If a debtor who owes you money files for bankruptcy, it is important that you understand what you need to do to get paid. Unfortunately, in most Chapter 7 cases, there will not be much, if anything, left to repay creditors. This is because Chapter 7 filers get to exempt quite a bit of property. However, in those rare cases when a debtor cannot exempt everything, a court-appointed trustee sells the non-exempt property and distributes the proceeds to creditors. How does the trustee decide which creditors to pay and how much? This is where the Proof of Claim comes into play.
The Basics of a Proof of Claim
The Proof of Claim is a document a creditor fills out and returns to the bankruptcy courts. The form requires the creditor to provide the most basic of information, including the debtor’s name and contact information and the amount he or she owes. The claim also requires the creditor to indicate whether the debt is secured or unsecured. For instance, a mortgage loan would be secured as it is backed by the home. A credit card, however, is unsecured as there is no collateral to protect the lender.
The Proof of Claim also requires the lender to provide a few other essential details, such as if the debt in question is entitled to priority. For instance, child support or alimony payments would take priority over a mortgage loan, and a mortgage loan would take precedence over credit card debt.
Finally—and this part is essential—the creditor must attach supporting documents, such as the loan agreement. He or she must then file the claim by the court-established deadline.
Without the essential document that is the Proof of Claim, a lender has no chance of recovering what the debtor owes him or her.
Notice to File Proof of Claim
Generally speaking, a trustee will not accept Proofs of Claim if there are no assets to speak of. However, if the case is what the bankruptcy courts call an “asset case,” the trustee will send out notices to file to all creditors to which the debtor owes money. The notice should provide the deadline for filing your Proof of Claim, but if it does not, contact the bankruptcy courts for more information.
Order of Priority
Unfortunately, payment does not occur on a first-come-first-served basis. If there are leftover proceeds, the trustee pays him or herself first. Next, the trustee will pay off priority debts, which include domestic support obligations; salaries, wages, or commissions earned within 180 days of the bankruptcy filing; employee benefit plan contributions; set amount for deposits on real estate property purchases or rentals; and past-due taxes or penalties. Only once the priority debts are paid will the trustee distribute the remaining proceeds to unsecured creditors on a first-come-first-served basis.
Increase Your Odds of Repayment
Many creditors chalk up a bankruptcy debt as a lost cause, which is precisely why you should not do so. Chances are that you are one of the few creditors to file a Proof of Claim, which means you will be high on the list of priority for repayment. You stand a lot to gain by filing a Proof of Claim and nothing to lose. Consult with a Alabama creditors’ rights attorney regarding how you can further increase your odds of repayment. Contact Cloud Willis & Ellis today to learn more.