and the person who filed bankruptcy are given an opportunity to review and may object to any proof of claim that is filed in the case. Let’s take a closer look at how this all works.

Proof of Claim - the Basics

As part of your bankruptcy case, you’re required to file a list of everyone you owe money to. This list of creditors needs to include account information, and an estimation of how much you owe each person or company. The court then sends a notice of bankruptcy to each creditor listed in the bankruptcy forms.

Creditors listed in a bankruptcy filing don’t automatically get money from the bankruptcy case. If they want to receive funds from the trustee, they’ll have to file their own papers with the court. This is called a “proof of claim.”

In this document, the creditor tells the bankruptcy court a bit about the history of the loan and the amount of the claim. It makes sense that creditors need to send these papers to the court – they’re the ones with the official records related to the account. Also, because they have some right to the filer’s money, they should get to tell the court the amount of the debt.

The bankruptcy court also requires creditors to have some proof the filer owes them anything. They’ll need to provide paperwork showing that the debt actually exists, like promissory notes, financing statements, or security agreements, and how much money the filer owes, like a recent statement or bill. Every creditor has to file the same Proof Of Claim form if they want to receive money from the bankruptcy estate.

Anybody you owe money to can file the official form. This includes hospitals and doctors you owe medical bills to, your credit card company, and yes, even family or friends you borrowed money from.

Creditors who receive a notice of bankruptcy don’t have to file a proof of claim with the court. But, under the Bankruptcy Code, if they don’t file their paperwork, they won’t receive anything from the bankruptcy estate. Creditors who don’t file the official paperwork can still have their debts discharged once the bankruptcy case is over. Additionally, the proof of claim paperwork can’t change a non-dischargeable debt into a dischargeable debt.

How Common Are Proofs of Claim in Chapter 7 Bankruptcy?

Proofs of claim in Chapter 7 cases aren’t actually common. Nearly every Chapter 7 case is filed as a “no-asset case,” because the filer doesn’t have anything the trustee can sell, or liquidate, to pay creditors.

With these cases, the Bankruptcy Code still requires the court to send out the notice of bankruptcy to creditors, but the initial notice tells creditors that they don’t have to file a proof of claim until further notice. 

If assets that can be sold are discovered down the line, the trustee will ask the court to send out a separate notice with a deadline for proofs of claim. If your trustee does set a deadline to file proofs of claims, known as a bar date, you’ll know that the trustee plans to liquidate some assets.

Objecting to a Proof of Claim

With Chapter 7, if any proofs of claim are actually submitted, usually only the trustee can object to the filed claim. Usually, the filer doesn’t have a stake in whether a particular creditor gets paid, so they don’t have any standing to file the objection. They can’t win or lose anything if a creditor files a proof of claim, so they can’t argue against the creditor’s claim.

However, if the filer does have enough money to pay off all the claims, and still have money returned to them, they have something at stake. In this case, the filer does have standing, or the ability to object. Even though this isn’t normally the situation with Chapter 7 cases, it does happen.

Unlike Chapter 7 Bankruptcy, in Chapter 13 cases, the filer usually pays a small amount to  most, or all of their creditors over a three- or five-year period. With Chapter 13 Bankruptcy cases, the proofs of claim are more than a formality. The filer makes monthly payments to the trustee, who divides money up among the creditors. Because the filer does have something at stake, they should review and, if necessary, file an objection to the proofs of claim. 

This is extra important with unsecured priority debts and secured debts. Unsecured priority claims, like back taxes and child support, must be paid in full. A secured claim, like your car loan or a mortgage on real estate, also must be paid in full if you want to keep the property. You still owe this money, whether or not the creditor files the official paperwork. You’ll be in a better financial situation if a higher portion of your monthly payments go towards this type of debt.

It’s less important to file proof of claim papers for unsecured creditors in this case, because they’ll receive a portion of whatever is left each month, and their debts will be discharged at the end of your Chapter 13 plan.

Why It May Make Sense for You to File a Proof of Claim on Behalf of a Creditor

After you file your bankruptcy petition, the court will set a schedule that includes a deadline for when creditors must file their proof of claim. This deadline is the “bar date,” because creditors who miss the deadline might be barred from filing their papers later. Under the bankruptcy rules, creditors who don’t file by that date might not get any funds from the trustee that are distributed from the bankruptcy estate.

Sometimes, creditors miss this deadline. For dischargeable debts, like medical bills and credit cards, it often doesn’t make a difference if these papers are actually filed, because in many cases they won’t receive any money from the trustee.

However, in cases with non-dischargeable debts, like domestic support obligations including child and spousal support (alimony), and taxes, it’s in the filer’s best interests that a proof of claim gets filed. If creditors for non-dischargeable debts don’t send their proof of claim to the court, you should file one for them. The Federal Rules of Bankruptcy Procedure give you 30 days to get this paperwork in after the creditor’s deadline to file a claim.

This paperwork won’t change the fact that the debt is non-dischargeable, and you will still need to pay it after your case is over. However, it does mean that at least some of your money will get paid towards this debt. Since you’ll be putting something towards your non-dischargeable debt, you’ll come out of the bankruptcy case owing this creditor less money.

Conclusion

There are a lot of bankruptcy rules about proofs of claim. However, most Chapter 7 filers don’t really have to worry about these claims. Most Chapter 7 bankruptcy cases are “no asset” cases, and even in the less-common cases where there are assets, most of those filers won’t need to worry about claims either.

If you’re considering whether bankruptcy is right for you, check out whether Upsolve is a good fit. Upsolve’s free web app can help you file a no asset Chapter 7 case for free if you can’t afford a bankruptcy attorney.