If your bankruptcy trustee is asking your creditors to file a proof of claim, it’s likely because the trustee discovered non-exempt assets in your case. Most Chapter 7 bankruptcy cases are no-asset cases. But if you have non-exempt property or assets, the trustee can liquidate or sell them. The funds from the sale are then used to repay your creditors at least part of what you owe. If a creditor wants to recover money through the liquidation process, they have to file paperwork called a proof of claim.
Written by Curtis Lee, JD.
Updated August 8, 2023
Most Chapter 7 bankruptcy cases are no-asset cases. But if you have non-exempt property or assets, they can be liquidated or sold by the trustee. Then those funds are used to repay your creditors at least part of what you owe. If a creditor wants to recover money through the liquidation process, they have to file paperwork called a proof of claim. If your bankruptcy trustee asks your creditors to file a proof of claim, it’s most likely because the trustee discovered non-exempt assets in your case.
That’s the short answer to the title question of this article, but it’ll make more sense if we can put it in the proper context. To do that, we’re going to step back and explain:
What a proof of claim is,
How the proof of claim process works, and
Why you or a creditor might want to file a proof of claim or object to one.
What Is a Proof of Claim?
It might come as a surprise, but the Bankruptcy Code doesn’t require the court or trustee to automatically send available money to your creditors if you file bankruptcy and have non-exempt assets. To be eligible to receive money from the bankruptcy estate, the creditor must first file a proof of claim.
A proof of claim is a statement from a creditor identifying debt it believes the filer owes them. Generally speaking, if a creditor fails to file a proof of claim, they’re not allowed to receive money from the bankruptcy case.
When you file bankruptcy, you’re required to give the court a creditor matrix — a list of your creditors and their addresses. The bankruptcy court uses this information to send out Official Form 309 to the creditors and other interested parties. This informs them of the bankruptcy. It also lists important details about the case, including the deadline to file a proof of claim (also known as a “bar date”).
Filing Proofs of Claim in Chapter 7 vs. Chapter 13
There are several variations of Official Form 309, depending on the type of bankruptcy filed and the need for a proof of claim. But Official Form 309 asking creditors to submit a proof of claim usually occurs in a Chapter 13 bankruptcies, but not Chapter 7 bankruptcies.
Chapter 13 Cases
Proofs of claims are common in Chapter 13 cases because filers have at least a few assets and/or some disposable income. This means the bankruptcy trustee can partially pay off at least some of the creditors. It may not be enough to fully repay all the debts, but it’s better than nothing for the creditors.
Except in special circumstances, if a creditor doesn’t file a proof of claim, they won’t get a single cent from the bankruptcy estate. This is true even if the filer has enough money to fully repay the debt.
Chapter 7 Cases
In a Chapter 7 bankruptcy case, proofs of claim aren’t common. That’s because most Chapter 7 cases are “no-asset” cases. If you have a no-asset Chapter 7 case, that doesn’t mean you don’t own assets or property. Instead, it means you don’t have assets that a bankruptcy trustee could use to pay off your debts. This means there’s no point in creditors filing a proof of claim.
In a no-asset case, Official Form 309 will tell creditors that they don’t need to file a proof of claim. Though if that changes, the trustee will let them know. This could occur if the bankruptcy trustee discovers non-exempt assets. The trustee can then sell these and use the proceeds to pay some of the creditors. If this happens, the bankruptcy trustee will send the creditors a special notice asking them to file a proof of claim by a specific deadline.
Who Can File a Proof of Claim?
If someone claims that you owe them money, they’re likely eligible to file a proof of claim. Traditional creditors, like hospitals, utility companies, and credit card companies can all file proofs of claim. Individual creditors, including friends and family members that loaned you money, can also file a claim.
To file a proof of claim, the creditor has to fill out Official Form 410 and file it in the same court that’s hearing your bankruptcy case. The creditor’s claim must include the following information:
The filer’s name and bankruptcy case number.
The creditor’s name and contact information.
The amount of money the filer owes the creditor.
The reason the debt exists.
The type of debt: secured or priority debt.
The creditor also needs to provide documents to support their claim. This could be a copy of a promissory note, mortgage agreement, court judgment, etc.
How Long Do Creditors Have To File a Claim?
Private creditors have 70 days from the bankruptcy filing date to file their proof of claim. If the creditor is a government entity, they have 180 days from the date of the bankruptcy filing. If creditors need to file a proof of claim, as is the case in most Chapter 13 bankruptcies, Official Form 309 will list the exact submission deadline.
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What Does It Mean To Object to a Proof of Claim?
If someone has a financial interest in the proof of claim, they can file an objection if they disagree with it. Most objections are made because someone disagrees with:
The amount of the debt claimed,
The classification of the debt (as a secured debt when it’s an unsecured debt, for instance), and/or
The documentation provided to support the debt claim.
Trustee Objections in Chapter 7 Cases
In most cases, the bankruptcy trustee will be the one filing an objection. If you file Chapter 7 and have non-exempt property (this is rare), it’ll be turned over to the bankruptcy trustee and distributed to your creditors. If this distribution of assets is used to pay off dischargeable debts, the filer normally won’t have the right to object to a creditor’s proof of claim. If a creditor were to file a proof of claim to go after this property and there’s an objection, it’s normally the trustee that will object, not the filer.
This is because the proof of claim relates to a debt that the filer will no longer be responsible for. So whether a creditor has a valid proof of claim shouldn’t matter to the filer since their debts are getting discharged.
Filer Objections in Chapter 7 Cases
There are rare cases where the Chapter 7 bankruptcy filer has enough property to fully pay all their debts with at least a little bit leftover. If this happens, then the filer could object to a creditor’s claim. Things are different in this situation because the court’s decision on the proof of claim will directly affect how much money the filer can hold on to.
A Chapter 7 filer might also object to a creditor filing a proof of claim for a non-dischargeable debt or a secured debt. When there’s a non-dischargeable debt, a filer could object because these debts aren’t discharged in a Chapter 7 bankruptcy. So the filer must pay these back after the bankruptcy case ends.
As for secured debts, filers must often continue making payments on those debts if they want to keep the property used to secure those debts (like using a reaffirmation agreement for a car loan). So in either of these situations, the filer has a clear interest in making sure this debt is valid and in the proper amount. We’ll explain how this works for Chapter 13 cases later in this article.
Filer Objections in Chapter 13 Cases
As for Chapter 13 bankruptcies, the filer has a financial interest in all debt claims. When the court accepts proofs of claim, the filer needs more time and money to comply with the repayment plan. So if the filer disagrees with a particular proof of claim, they should object to it.
The exact process for objecting to a proof of claim depends on the rules of the specific bankruptcy court handling the case. But objectors have to complete the necessary paperwork explaining why they think the proof of claim is incorrect and provide supporting documentation. The bankruptcy judge may also schedule a hearing date to help decide if the objection is valid. It may be useful to get legal advice from an attorney who knows bankruptcy law well if you want to file an objection.
Why the Filer May Want To File a Proof of Claim
It might seem counterintuitive, but in some situations, the filer should file a proof of claim on behalf of one or more of their creditors if the creditor doesn’t file one. This is especially true when dealing with certain secured creditors or non-dischargeable debts.
Filing a Proof of Claim on Secured Debt
Even if the bankruptcy discharges a secured debt, the creditor still holds a lien on the property. This means if the filer wants to keep the property that’s serving as collateral for the debt, the filer must continue making payments on the debt.
One of the most common types of secured debt in bankruptcy is a home mortgage. People who are trying to save their homes from foreclosure often file Chapter 13 bankruptcy because it allows them to catch up on missed mortgage payments and keep their homes. They make up the missed mortgage payments as part of their Chapter 13 repayment plan.
If you file Chapter 13 for this reason and the mortgage lender never files a proof of claim, you might not get to include your mortgage in the repayment plan. This makes it harder for you to keep your home. To prevent this, you can file a proof of claim on behalf of the mortgage lender.
Filing a Proof of Claim on Non-Dischargeable Debts
As for non-dischargeable debts, it sometimes makes sense for filers to file a proof of claim on behalf of unsecured creditors with priority claims (who often hold non-dischargeable debts). Examples of these types of debts include:
Student loans (in some cases)
Back taxes like income tax
Unpaid alimony or child support
You might want to submit a proof claim for a non-dischargeable debt during your Chapter 13 bankruptcy for two reasons. One reason is that even if no proof of claim gets filed, the debt still exists after the debtor’s bankruptcy proceeding ends. A second reason is that it might save you money in the long run.
Because Chapter 13 filers often don't have enough money to fully repay all their debts during the repayment plan, there’s a good chance that some of their debts will be discharged. But before that can happen, the filer must make regular payments for about three to five years as a part of a repayment plan. Then any eligible debts that remain after that time period, can get discharged.
If a creditor with a non-dischargeable debt doesn’t file a proof of claim during bankruptcy, then that debt doesn’t get included in the bankruptcy estate. If you file a proof of claim for a creditor with a non-dischargeable debt, you get to make payments toward that debt as a part of your three-to-five-year Chapter 13 repayment plan. Then at the end of the repayment plan, any remaining dischargeable debts are wiped out. You’ll still need to pay off your non-dischargeable debts, but they’ll be smaller after bankruptcy because they were included in the repayment plan.
Additionally, because some of the payments during the repayment plan went to your non-dischargeable debts, less money was used to pay off your dischargeable debts. As a result, when the repayment plan is over, the debts eligible for discharge will be bigger. This means you didn’t have to spend as much money to pay off debts that were eventually going to get discharged.
When a creditor files a proof of claim it’s telling the court that it has a debt it wants to be paid with proceeds from the bankruptcy proceeding. Because most Chapter 7 bankruptcies have no assets available to pay off any debts, creditors don’t typically file proofs of claim. But if there’s property available for the bankruptcy trustee to sell and proceeds to distribute to creditors (as is the case with Chapter 13 and some Chapter 7 bankruptcies), then creditors must file a proof of claim to get paid.
If someone disagrees with a proof of claim, they can file an objection. Individuals who file a bankruptcy petition won’t normally object to a proof of claim unless they file Chapter 13 bankruptcy or the proof of claim involves a non-dischargeable or secured debt (that’s secured by property the filer wants to keep). If a creditor fails to file a proof of claim, filers sometimes benefit from submitting one to the court on behalf of the creditor. This makes it easier for the filer to pay off a particular debt or keep certain property during the bankruptcy proceeding.