Maryland Bar Bulletin
Publications : Bar Bulletin : October 2007

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When a creditor gets notice that a debtor has filed for bankruptcy, the creditor should immediately determine whether it needs to file a Proof of Claim in the debtor’s case to preserve its rights to receive payments from the debtor’s estate. In Chapter 13 and 7 bankruptcy cases, the creditor will not share in any distribution of funds from the bankruptcy estate unless it has filed a timely Proof of Claim. In a Chapter 11 case, it is not necessary to file a claim if the creditor agrees with the amount the debtor has listed as due in its Schedules and the debtor has not listed the debt as disputed, contingent or unliquidated. However, if the creditor believes it is owed more money than indicated by the debtor, or its claim is listed as disputed, contingent or unliquidated, the creditor needs to file a claim for the full amount owed. A proof of claim is not difficult to complete and file properly. The clerk of the United States Bankruptcy Court will generally send creditors a blank form to complete. First, the creditor needs to make sure it marks its claim in the proper classification section, such as secured, general unsecured or priority unsecured. Next, it must state the amount owed, and if there are any documents to support the claim, such as a note, deed of trust, judgment lien, etc., these documents should be attached to the claim and submitted to the court with the claim. If the claim is based on several charges (e.g., interest, attorney’s fees, late fees), an itemization of those charges should also be attached to the claim. The completed claim must be filed in the debtor’s case pending in the Bankruptcy Court.
Claims that are timely filed are considered as prima facie valid in the amount claimed. Claims that are not timely filed may not be valid. Therefore, when a creditor first receives notice of a bankruptcy filing, it should also find out what the deadline is for filing the claim. If the deadline has expired, the debtor may file a claim on behalf of the creditor. If one is not filed by the debtor, the creditor may file a claim after the bar date, but must be prepared to argue that its failure to file a timely claim was due to excusable neglect. The Supreme Court in Pioneer Inv. Servs. Co. v. Brunswick Assoc. Ltd. P’ship, 507 U.S. 380, 389 (1993) enumerated four factors to determine whether or not neglectful late filings of claims are excusable: (1) whether allowing the late claim will prejudice the debtor; (2) the length of the delay in filing the claim and the resulting potential impact on the judicial proceedings; (3) the reason for the delay, including whether the delay was within the reasonable control of the creditor filing the claim; and (4) whether the creditor that filed the claim acted in good faith.

When balancing the Pioneer factors, courts have placed the greatest weight on whether any prejudice to the debtor will occur by allowing the late claim. The party seeking to file a late claim bears the burden of proving a lack of prejudice to the debtor. Courts considering a tardy filing have all examined the relationship between the length of the delay and the creditor’s control over the circumstances causing the delay in order to determine its reasonableness. For example, if the debtor did not list the creditor in the debtor’s Schedules, and the creditor did not find out about the bankruptcy filing until after the bar date for filing claims, its late filing may be excused under the doctrine of excusable neglect. On the other hand, if the creditor knew about the bankruptcy case but failed to file a timely claim, even if the debtor did not list the creditor on the debtor’s Schedules, its claim may be denied.

If the creditor did not file a timely proof of claim, but did file other pleadings in the debtor’s case, the court may consider those pleadings as “informal” proof of claims, which can then be amended after the bar date by the filing of a formal proof of claim. Whether an informal proof of claim should be allowed is an equitable determination made within the sound discretion of the bankruptcy judge. The factors the courts consider in determining whether the prior pleading constitutes informal claims include: whether the pleading was in writing and filed in the debtor’s bankruptcy case; was a demand by the creditor on the debtor’s estate; expressed the intent to hold the debtor liable for the debt; and, finally, whether it would be equitable under the circumstances of the case to allow the filing of formal proof of claim. For example, the filing of an objection to the debtor’s discharge may be considered an informal proof of claim if it contains all the information stated above. However, if the complaint does not contain a demand on the debtor’s estate, it may not be considered an informal proof of claim.

Even if the creditor filed a timely claim, the claim may not be allowed by the court if the debtor or the Trustee files an objection to the claim and that objection is sustained. Once an objection to the claim is filed, the burden of proof shifts to the creditor to prove that the claim is valid. There are many reasons a debtor or the trustee appointed to administer the estate may object to a claim, including disputing the amount of the claim, the validity of the claim, or the classification of the claim as secured or priority when the debtor believes it should have been classified as a general unsecured claim. Creditors need to be aware that filing a false or fraudulent claim is a criminal offense subject to a large fine or imprisonment. A creditor may withdraw its claim by filing a notice of withdrawal with the court, but that may not be sufficient to relieve the creditor of liability if it filed a false claim with the court.

As a general rule, it is recommended that a creditor file a proof of claim in all cases with the exception of no-asset Chapter 7 cases. This will preserve the rights of the creditor to be paid in the case, without being concerned that it missed the deadline to file and must now seek court permission to file a late claim.

Laura J. Margulies is president of Laura Margulies & Associates, LLC. Margulies concentrates her practice in bankruptcy law.

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Publications : Bar Bulletin: October  2007