10. What is a claim by creditors of the bankruptcy estate?
A claim is a notice to the trustee of the debtor’s estate that the debtor owes a fixed amount to the claimant. Claimants are creditors of the estate. For liquidation bankruptcies and personal reorganization bankruptcies, creditors of the estate must submit a proof of claim within a specific period of receiving notice of the bankruptcy filing. A creditor that fails to file a claim against the estate is barred from later collecting that debt if the bankruptcy filing proceeds to discharge of the debtor. Below are several important aspects about claims against the bankruptcy estate:
• Proofs of Claim – At the commencement of a bankruptcy case, the debtor is required to provide a list of all assets and debts to be included in the estate. The debtor must also identify all creditors holding these debts. Creditors are then given notice of the debtor’s bankruptcy case with instructions on how to submit a claim. Creditors must then submit a proof of claim attesting to the court the nature and amount of the claim. If a creditor submits a secured claim, she must include evidence of a security interest. Creditors in Chapters 7 and 11 bankruptcies must file the proof of claim within 90 days of learning of the bankruptcy case. In Chapter 11 cases, the court will establish a “bar date” by which creditors may file a proof of claim; but, filing a proof of claim is not necessary to receive a distribution from the debtor’s estate. All creditor claims are generally allowed, unless the claim is challenged by the debtor, trustee, debtor-in-possession or by other creditors.
⁃ Note: In some cases, unsecured creditors may request the court appoint a “creditor’s committee” to represent their collective interests and communicate with the debtor in possession.
• Disputing Proofs of Claims – When a creditor submits a claim against the bankruptcy estate, other parties in interest (such as the debtor, trustee, DIP, or other creditors) can file an objection to the claim. If a third-party opposes the claim, this creates a “contested matter” which is adjudicated in a proceeding before the bankruptcy court. The objecting party must demonstrate that the claim is not valid. If the party presents some evidence against the claim, the claimant will have to introduce evidence to support her claim. A trustee or debtor in possession generally pays based upon the amount of claim “allowed” by court.
• Secured and Unsecured Claims – A secured claim is the amount of a debt equal to the “value” of creditor’s interest in assets of the estate. The claim is bifurcated and is secured to extent of the value of the collateral. Any amount of the creditor’s claim beyond the value of the collateral is classified as an unsecured claim. The amount of a claim is generally the debt owed at the time of filing, including all amounts that accrue pre-petition, interest, late charges and attorney’s fees. A debt generally does not receive interest during the pendency of the bankruptcy without special exception. Debts arising after the filing of bankruptcy are not included in the bankruptcy estate. The only post-petition debts included in the bankruptcy estate are the administrative expenses of managing the estate or instances of post-petition financing. These claims generally receive administrative priority over the unsecured claims. The difference between the allowed claim amount paid to the creditor and the amount of the creditor’s claim is the amount of the debt discharged in bankruptcy.
⁃ Note: To be included as part of a secured or unsecured claim, attorney’s fees must be permitted by contract or state law. If so allowed, attorney’s fees are treated the same as interest on the debt.
• Discussion: What do you think about the requirement for all creditors of the debtor to submit claims to the bankruptcy estate? Is the requirement to dispute claims adequate? Do you agree with the manner in which secured and unsecured claims are handled?
• Practice Question: ABC Corp files for Chapter 11 bankruptcy (reorganization). 123 Corp is a creditor of ABC. ABC sends notice of the bankruptcy filing to all creditors. What are the requirements for 123 to be paid on its claim? What happens if ABC or any other creditor disputes 123’s claim against the estate? If the debt owed to 123 is secured by collateral that is only worth one half of the amount of the debt, how will this be handled?