During the course of Chapter 11 bankruptcy, there are several factors that can delay recovery for Creditors awaiting payout on their claims. The first few months of the process require the Creditors to submit their bankruptcy claims and the Debtor to review them to determine if they’ll be included in the Plan for Reorganization.
If the Debtor deems a bankruptcy claim false or inaccurate, they may seek to invalidate or disallow it in court. Claim disputes and the court hearings necessary to sort them out are one of the many setbacks that can significantly lengthen the Ch.11 proceedings for all parties involved.
As Creditors file their Proofs of Claim, they are required to submit supporting documentation, including invoices, contracts, receipts, loan agreements, itemized statements or other evidence that verifies the total amount they are owed by the Debtor as of the petition date. After reviewing the information provided and comparing it with the Debtor’s own financial records, any conflicting details may incite the Debtor or trustee to exercise their legal right to file an objection against the claim.
In order to object to a Proof of Claim, the Debtor is required to file a written objection with the Bankruptcy Court and request a hearing. The Creditor must receive a copy of the objection and the notice of hearing no later than 30 days before the hearing date.
Reasons For the Debtor Filing an Objection
Why would the Debtor file an objection against a Creditor’s bankruptcy claim? The following is a list of common reasons that may warrant a Debtor filing an objection:
- The claim lists an incorrect amount due
- The claim lists false interest or penalty charges
- The claim lists an incorrect category, falsely stating it is a priority or secured
- The claim has been filed for unethical reasons
- There is a lack of supporting documentation with the claim
When a Debtor successfully objects to a claim, it can relieve them of some or all of their liabilities owed to the Creditor, scale down the amount of money they’ll have to eventually pay out, and simplify the restructuring process. However, for the Creditor, it means they lose their right to receive a payout from the Debtor’s bankruptcy estate. If disallowed, a Creditor’s bankruptcy claim will be discharged upon conclusion of the Ch.11 case unless they pursue legal action to dispute the disallowance.
How are Claim Objections Settled?
If the Creditor with the claim in question fails to respond to the objection by the deadline enforced by the court, the objection will automatically be approved. If the Creditor responds to the objection within the time allotted, a court hearing will be held to resolve the dispute. The bankruptcy judge will review the objection and the information provided by both the Creditor and the Debtor or trustee to either uphold the objection or overrule it and allow the claim.
Chapter 11 bankruptcy is an unpredictable process that can present several different outcomes for the Creditor. Unfortunately, Creditor payout is not guaranteed.
The Debtor’s ability to file an objection against a claim can not only draw out the proceedings for all of the parties involved, but it can incur a substantial amount of added expenses for the Creditor as they pursue legal action to dispute the objection. If a Creditor is uncertain whether their bankruptcy claim will warrant a payout, it might be in their best interest to pursue other options.
Creditors can choose to sell their bankruptcy claim to receive immediate liquidation. Why wait it out? Avoid dealing with the complications and costs of the Chapter 11 process by selling your claim on the XCLAIM marketplace.