Category Archives: Proof of Claims

What If A Creditor In A Bankruptcy Case Is An Infant or Incompetent Person?

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I really do not know the utility of this article given I know this set of circumstances rarely will ever come up. I have literally had a hand in four or five thousands cases over the years and this issue has not come up so far. I also administered countless Chapter 13 cases as the staff attorney for David Burchard, the Chapter 13 Trustee for the San Francisco and Santa Rosa Divisions of the United States Bankruptcy Court for the Northern District of California. The set of circumstances that this could be an issue are very narrow. The bankruptcy filer would at some point injured or damaged a minor somehow or the person with a claim against the bankruptcy filer became incompetent over time. Also, if the person with a claim is an adult, how would the bankruptcy filer or their Bankruptcy Attorney ever know the person is incompetent? They probably would not.

Nonetheless if this issue does come here you go. It is rare for an adult, someone over the age of 18, to be indebted to or someone under the age of 18 has a “claim” against an adult. It is also rare for someone to owe an incompetent person money. If someone is incompetent they cannot enter into a contract legally. It is possible that the debt or claim arose prior to the person becoming incompetent. So there are a some reasonable hypothetical facts to help discuss this issue. In the real world you will probably look long and hard to find this was every an issue in a bankruptcy case.

The issue is how can you provide notice of a bankruptcy filing to an infant or someone who is incompetent? An infant is defined as a person who has not attained legal majority; or under-age or under 18 or 21 years of age depending upon state law. A person that is under the age of minority cannot be served legally even if they are a creditor of the person who is filing for bankruptcy protection. Also, a person that is incompetent cannot be or accept service given they are incompetent. Incompetency is generally defined as an adult who can no longer take care of their own financial and personal affairs because of mental problems or potentially a physical problem too.

The most important parts of filing for bankruptcy protection is giving all creditors notice of the bankruptcy case. Once the bankruptcy attorney files the bankruptcy petition any and all collection activity must stop and the Bankruptcy Court is the sole place to seek remedy. So if all creditors do not receive notice or do not understand the notice that is a problem. Every bankruptcy filer wants their creditors to receive notice and stop the phone calls or harassing letters. You will also want the creditor to get the order of discharge in the mail so that they know once and for all the debt is no longer legally enforceable by federal court order.

How Do You Serve An Infant Or Incompetent Person?

First look to Federal Rule of Bankruptcy Procedure 1007(m). In 2001 FRBP was amended to add section “m.” FRBP 1007(m) provides: If the bankruptcy filer knows that a person on the list of creditors or schedules is an infant or incompetent person, the bankruptcy filer also shall include the name, address, and legal relationship of any person upon whom process would be served in an adversary proceeding against the infant or incompetent person in accordance with Rule 7004(b)(2). The point is to serve someone that knows the infant or incompetent person that can accept service on their behalf. Federal Rule of Bankruptcy Procedure 7004(b)(2) provides: (b) Service by First Class Mail. Except as provided in subdivision (h), in addition to the methods of service authorized by Rule 4(e)–(j) F.R.Civ.P., service may be made within the United States by first class mail postage prepaid as follows: (2) Upon an infant or an incompetent person, by mailing a copy of the summons and complaint to the person upon whom process is prescribed to be served by the law of the state in which service is made when an action is brought against such a defendant in the courts of general jurisdiction of that state. The summons and complaint in that case shall be addressed to the person required to be served at that person’s dwelling house or usual place of abode or at the place where the person regularly conducts a business or profession.

Basically for an infant you need to also include the name and address of the infant’s parents or legal guardian. The same is true for an incompetent person. Someone has to be taking care of or appointed as a conservator or guardian of the incompetent person. Whoever is taking care of them is the person upon whom process is prescribed to be served by the law of the state in which service is made when an action is brought against a defendant in the courts of general jurisdiction of that state.

Current Proof of Claim Procedures in Bankruptcy Need to be Improved

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Proofs of claims are how people or businesses prove in bankruptcy cases the amount they are owed to get paid money from the bankruptcy estate of the person or company that filed for bankruptcy protection. Federal Rule of Bankruptcy Procedure 3001 (Proof of Claim) provides the rules and procedure for filing a proof of claim. A claim can be secured, priority unsecured or a general unsecured claim. The type of claim determines what the creditor is paid, if anything, through the bankruptcy estate. Since proofs of claims are always filed in chapter 13 reorganization cases that is what this article will focus on.

FRBP 3001 Prima Facie Proof of Claim

How FRBP 3001 works is the rule lists the documentation or evidence necessary to prove the amount owed for different types of claims. If the claim includes the proper documentation then it is assumed that the filed claim is prima facie proof as to the validity of the claim. This means that the amount of the claim provided by the person or company owed in the filed claim is automatically allowed and deemed valid assuming the proper documentation is provided. This is part of the problem. The claim itself might not be allowable, there may not be proper documentation of the interest or additional fees included in the claim, the amount of the claim could be wrong and other potential documentation problems. See FRBP 3001(f): Evidentiary Effect. A proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim.

Okay, well, who determines that the documentation filed with the claim is in accordance with FRBP 3001? In the beginning when the claim is filed it is the creditor filing the claim. Creditors are not supposed to file claims if the claim is not properly supported by evidence. That is not how it is in the real world. In the real world creditors and third party collection agencies file invalid claims all the time by simple mistake or potentially to see if they can get away with it and be paid money they are not legally entitled to. So initially the creditor can file a claim and do whatever they want regarding the documentation. After the proof of claim is filed the burden shifts to the bankruptcy filer to object to the validity of the claim or documentation supporting the validity of the filed claim.

There is No Incentive For a Creditor to Not File an Invalid Claim

Unfortunately for bankruptcy lawyers the law in this area is far from favorable. The courts have more or less said that is the bankruptcy filer’s responsibility to object to invalid or fraudulent filed claims.For Example: In a Chapter 13 case the debtor owes American Express $7,500 and the statute of limitations under California law of four years has expired. Every debt or claim has a time limitation in which the debt must be enforced or the holder of the debt loses their right to enforce the debt. Not paying a credit card is a breach of contract with a statute of limitations of four years under California law. What happens is American Express sells the debt to a third party collector so AMEX can get some money out of the debt. In our example let us say the last payment was made by the bankruptcy filer on January 1, 2010, and the bankruptcy filer filed for Chapter 13 Bankruptcy on January 30, 2014, over four years after breach of the contract. So the statute of limitations has expired under California law and the debt is no longer legally enforceable. So what does the third party collection agency do? They file a proof of claim for the $7,500 even though the claim is no longer enforceable given the statute of limitations has expired. Now the bankruptcy filer must object to the claim wasting valuable time and money. In this example where the bankruptcy attorney should receive their attorneys’ fees and costs for successfully objecting to and disallowing the fraudulent claim. That is an uphill battle though in California anyway. See Cal. Civ. Code § 1717(a). The effect of section 1717 is to make reciprocal an otherwise unilateral contractual obligation to pay attorney’s fees. Santisas v. Goodin, 17 Cal. 4th 599, 610–11 (1998). Depending upon the circumstances just filing an objection to the claim and succeeding may not be enough to be award attorneys’ fees and costs under FRBP 3001(c)(2)(D)(i)or(ii).

What Must be Proven to be Awarded Attorneys’ Fees When Objecting to a Claim Under California Law?

The Ninth Circuit Court of Appeals recently discussed CCP 1717 and provided three conditions that must be met before CCP 1717 applies: (1) the action generating the fees must have been an action “on a contact” (2) the contract must provide that attorneys’ fees incurred to enforce it shall be awarded either to one of the parties or the prevailing party and (3) the party seeking fees must have prevailed in the underlying action. See In re Penrod, 802 F.3d 1084, 1087 (9th Cir. 2015). This is a lot of time and money wasted due to a creditor filing an invalid claim with no guarantee that the fees incurred will be paid by the creditor that filed the invalid claim. Then to try and get the creditor that filed the claim to pay for the attorneys’ fees and costs will cost even more time and money with no guarantee of recovery.

What Can be Changed to Help?

Procedurally FRBP 3001 provides for sanctions. The problem is the sanctions are not strong enough for prevent creditors from filing invalid proofs of claims or proofs of claims for unenforceable debts. It happens far too often. When a claim is objected to it should be for a dispute as to the calculation or the amount of the claim or if anything is owed to the creditor at all. Not that the claim meets the requirements to be a valid prima facie claim.

Rule 3001. Proof of Claim

(a) Form and Content. A proof of claim is a written statement setting forth a creditor’s claim. A proof of claim shall conform substantially to the appropriate Official Form.

(b) Who May Execute. A proof of claim shall be executed by the creditor or the creditor’s authorized agent except as provided in Rules 3004 and 3005.

(c) Supporting Information.
(1) Claim Based on a Writing. Except for a claim governed by paragraph (3) of this subdivision, when a claim, or an interest in property of the debtor securing the claim, is based on a writing, a copy of the writing shall be filed with the proof of claim. If the writing has been lost or destroyed, a statement of the circumstances of the loss or destruction shall be filed with the claim.
(2) Additional Requirements in an Individual Debtor Case; Sanctions for Failure to Comply. In a case in which the debtor is an individual:
(A) If, in addition to its principal amount, a claim includes interest, fees, expenses, or other charges incurred before the petition was filed, an itemized statement of the interest, fees, expenses, or charges shall be filed with the proof of claim.
(B) If a security interest is claimed in the debtor’s property, a statement of the amount necessary to cure any default as of the date of the petition shall be filed with the proof of claim.
(C) If a security interest is claimed in property that is the debtor’s principal residence, the attachment prescribed by the appropriate Official Form shall be filed with the proof of claim. If an escrow account has been established in connection with the claim, an escrow account statement prepared as of the date the petition was filed and in a form consistent with applicable nonbankruptcy law shall be filed with the attachment to the proof of claim.
(D) If the holder of a claim fails to provide any information required by this subdivision (c), the court may, after notice and hearing, take either or both of the following actions:
(i) preclude the holder from presenting the omitted information, in any form, as evidence in any contested matter or adversary proceeding in the case, unless the court determines that the failure was substantially justified or is harmless; or
(ii) award other appropriate relief, including reasonable expenses and attorney’s fees caused by the failure.
(3) Claim Based on an Open-End or Revolving Consumer Credit Agreement.
(A) When a claim is based on an open-end or revolving consumer credit agreement — except one for which a security interest is claimed in the debtor’s real property — a statement shall be filed with the proof of claim, including all of the following information that applies to the account:
(i) the name of the entity from whom the creditor purchased the account;
(ii) the name of the entity to whom the debt was owed at the time of an account holder’s last transaction on the account;
(iii) the date of an account holder’s last transaction;
(iv) the date of the last payment on the account; and
(v) the date on which the account was charged to profit and loss.
(B) On written request by a party in interest, the holder of a claim based on an open-end or revolving consumer credit agreement shall, within 30 days after the request is sent, provide the requesting party a copy of the writing specified in paragraph (1) of this subdivision.

(d) Evidence of Perfection of Security Interest. If a security interest in property of the debtor is claimed, the proof of claim shall be accompanied by evidence that the security interest has been perfected.

(e) Transferred Claim.
(1) Transfer of Claim Other Than for Security Before Proof Filed. If a claim has been transferred other than for security before proof of the claim has been filed, the proof of claim may be filed only by the transferee or an indenture trustee.
(2) Transfer of Claim Other than for Security after Proof Filed. If a claim other than one based on a publicly traded note, bond, or debenture has been transferred other than for security after the proof of claim has been filed, evidence of the transfer shall be filed by the transferee. The clerk shall immediately notify the alleged transferor by mail of the filing of the evidence of transfer and that objection thereto, if any, must be filed within 21 days of the mailing of the notice or within any additional time allowed by the court. If the alleged transferor files a timely objection and the court finds, after notice and a hearing, that the claim has been transferred other than for security, it shall enter an order substituting the transferee for the transferor. If a timely objection is not filed by the alleged transferor, the transferee shall be substituted for the transferor.
(3) Transfer of Claim for Security Before Proof Filed. If a claim other than one based on a publicly traded note, bond, or debenture has been transferred for security before proof of the claim has been filed, the transferor or transferee or both may file a proof of claim for the full amount. The proof shall be supported by a statement setting forth the terms of the transfer. If either the transferor or the transferee files a proof of claim, the clerk shall immediately notify the other by mail of the right to join in the filed claim. If both transferor and transferee file proofs of the same claim, the proofs shall be consolidated. If the transferor or transferee does not file an agreement regarding its relative rights respecting voting of the claim, payment of dividends thereon, or participation in the administration of the estate, on motion by a party in interest and after notice and a hearing, the court shall enter such orders respecting these matters as may be appropriate.
(4) Transfer of Claim for Security after Proof Filed. If a claim other than one based on a publicly traded note, bond, or debenture has been transferred for security after the proof of claim has been filed, evidence of the terms of the transfer shall be filed by the transferee. The clerk shall immediately notify the alleged transferor by mail of the filing of the evidence of transfer and that objection thereto, if any, must be filed within 21 days of the mailing of the notice or within any additional time allowed by the court. If a timely objection is filed by the alleged transferor, the court, after notice and a hearing, shall determine whether the claim has been transferred for security. If the transferor or transferee does not file an agreement regarding its relative rights respecting voting of the claim, payment of dividends thereon, or participation in the administration of the estate, on motion by a party in interest and after notice and a hearing, the court shall enter such orders respecting these matters as may be appropriate.
(5) Service of Objection or Motion; Notice of Hearing. A copy of an objection filed pursuant to paragraph (2) or (4) or a motion filed pursuant to paragraph (3) or (4) of this subdivision together with a notice of a hearing shall be mailed or otherwise delivered to the transferor or transferee, whichever is appropriate, at least 30 days prior to the hearing.

(f) Evidentiary Effect. A proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim.

(g) To the extent not inconsistent with the United States Warehouse Act or applicable State law, a warehouse receipt, scale ticket, or similar document of the type routinely issued as evidence of title by a grain storage facility, as defined in section 557 of title 11, shall constitute prima facie evidence of the validity and amount of a claim of ownership of a quantity of grain.

Potential Lawsuit Claims Need to be Listed When Filing Bankruptcy and Are Part of the Bankruptcy Estate

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Preparing a bankruptcy petition and filing for bankruptcy is actually a much more complicated process than most believe. Of course there are certain cases that really do not require too much work, but even those cases could have hidden landmines. One of the landmines I speak of is a bankruptcy filer’s claims or potential claims against a third party for damages (Money!!!). Most clients do not think about a potential claim as part of their assets. It is just the right to sue so . . . . . . . . The claim or potential claim could derive from an employment issue at work, slip and fall at a store or business, fraud, breach of contract or other way any of us can be hurt financially and potentially have a claim against a third party. Yes, your right to sue someone is a claim that should be listed in the bankruptcy petition schedules and could have value to be protected depending upon the circumstances. What happens if a claim is not listed in the bankruptcy petition schedules? A recent Ninth Circuit Bankruptcy Appellate Panel case discusses the treatment of an unlisted claim when the bankruptcy filer, after discharge and the case was closed, attempts to enforce the claim by filing a lawsuit. Goldstein v. Alberta P. Stahl, Chapter 7 Trustee; Wells Fargo Bank, N.A.; Bank of America, N.A.; BAP No. CC-14-1346-TaDPa, March 3, 2015.

What are Claims?

A claim when filing for bankruptcy is defined as the right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.

So a potential claim is the potential right to payment for damages that you have not yet filed a lawsuit for and obtained a judgment is an unliquidated and most likely disputed claim. A claim no less though. Sierra Switchboard Co. v. Westinghouse Elec. Corp., 789 F.2d 705, 707 (9th Cir. 1986)

Property of the Bankruptcy Estate

Section 541 of the Bankruptcy Code provides what is property of the estate. Part of the definition includes: Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date, by bequest, devise, or inheritance; as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree; or as a beneficiary of a life insurance policy or of a death benefit plan.

As you can see this definition includes all property at the time the case is filed to be listed in the bankruptcy schedules. In the Goldstein case one of the issues was whether the right to sue their mortgage companies arose prior to the chapter 7 bankruptcy case being filed. Of course the Goldstein’s bankruptcy attorney argued the right to sue arose after the case was filed. The mortgage companies bankruptcy lawyers argued the claims arose before the chapter 7 case was filed.

Goldstein v. Alberta P. Stahl, Chapter 7 Trustee; Wells Fargo and Bank of America

Long story short the bankruptcy filer’s in this case, the Goldstein’s, applied for a loan modification prior to filing for relief under chapter 7 of the Bankruptcy Code. They fulfilled the terms of the temporary loan modification but their mortgage company never provided them a permanent loan modification. The Goldstein’s paid over $22,000 in mortgage payments in reliance upon their mortgage companies offer to modify their mortgage though. This is the claim the Goldstein’s allegedly had at the time their chapter 7 case was filed against their mortgage companies. For whatever reason the Goldstein’s did not list this claim in their bankruptcy schedules and their case was discharged and closed. The Goldstein’s then sued their mortgage companies for the mortgage payments and other causes of action. Their mortgage companies used the defense that the claim was not listed in their bankruptcy schedules so the claim was actually still property of the bankruptcy estate and could not be pursued by the Goldstein’s. The Goldstein’s then reopened their bankruptcy case to add the claim to their schedules. As part of reopening the bankruptcy case a chapter 7 trustee was appointed to the case again. The Goldstein’s mortgage companies then entered in to negotiations for the settlement of the claim with the chapter 7 trustee and sought to extend the deadline for the chapter 7 case to close again. Eventually the chapter 7 trustee filed a motion to compromise the claims or sell the claim free and clear. The Goldstein’s opposed arguing the claims did not become complete until their mortgage companies denied the permanent loan modification two weeks after the bankruptcy case was filed. Given that the claims should not be part of the bankruptcy estate. The bankruptcy court held the alleged breach by the mortgage companies was before the bankruptcy case was filed when they failed to grant a permanent loan modification. To determine when a cause of action accrues, and therefore whether it accrued pre-bankruptcy and is an estate asset, the Court looks to state law.” Boland v. Crum (In re Brown), 363 B.R. 591, 605 (Bankr. D. Mont. 2007) Under California law a cause of action accrues upon the occurrence of the last element essential to the cause of action.” Howard Jarvis Taxpayers Assn. v. City of La Habra, 25 Cal. 4th 809, 815 (2001) The Ninth Circuit Bankruptcy Appellate Panel upheld the bankruptcy court’s ruling that the claims are property of the estate. The panel noted that the third mortgage payment was made by the Goldstein’s prepetition and that is when they could have brought their lawsuit at that time.

Who Are These Companies Filing Proofs of Claims in My Bankruptcy Case?

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In certain bankruptcy cases the companies or people you owe money to are asked to file a proof of claim or should file a proof of claim in the hope of being paid a portion or all of the debt owed to them. If you filed a Chapter 7 case and all of your assets cannot be protected by bankruptcy exemptions then you have an asset Chapter 7 case. The Chapter 7 trustee assigned to the case will send out a notice of possible dividends, which means there is a possibility of creditors receiving money from the bankruptcy estate in the bankruptcy case. If you file a Chapter 13 case then your creditors should always file a proof of claim to be paid pursuant to the Chapter 13 plan filed. In Chapter 13 cases a creditor may not receive anything, but still should file a proof of claim just in case.

Bankruptcy Code Section 101(9)(A) defines a “creditor” as any “entity that has a claim against the debtor at the time of or before the order for relief.” A “claim” is a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, secured, or unsecured.” 11 U.S.C. § 101(4)(A). A “claim” also can be a “right to an equitable remedy for breach of performance if such breach gives rise to a right to payment.” 11 U.S.C. § 101(4)(B). See In re Beugen, 99 B.R. 961, 963 (9th Cir. B.A.P. 1989)

Who Are These Companies Filing Proofs of Claims in My Bankruptcy Case

Who Are These Companies Filing Proofs of Claims in My Bankruptcy Case

I Do Not Recognize Any of the Creditor Names

Once creditors start filing their proofs of claims you may not recognize any of the names of the creditors because the original debt was sold or transferred to a third party. This is normal and quite common. Each proof of claim is supposed to provide who the original creditor was and have the assignment or transfer documents attached to the proof of claim so that you can determine if you actually owe the money or not. If the claim does not provide proper documentation as to how it was calculated your bankruptcy attorney should object to the claim.

Debts Cannot be Purchased for Improper Purposes Though

See In re Beugen, 99 B.R. 961 (9th Cir. B.A.P. 1989), aff’d, 930 F.2d 27 (9th Cir. 1991) regarding a creditor purchasing claims for an improper purpose. In this case the creditor, Young, was more or less buying claims so that he could harass the debtors, the Beugens. Young apparently had no intention of just collecting on the underlying debts of the purchased claims. In this case Young originally filed an adversary complaint against the Beugens arguing fraud resulting from the sale of a salon from the Beugens to Young. The complaint was dismissed and then Young filed a motion to dismiss the Beugens’ corporate Chapter 11 and their personal Chapter 11 cases. The court agreed with Young and dismissed the corporate Chapter 11 but the court did not dismiss the personal Chapter 11 case. Eventually the court did convert the Beugens’ personal Chapter 11 case to a case under Chapter 7 of the Bankruptcy Code. Here is where Young went wrong though. The first claim Young purchased was a claim totaling $753.38 from a small claims judgment. A balance of only $374.47 remained on this claim at the time Young purchased it from the original creditor. Young acquired another claim totaling $5,000. Both of these claims were solicited and assigned after the Beugens filed their Chapter 11 case. Young proceeded to file another adversary complaint objecting to the Beugens under the claims he had purchased. The Beugens bankruptcy lawyer argued that since Young was not the original holder of these two claims that Young did not have the right to object to the Beugens discharge under 727 of the Bankruptcy Code. The court in Beugen provides in part that “the right to object to a debtors discharge is not a marketable commodity which may be purchased by one party from another in order to inflict punishment and discomfort upon a debtor.”

Purchasing a claim is perfectly normal and acceptable if the underlying motivation is to seek payment of the claim. If a claim is purchased for other purposes such as objecting to the discharge of the debtor a party should think twice before proceeding. Mr. Young was ordered to pay the attorney fees and double costs of the Beugens pursuant to Federal Rule of Appellate Procedure 38. A very expensive mistake.

What Happens if a Claim is Disallowed in Your Bankruptcy Case? It the Claim also Discharged?

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If you filed a Chapter 13 or Chapter 11 bankruptcy case then you know that the claims process is an important part of reorganizing your debts. What is the result if you object to the allowance of a claim and the claims is disallowed in its entirety? Is the claim therefore discharged when the plan of reorganization is completed? Does the creditor have a right to seek payment of the disallowed claim after you receive your discharge and the case is closed? The answer is it depends upon the type of claim that was disallowed. Make sure you give your bankruptcy lawyer as much information as possible prior to objecting to a claim.

The first case to discuss involves student loans. Student loans are not dischargeable pursuant to Section 523(a)(8). In Cruz the debtors objected to the claim of Educational Credit Management Corporation (“ECMC”.) ECMC did not respond to the objection and the court entered an order that said the claim was disallowed in its entirety and the claim was paid in full. After the debtors completed their chapter 13 plan and obtained a discharge ECMC intercepted the debtors’ post-discharge tax refund to satisfy the student loan held by ECMC. The debtors bankruptcy attorney reopened the bankruptcy case and filed a motion for sanctions against ECMC. The court found that ECMC’s claim was not discharged and ECMC had a right to intercept the debtors’ tax refund.

The disallowance of a claim does not necessarily mean the underlying debt is discharged. See Bell v. ECME 236 B.R. 426 (N.D. Ala. 1999) or In re Shelbayah 165 B.R. 332, 335 (Bankr. N.D. Ga 1994) holding that the allowance or disallowance of claims is unrelated to the dischargeability of those claims under section 523. In the Cruz case the underlying debt was not dischargeable, a student loan. Therefore even though the claim was not allowed the underlying debt was not discharged.

General Unsecured Claims

What if the underlying claim was that of a credit card company? If you object to a credit card claim and the claim is disallowed in its entirety is it also discharged? A general unsecured claim should be discharged upon completion of the plan of reorganization.

Vehicle Loan Lien

What about a car loan company that believes it has a valid lien on your vehicle at the time you file for bankruptcy? In National Capital Management v. Gammage-Lewis, No. 12-2286 (June 6, 2013) the court held that a car loan companies lien was extinguished when the debtor’s received their discharge given the car loan companies failure to provide the appropriate documents to prove it had a perfected security interest. The disallowance of the claim of a lien made the lien void under Section 506(d) of the Bankruptcy Code. The court held that the objection to the claim was sufficient to provide the car loan company the necessary notice and opportunity to be heard regarding their claim. In most circumstances an adversary proceeding must be initiated to determine the validity, priority or extent of a lien.

The bottom line whether a claim that is disallowed is also discharged depends upon the type of claim and the circumstances under which it was disallowed.

What is This Notice to File a Proof of Claim I Received?

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If you have receive a notice of possible dividends or notice of 341 meeting of the creditors, then someone who owes you money has filed for bankruptcy protection.  You should seek the counsel of an experienced bankruptcy attorney for advice.  Do not just show up at the 341 hearing yourself if you are not sure what is going on.

One of the most important parts of the bankruptcy process when there are assets available to creditors is the claims process.  The vast majority of bankruptcy filers do not have assets that are available to the people they owe money.  All assets can be protected or exempted.  But what about the cases in which there are assets available to creditors?  How do they get paid and what amount?  A proof of claim must be filed that proves how much was owed to them at the time the bankruptcy case was filed.

Federal Rule of Bankruptcy Procedure 3001 provides the rules for the filing of a proof of claim and what documentation must be provided to prove how much is owed.  In asset Chapter 7 bankruptcy cases the trustee assigned to the case does not ask for proof of claims to be filed until they file the notice of possible dividends.  Once this notice is filed then creditors have to file their proof of claims to be paid in the case.  In a Chapter 13 bankruptcy cases we already know there are assets available to creditors.  All Chapter 13 bankruptcy cases have either money or assets available to creditors, so creditors are asked to file their claims with notice of the meeting of the creditors.

The deadline for normal creditors to file a claim generally should not exceed nineties days after the first date of the 341 meeting of the creditors.  Government entities such as the Internal Revenue Service are provided more time to file a claim.  A frustration of many bankruptcy lawyers is how long it takes creditors to file their claims sometimes.  Not knowing how much is owed on secured claims or priority unsecured claims at the time the case is filed can delay confirmation of the Chapter 13 Plan.

Sometimes debts are transferred or sold to multiple parties.  Other times creditors file claims that are just not accurate.  Whether a creditor tries to get paid more than they are entitled to or just does not provide the necessary documents to prove their claim; an objection to the claim should be filed if any inaccuracy exists.  The evidentiary effect of filing a claim is that if the proof of claim meets the rules it will constitute prima facie evidence of the validity and amount of the claim.  If you do not object the claim is assumed to be accurate.  There has been litigation regarding collection agencies filing junk claims to get paid nominal amounts.  If the collection agency does this in a thousand cases and merely receives $50 from each case, they will have fraudulently received $50,000.  The good news is most Chapter 13 Trustee’s also review the filed claims and will object to some on behalf of the bankruptcy estate under certain circumstances.