In most Chapter 7 cases, there is not much practical effect to what creditors put on their proofs of claim.
Bankruptcy Debts, Claims, and Proofs of Claim
Filing bankruptcy is of course about dealing with your debts. A debt is what you owe to a creditor on its claim against you. A creditor files a “proof of claim” in your bankruptcy case, stating how much you owe and its basis for that. See Section 501 of the U.S. Bankruptcy Code.
Objecting to a Proof of Claim
You as the debtor can accept that proof of claim or you can object to it. You can object that you owe the debt altogether or that the amount is wrong. If you don’t object, the claim “is deemed allowed.” The bankruptcy court assumes that whatever the creditor put into its proof of claim is accurate. See Section 502(a).
If you do object, the bankruptcy “court, after notice and hearing” shall determine the amount of such claim…. and shall allow such claim in such amount… .” See Section 502(b).
What Difference Do Creditor’s Proofs of Claim Make?
The proofs of claim filed by creditors can make all the practical difference in the world. Or they can make no difference at all. It depends on the circumstances of your case.
First of all, in many, probably most, bankruptcy cases there is little or no dispute about how much the debtor owes on his or her debts. So in a case like that you would have no grounds to object to your creditors’ proofs of claim.
Second, in many cases some of the creditors, or even all of them, don’t receive any money through the process. So it doesn’t matter what they put on their proofs of claim. Whatever they claim does not change that they are getting nothing.
Third, even when the creditors are receiving something, often their proofs of claim make no practical difference. They do not affect the amount you pay. That’s because in many consumer bankruptcies there is only a set amount of money available. The amounts of debts reflected in the proofs of claim don’t change what you have to do. There is a limited pot of assets or money that the creditors must share. The amounts in each proof of claim at most just affect how that pot is distributed among the creditors.
And yet, in some cases what the creditors put on their proofs of claim can make all the difference. Let’s look at this in Chapter 7 cases today, and then in Chapter 13s in our next blog post.
What Difference to Proofs of Claim Make in Chapter 7 Cases?
Chapter 7 “straight bankruptcy”—the most common form of consumer bankruptcy—usually does not involve proofs of claim at all. That’s because most of the time there is no money to distribute to creditors at all. That’s because most cases are “no asset” cases—everything the debtor owns is “exempt,” protected from the creditors. The Chapter 7 trustee has no right to take anything to “liquidate” on behalf of the creditors. With nothing to liquidate, there’s nothing for the trustee to distribute, and no reason for the creditors to file proofs of claim. Indeed, at the beginning of a consumer Chapter 7 case creditors are often told not to file proofs of claim. They’re told that if the trustee does find assets to distribute creditors will then be asked to submit their claims.
And even in the small minority of Chapter 7s that are “asset” cases, the proofs of claim make little difference. That’s because there is a very limited pool of money distributed—the proceeds of the trustee’s sale of non-exempt assets. The amount generated from that sale is puny compared to the amount of the debts. And the amount available for the creditors is fixed. So, as mentioned above, there is a limited pot of assets or money that the creditors must share. The amounts in each proof of claim at most just affect how that pot is distributed among the creditors. It doesn’t increase or affect what you have to do.
Let’s make this clearer with a simple example. You have one of those somewhat unusual Chapter 7 cases in which you have a non-exempt asset. You closed a business and have some leftover business equipment. Or a boat you no longer want to maintain. Either way let’s say the trustee sells whatever is not exempt for $5,000. You owe $3,000 in “priority” income taxes to the IRS, plus $100,000 to all your other creditors. The trustee is required to pay the taxes in full before paying anything to the other creditors. He or she also receives a fee of as much as 25% the $5,000 for doing the liquidation and distribution. There is less than $1,000 left over for the other creditors, who are paid pro rata based on their proofs of claim.
So you can see that, with that limited amount to distribute, it hardly ever makes any practical difference what all the other creditors put on their proofs of claim in most Chapter 7 cases.