Why bother to file a proof of claim in bankruptcy case?
September 2010
Elden Hopple, Esq.
Erik Stock, Esq.
Schottenstein Zox & Dunn Co., LPA
Your business has been working closely with one of its customers that owes a substantial amount on an
open account for goods or services provided to the customer. Some progress is made, but then you
receive notice that the customer has filed bankruptcy.
Sound familiar? Should you then pour good money after bad to consult your attorney and file a proof of
your claim in the bankruptcy? Here are some important factors to consider.
What is a claim in a bankruptcy case?
In bankruptcy, a “claim” is simply a right to payment. Payment rights may arise out of any number of
sources. Among the most common claims are those for payment of goods or services that were provided
to the debtor prior to the bankruptcy. Other typical claims are for amounts due under financial
instruments, such as promissory notes, or for damages under contracts or leases that are rejected during
the bankruptcy case.
What are the different types of claims?

Administrative expenses and priority unsecured claims: Some claims will be
given priority of payment in the bankruptcy case, including some wage and tax
claims, and claims arising out of goods received by the debtor within 20 days
before the filing of the bankruptcy petition. Section 503(b)(9) of the Bankruptcy
Code allows these claims to be paid in full (assuming there are sufficient
unliened funds available), rather than the pro rata distribution applied to general
unsecured claims.

Secured claims: Claims that are secured by a prepetition lien or security interest
in property of the debtor are secured to the extent of the value of the property in
which the creditor has an interest. Secured creditors have certain rights in the
bankruptcy case, including the right to receive payments to protect their collateral
and the right to request that the court lift the bankruptcy stay to repossess or
liquidate their collateral.

Claims arising from rejected contracts and leases: A creditor may claim its
damages caused by the rejection of a contract or lease during the course of a
bankruptcy. For example, when a Chapter 11 debtor-in-possession rejects a
contract for the ongoing supply of goods, the non-debtor counterparty may file a
proof of claim in the bankruptcy case for damages arising out of the rejection
(i.e., the amounts the creditor would have received had the debtor assumed—or
continued to perform under—the contract). And note that in a Chapter 7
liquidation bankruptcy all executory contracts and unexpired leases are
automatically rejected unless the trustee elects to assume—which seldom
happens.

General non priority unsecured claims: These are claims that do not qualify
as administrative expenses or priority claims, and which are not secured by a
perfected lien or security interest in the debtor’s property. In a Chapter 7
bankruptcy, if liquidation of the assets yields funds in excess of secured,
administrative and priority claims, creditors will be paid pro rata shares of their
claims, based on the proportion of each claim to the entire class of general
unsecured claims. In a Chapter 11 case where a plan of reorganization is
confirmed there will probably be some payment to general unsecured creditors.
Why bother to file a proof of claim in a bankruptcy case?
Filing a proof of claim is relatively straightforward and inexpensive to do. Bankruptcy courts nationwide
have adopted a uniform proof of claim form (Official Bankruptcy Form B10). While it is recommend that a
creditor consult an attorney to ensure that a proof of claim is properly prepared and submitted, in most
instances a single proof of claim should not take longer than an hour or two for a bankruptcy attorney to
prepare if a creditor is able to provide all of the information supporting the claim (e.g., invoices,
receivables aging reports, contracts). The most important reason to take the time to prepare and file a
proof of claim is to preserve payment rights on a claim. If the debtor fails to include a debt on its
bankruptcy schedules, or schedules the debt at less than in full, the creditor may not be paid absent a
timely filed proof of claim. Moreover, in Chapter 7 cases, the creditor must file a proof of claim, even if the
debtor has correctly scheduled the creditor’s claim.
It is also important to note that a claim may be amended by filing an amended proof of claim with the
bankruptcy court. This allows a creditor that discovers additional documentation (invoices, etc.) to
recalculate and resubmit its claim.
The takeaway here is that if you do not file a proof of claim, you will most likely not be paid any amount on
your claim.
When not to file a claim
In certain circumstances, filing a proof of claim is unnecessary or unadvisable:
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
Properly scheduled claim: For creditors holding claims in a bankruptcy under
Chapters 9 (municipality bankruptcy) or 11 (reorganization) of the Bankruptcy
Code, it is not necessary to file a proof of claim if the debtor has listed the correct
amount of the claim on its schedules, and the claim is not listed as contingent,
disputed or unliquidated. In such instances, a creditor’s claim is deemed to be
“allowed,” or valid. However, because it is a simple and inexpensive matter, a
creditor often will wish to file a proof of claim even in instances where the debtor
has properly scheduled a claim. Moreover, it is usually less expensive to file a
proof of claim than it is to verify whether the Chapter 11 debtor has correctly
scheduled the claim.

Creditor holds a small claim and is at risk for a preference claim: A creditor
receiving payments from the debtor within the 90 days prior to the bankruptcy
filing (or in some instances 180 days) may be at risk for a preference claim,
which can result in the creditor having to repay amounts received by it during the
preference period. Creditors holding relatively small claims, but which are at risk
of being sued by a bankruptcy trustee or debtor-in-possession for a preference
action, may wish to forgo filing a proof of claim for strategic reasons. The
amendments to U.S. bankruptcy law under the 2005 Bankruptcy Abuse and
Consumer Protection Act include a provision (28 U.S.C. § 1409(b)) which
requires a trustee or debtor-in-possession to bring a preference action for an
amount less than $10,950 in the jurisdiction where the creditor resides. However,
if that creditor voluntarily submits itself to the bankruptcy court’s jurisdiction by
filing a proof of claim, the preference action may be initiated in the jurisdiction
where the bankruptcy case is pending. The result is that creditors holding claims
for less than $10,950 may wish to forgo filing a proof of claim in order to ensure
that any preference action will be brought where the creditor resides—which can
be a significant benefit if the creditor is located a long distance from where the
bankruptcy case is pending. We recommend that creditors consult their attorney
before making any decision regarding whether to a file proof of claim under such
circumstances.
What can a creditor expect to occur during the course of a bankruptcy case?
Once a proof of claim is filed in a bankruptcy case, it is deemed to represent an allowed claim unless and
until the trustee or Chapter 11 debtor-in-possession objects to the claim. If a claim is objected to, the
creditor will receive a copy of the objection and a notice. The notice will include a deadline for the creditor
to respond to the objection. If a creditor fails to timely respond to the objection, the claim will likely be
disallowed and the proof of claim expunged. Any creditor receiving an objection to its claim should
immediately contact an attorney to ensure that its rights under the claim are preserved until a settlement
is reached or the bankruptcy court rules on the objection.
If a claim does not draw an objection, it will be paid if there is sufficient property in the debtor’s estate to
enable some payout. Claims for priority or administrative expenses can be paid relatively quickly if the
creditor files a motion in the bankruptcy court for immediate payment. Creditors holding secured claims
may petition the court for relief from the automatic bankruptcy stay in order to repossess and liquidate
their collateral. However, creditors holding general unsecured claims must wait until the debtor-inpossession or the trustee has collected and liquidated sufficient property to begin the process of paying
unsecured creditors. This process can take a long time—even years in large cases—because often a
primary source of recovery for unsecured creditors comes from the proceeds of litigation conducted
through the bankruptcy case.
Creditors should also be aware that they may be contacted by “claims traders” who purchase claims at a
discount from unsecured creditors. Claims trading is legal, and it is a business decision on the part of a
creditor to decide whether it would rather receive an immediate discounted payment or wait for the
chance of a larger recovery on its claim later in the bankruptcy case.
Important documents and pleadings concerning proofs of claim
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
Proof of claim form: Creditors listed by the debtor on its schedules will
automatically receive a proof of claim form several weeks after the bankruptcy
case is filed, unless the trustee determines that there are no assets and notifies
creditors that they need not file claims. However, a creditor holding a claim need
not wait to receive a proof of claim form in the mail; bankruptcy courts nationwide
will accept claims presented on Official Bankruptcy Form B10. While most, if not
all, bankruptcy courts will accept proofs of claim filed by mail, courts are quickly
expanding the use of electronic filing. Creditors are advised to visit a court’s
website for the latest information on any jurisdiction-specific filing requirements.

Claims bar date notice: This is the notice informing creditors of the date by
which all proofs of claim must be received by the bankruptcy court or claims
agent—failure to adhere to this deadline may cause a creditor to lose any right to
be paid on its claim.

Motion and notice to disallow/expunge a claim: As discussed above, creditors
receiving these documents should contact an attorney immediately.

Motion to assume or reject an executory contract: Within 60 days after a
Chapter 7 bankruptcy case is filed, unless the trustee moves to assume
(continue) executory contracts, they are deemed rejected—examples are
contracts such as leases and purchase orders that have terms which remain
unfulfilled (payments remaining, goods to be shipped, etc.). In a Chapter 11
reorganization case, the debtor-in-possession or Chapter 11 trustee can assume
reject executory contracts and leases—except for leases of non-residential real
property where the debtor is the lessee—any time prior to Plan confirmation.
Rejection of an executory contract may give rise to damages for breach of
contract, and creditors have 30 days after rejection to file a proof of claim for
those damages. A trustee or Chapter 11 debtor-in-possession has 120 days after
the bankruptcy is filed to assume a lease of nonresidential real property under
which the debtor is the lessee, after which time such lease is deemed rejected.
For more information about filing a claim in a bankruptcy case, or about any other bankruptcy or creditors’
rights issue, please contact Elden J. Hopple at 614.462.2305 ([email protected]) or Erik Stock at
614.462.1105 ([email protected]).
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