Understanding Bankruptcy Claim Status and Its Effects On Creditor Payout
To initiate the process of filing for Chapter 11 Bankruptcy, a Debtor must file a petition with the court and fill out various forms that outline their financial position, including how many assets they have, how much debt they owe, and the names of the Creditors to which they owe these debts. The document in which the Debtor lists its obligations is the Schedule of Liabilities.
Within the Schedule of Liabilities, the Debtor describes each Bankruptcy Claim and its status, and communicates any unresolved issues regarding a claim before distributing payment. The Creditors then have the opportunity to review the Schedule and assess whether their claim is accurate. If a Creditor’s bankruptcy claim is excluded or is incorrect in the Schedule, the Creditor must file a Proof of Claim to provide the correct information and assert their right to receive money owed to them.
A Bankruptcy Claim status can determine how the Ch.11 case proceedings will conclude and whether or not a Creditor will receive any remediation. Creditors must understand the different ways a Bankruptcy Claim is listed within the Schedule and the implications of their claim’s status. While it’s impractical to predict a Creditor’s likelihood of receiving a full recovery, knowing the varying factors that can affect claim status can reduce the possible outcomes.
How did the Debtor list my bankruptcy claim?
Debtors are allowed up to 14 days from the petition date to submit their Schedule of Liabilities to the Bankruptcy Court and for Creditors to review. For many Ch.11 cases, the Claims are relatively straightforward and easy to articulate. However, certain circumstances can make it more complicated for the Debtor to determine the status and amount of a Bankruptcy Claim on the Schedule. These circumstances might involve:
- a dependency on possible future events that affect the debt amount
- a liability that is hard to quantify the exact amount owed
- a disagreement between the Creditor and Debtor about the Claim
If there are special circumstances with a Claim, they are listed in the Schedule of Liabilities as one of the following:
A Contingent Claim is when debt is dependent on an event that has not happened yet or might not happen in the future. It is debt that may never materialize.
For example, if the Debtor has co-signed a secured loan for another person, they are not responsible for payments unless the other person fails to make payments and the loan defaults. This situation would mean the Bankruptcy Claim is contingent on the default.
The Debtor may list a Bankruptcy Claim as unliquidated if they know that the debt exists, but the amount has not been determined yet. For example, an Unliquidated Claim could represent a pending lawsuit in which the Debtor has admitted liability. In this instance, the expenses of the lawsuit and reparations owed have not been calculated, so the amount of the debt is undecided.
In the event that the Debtor and Creditor disagree about the existence or value of a Claim, the Debtor must list the Claim as disputed. Procedurally, a Debtor file an objection to the claim as a result of the dispute in question. A Debtor needs to include this debt in the Schedules, even if they do not believe it is owed. The amount of the Disputed Claim should reflect what the Creditor alleges is due. The disputed status does not mean that the Debtor will be restricted in contesting the claim later on.
Creditors with Claims listed as contingent, unliquidated or disputed are required to file a Proof of Claim to ensure that they will be included in the Chapter 11 process and assert their right to payment from the Debtor’s bankruptcy estate. It is important to note that when a Creditor files a Proof of Claim, the same attributes do not apply.
Factors that Can Affect Bankruptcy Claim Status
Upon receipt of all Bankruptcy Claims, the Debtor and Court will review the claims and supporting documentation to approve their status before moving forward with devising a Plan of Reorganization. Each Bankruptcy Claim may be subject to objections from the Court or the Debtor. There are several factors that could lead to the Court changing or updating the status of a Bankruptcy Claim.
Objected, Disallowed, and Discharged Claims
The Debtor, or their designated trustee, may file objections against a Creditor’s Claim to disallow it, which would subsequently lower the overall amount of debt owed and further simplify the restructuring process. If a Proof of Claim provides false information regarding the amount due, interest, or penalty charges, the Debtor maintains the right to file an objection. This right also applies if the Claim is miscategorized, does not include sufficient documentation to support the alleged debt, or was filed with unethical intentions.
Any objections filed by the Debtor will be addressed at a court hearing. If the Court deems the Debtor’s objection plausible, the Claim is disallowed and therefore will be discharged at the conclusion of the case. However, the Creditor can dispute the court’s decision to disallow the Claim by filing their own objection.
The status of a Claim determines the Creditor’s priority level and the order in which they will receive payment. Since Claims with higher priority levels must be paid in full before any others are paid, there is often not enough funds in the bankruptcy estate for the lower priority level Creditors to be paid the total value of their Claims. If a Bankruptcy Claim is low priority or unsecured, it is likely to be reduced, which means partial payment will be distributed, or the debt will be recharacterized as equity.
If a Creditor fails to file a Proof of Claim by the deadline, or the Bar Date, their Claim can be deemed invalid. A Creditor can file a claim after the Bar Date, but they must prove excusable neglect for the court to accept the late claim.
Furthermore, the Debtor can also deem a Claim invalid if it has been filed for unethical reasons or with false information. Under these circumstances, the Debtor must file an official objection with the court to have the claim discharged.
Claim Subordination Within a Class
Another factor that can affect the status of a Claim and therefore determine the likelihood of Creditor recovery is the Court deciding to subordinate a claim within a Creditor class. This happens when claim priorities are rearranged due to equitable principles. Claim subordination can cause certain Claims within a class to be reduced to a lower priority level. Consequently, the subordinated claims are likely to receive less or later payouts.
During the pendency of the Chapter 11 process, the Debtor will formulate a Plan of Reorganization that outlines how they will pay out the claims. A Claim can become defective or not paid in full by the proposed terms of the Plan. This claim is deemed impaired as a result of its impacted repayment terms in the Plan of Reorganization.
When a Claim’s repayment terms are unaffected by the Debtor’s Plan of Reorganization, it is considered unimpaired. An impaired Claim is eligible to vote on whether to reject or approve the Debtor’s Plan of Reorganization given the impact to their payout, while an unimpaired Claim is not eligible to vote.
How a Creditor Can Get Involved
The Creditor’s involvement in the Chapter 11 Bankruptcy process does not end once their Proof of Claim is filed. There are many steps along the way that will require action from the Creditor to maintain their rights and dictate the outcome of their recovery in pursuit of a payout.
Creditors can file various motions during the pendency of a Ch.11 bankruptcy case. One of the most common motions filed by Creditors is relief from the automatic stay. This motion, if granted, would allow a Creditor to continue their debt collection efforts against the Debtor without waiting for the Plan to be approved.
Because Chapter 11 cases are likely to encounter significant delays in the formulating, filing, and confirming of the Plan of Reorganization, Creditors often file motions to convert the case to a Chapter 7 Bankruptcy (liquidation) or dismiss the case entirely.
Throughout the Chapter 11 process, hearings are held by the Court to appoint a trustee, resolve objections to Claims, decide upon the conversion to Chapter 7 liquidation, or dismissal of a case. After the Plan of Reorganization is received and voted upon, a hearing is held to address modifications and, ultimately, obtain confirmation of the Plan. Creditors maintain the right to attend the hearings and object to a motion or proposed terms in person.
Objections, Complaints, and Injunctions
Not only do Creditors file objections against the Debtor when the status or amount of their Claim is incorrect but also for several other reasons. Upon review of the Plan of Reorganization and Disclosure Statement, a Creditor can file an objection against the proposed terms of the Plan. All objections are assessed by the court and ruled on in a hearing.
Another manner in which Creditors may need to exercise their rights relates to adversary proceedings. These are lawsuits involving the Debtor that are filed by Creditors with the intention of avoiding liens, preferences, fraudulent transfers, and post-petition transfers. Creditors have the power to initiate adversary proceedings by filing a complaint to validate the status of a lien, repeal an order of confirmation of the Plan, determine the dischargeability of a Claim, subordinate the Claim of another Creditor, or obtain an injunction.
To protect the interests of the Creditors and ensure that all parties receive fair restitution, a Creditors’ Committee is appointed by the US Trustee. In collaboration with the Debtor, this group of individuals negotiates and helps develop the terms of the Plan of Reorganization. The Creditors’ Committee may pursue liquidation instead of reorganization to maximize Creditor recovery.
The responsibilities of the Creditors’ Committee include acting as the liaison between the Debtor and other Creditors during negotiations, contributing to the formulation of the Plan of Reorganization, investigating the Debtor’s conduct and financial situation, and advising other Creditors within the same class.
Voting on Plan of Reorganization
For certain Creditors, their involvement in the Ch.11 case also includes voting on the acceptance or rejection of the Debtor’s Plan of Reorganization. Creditors within a class of impaired claims are eligible to vote and receive a ballot with the Plan and Disclosure statement. Once all ballots have been collected, the Court will tally the votes and determine the outcome of the bankruptcy case.
It is impossible to predict the precise outcome of a Chapter 11 Bankruptcy case. Unfortunately, a Creditor’s recovery journey does not always result in the full repayment of their lost revenue, even when playing an active role in asserting one’s rights in the case.
Understanding the nuances of Ch.11 Bankruptcies, including the many ways a Claim may be listed, its status updated, and the points at which to exercise one’s rights throughout the proceedings, can help an informed Creditor better navigate the complexities of the process.