Filing for bankruptcy involves disclosing your debts, or “creditor claims,” on official bankruptcy paperwork. But as easy as that might sound, classifying claims can get a bit tricky.
First, you’ll list the debt as either a secured or unsecured claim. Then, you’ll divide the unsecured claims into priority and non-priority unsecured claims.
Listing Creditor Claims in Your Bankruptcy Paperwork
A bankruptcy case gets started after you complete and file official bankruptcy forms. The cover document, called the petition, is where you’ll disclose identifying information, such as your name, address, and the bankruptcy chapter you’re filing. You’ll provide details about your income, creditor claims (debts), and assets on forms called schedules.
Creditor claims will appear on one of two schedules:
• Schedule D: Creditors Who Hold Claims Secured By Property. Here you’ll include secured claims, such as a mortgage, car payment, or another collateralized obligation.
• Schedule E/F: Creditors Who Have Unsecured Claims. You’ll list unsecured claims on this form. Priority unsecured claims, such as unpaid taxes and child support, belong in Part 1. You’ll list your non-priority unsecured claims (all remaining debts) in Part 2.
A creditor with a secured claim in bankruptcy has two things: a debt that you owe and a lien (also called a security interest) on a piece of property you own. If you don’t pay according to the terms of your contract, the lien allows the lender to recover the property, sell it at auction, and apply the proceeds to the account balance. For instance, a mortgage lender with a lien can recover real estate in a foreclosure action, and a vehicle loan lender with a lien can recover a car through repossession.
Secured claims are often voluntary. For instance, if you agree to pledge an asset as collateral for the loan (a common practice when buying a house or car), you voluntarily give the creditor a security interest in your property.
Creditors can also obtain an involuntary lien against your property without your consent. For instance, a credit card company can get an involuntary lien after suing you in a collection lawsuit and winning a money judgment. When you fall behind on your taxes, statutory law gives the IRS the right to a tax lien against your property.
Common examples of secured bankruptcy claims include:
• car loans
• unpaid real estate taxes, and
• other property liens.
What Happens to Secured Claims in Bankruptcy?
A creditor with a secured claim is in a good position. A bankruptcy discharge (the order that wipes out debt) won’t get rid of a lien on your property. It only eliminates your liability to pay the debt.
Since the lien remains, the creditor can still foreclose or repossess the property if the loan doesn’t get paid. So if you file for bankruptcy and want to keep property securing a loan, you’ll have to continue making payments to the lender until you pay off the debt.
However, if there is significant equity in a house or car, a Chapter 7 trustee will likely sell it. But, because of the lien, the trustee must get enough to pay off the loan, return any exemption amount to you (the amount of equity you’re allowed to protect), and use the remaining funds to pay off creditors. If there isn’t enough equity to pay something meaningful to creditors, the trustee won’t sell the property.
If a property you’d like to keep has significant equity, a Chapter 13 case will likely be a better option. But you’ll have to have enough income to pay a hefty monthly payment for three- to five-years (you must pay the value of the nonexempt equity in the plan).
Eliminating Liens in Bankruptcy You can eliminate certain types of property liens in bankruptcy. For instance, you might be able to ask the court to:
• get rid of a judgment lien that impairs your bankruptcy exemptions, or
• wipe out a wholly unsecured junior lien from your property in Chapter 13 bankruptcy.
A creditor with an unsecured claim doesn’t have a lien. There are two types of unsecured claims:
• Priority unsecured claims. These debts aren’t dischargeable in bankruptcy and, if money is available, the claim will get paid before non-priority unsecured claims.
• Non-priority unsecured claims. Most of these obligations are dischargeable in bankruptcy (except student loans). All priority debts must be satisfied before these debts can be paid with bankruptcy funds.
Nonpriority Unsecured Claims
The bankruptcy discharge will eliminate most types of nonpriority, unsecured claims, but not all. Some of the most common nonpriority unsecured claims you can discharge in bankruptcy include:
• credit card debt
• medical bills, and
• personal loans.
Although student loans are unsecured debts, you can’t discharge them unless you can prove that it would be an undue hardship to pay them (which is a difficult standard to prove).
Priority Unsecured Claims
Priority unsecured debts aren’t dischargeable and receive special treatment. Priority creditors get paid before other creditors in bankruptcy.
Because you can’t wipe out priority debts in Chapter 7 bankruptcy, you’ll be responsible for paying any balance that remains after your Chapter 7 case (the bankruptcy trustee might sell some of your property and apply the funds to the debt). If you file for Chapter 13 bankruptcy, you’ll have to pay off priority unsecured debts in full through your three- to five-year repayment plan.
Proof of Claim in Bankruptcy
A proof of claim is the paperwork that a creditor must file before getting paid in a bankruptcy case. Under the bankruptcy payment system, some debts—like income tax and domestic support obligations—have “priority” status and are paid before other claims.
The proof of claim tells the bankruptcy trustee about the type of claim, as well as how much a creditor is owed, so the trustee can determine the amount to pay the creditor if anything.
Who Must File a Proof of Claim?
All creditors who wish to be paid out of bankruptcy funds must file a proof of claim. On December 1, 2017, the law was amended to make clear that in Chapters 7, 12 and 13 bankruptcy cases, a secured, unsecured, or equity secured creditor (with a few exceptions) must file a proof of claim to receive money from the bankruptcy estate. Of course, if funds aren’t available for distribution—such as in a Chapter 7 “no-asset” case—a creditor won’t be told to file a proof of claim. That status will change if the trustee finds undisclosed assets during the review period. Then the trustee will instruct creditors to file a proof of claim.
Secured Creditors and Liens
Like all creditors, a secured creditor—such as a mortgage or vehicle lender must file a claim in order to receive money through the bankruptcy estate (with a few exceptions). However, even if the secured creditor doesn’t file a proof of claim, the creditor won’t lose its lien.
This rule can be problematic for a debtor in a Chapter 12 or 13 case. Why? When a lien is in place, the debtor can keep the property securing the debt only if the debtor remains current on the loan. If the debtor doesn’t pay as agreed, the creditor will be able to take back the property, sell it at auction, and use the funds to pay down the loan. As a practical matter, if a secured lender doesn’t file a proof of claim in a Chapter 12 or 13 case (and won’t receive monthly plan payments), a debtor who wants to keep the property securing the claim (such as a house or car) has a couple of options.
• Pay outside of the plan. The debtor can make the payments directly to the creditor (instead of through the plan). However, if the debtor arranged to make the payment directly, it likely won’t be possible. Most of the debtor’s funds go into the plan leaving nothing left for a hefty payment.
• File a proof of claim for the creditor. The debtor can file a proof of claim on behalf of the creditor. Doing so will allow the trustee to use bankruptcy plan payments to maintain the secured payment.
When Must a Proof of Claim Be Filed in Chapter 7, 12, and 13 Bankruptcy Cases?
The deadline for filing a proof of claim for non-governmental creditors in a Chapter 7, 12, or Chapter 13 bankruptcy case is 70 days after the petition filing date. (On December 1, 2017, the previous deadline of 90 days after the first meeting of the creditors was shortened to the current period). Government entities have additional time. They must file a proof of claim within 180 days after the date of the order for relief (the bankruptcy filing date).
The first notice sent to creditors includes the deadline for filing proofs of claim. This notice informs creditors that a petition has been filed and indicates the date set for the meeting of creditors. This notice also sets the last date on which they can file objections to the discharge. Although the court doesn’t usually permit extensions once the deadline has passed, the court has the power to extend the filing time if a creditor shows extenuating circumstances.
What Must the Creditor Include in a Proof of Claim?
Here’s what the creditor must include in its proof of claim.
Formal Proof of Claim
A proof of claim must conform substantially with the official bankruptcy form, Proof of Claim (Form 410). You can download all of the official bankruptcy forms, including Form 410 from the U.S. Courts Bankruptcy Forms page.
The information a creditor will need to include is as follows:
• the debtor’s name and the bankruptcy case number
• the creditor’s information, including a mailing address
• the amount owed as of the petition date
• the basis for the claim (such as goods or services purchased, a loan or credit card balance, a personal injury or wrongful death award), and
• the type of claim (secured or unsecured).
The creditor should attach supporting documentation, such as the contract, as evidence of the claim. Official attachment forms are available. Also, the creditor or an authorized representative must sign the proof of claim.
Informal Proof of Claim
Some courts will accept an informal proof of claim from a creditor if it meets five requirements:
• the proof is in writing
• the writing includes a demand against the bankruptcy estate
• the writing demonstrates the intent to hold the estate liable
• the writing is filed with the bankruptcy court, and
• allowing the claim would be fair under the circumstances of the case.
Although a bankruptcy judge will consider these requirements, the decision about whether an informal proof of claim will be allowed is ultimately within the discretion of the bankruptcy judge.
Objecting to a Proof of ClaimWho Can Object to a Chapter 7 Bankruptcy Claim?
Only a “party in interest” can object to a claim in a Chapter 7 bankruptcy case. A “party in interest” is a person or entity that has a financial stake in the outcome of the claim at issue. Generally, in a Chapter 7 bankruptcy case, the Chapter 7 trustee will object to proofs of claim. But a Chapter 7 debtor might need to object to a claim, too. A Chapter 7 debtor will do so if the existing claims, as they stand, will cause the debtor to lose more property than necessary or cause the debtor to owe more than the debtor should after the closure of the bankruptcy case. This will usually happen only if an issue exists with a nondischargeable priority claim, such as taxes or a domestic support obligation.
Additionally, the majority of bankruptcy courts have held that a Chapter 7 debtor can object to claims if he or she shows:
• the debtor had a financial interest in the result because there is likely to be money left over once all claims are paid (this is rare in a Chapter 7 case)
• the trustee unjustifiably failed or refused to object to the claim or claims in question, or
• the debt owed by the debtor is not dischargeable.
The objecting party has the burden of presenting sufficient evidence that demonstrates the creditor’s claim should not be allowed. If the objecting party produces such evidence, the burden of proof shifts back to the creditor to prove their claim.
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