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When a company receives notice that one of its customers has filed for bankruptcy, the initial response may be “Great, there goes the prospect of receiving payment of those outstanding invoices.” While that may be the ultimate outcome, the only way that result may be locked in with certainty is if the company fails to properly assert its claim against the debtor customer in the bankruptcy proceeding. Fortunately, in many instances, filing a proof of claim in a bankruptcy is a simple and straightforward process, and may not even require the assistance of counsel.

Completing the Proof of Claim

For claims against the debtor that existed at or before the time the debtor entered bankruptcy, otherwise known as prepetition claims, creditors should use the general form that is available, with instructions, on all bankruptcy court websites. This “proof of claim” is the vehicle for a creditor to assert its claims against the debtor in the bankruptcy proceeding (the automatic stay of bankruptcy prohibits creditors from asserting claims against the debtor outside of the bankruptcy proceeding and from exercising control over any of the debtor’s property). To properly complete the proof of claim, the creditor must, among other things, identify the prepetition amount owed, describe the basis of the claim, designate whether the claim is entitled to priority (such as, for example, a claim based upon goods shipped to the debtor within 20 days of the bankruptcy filing), and designate whether the claim is fully or partially secured. For claims against the company’s customers, the most common form of security is a right of set off, which may exist if the company’s customer is entitled to credits against the balance the customer owes the company (for example, for defective goods, deposits, outstanding warranties or repairs), in which case the company creditor must reflect those set off rights in the proof of claim in order to prevent waiving them. Finally, the creditor should attach supporting documentation, such as unpaid invoices, to the proof of claim. Of course, the creditor should consider whether any supporting documentation is confidential or contains sensitive information and, if so, consider whether that information should not be publicly filed with the proof of claim but rather made available later in the process, if necessary, after a protective order is entered to preserve confidentiality.

Deadline for Filing a Proof of Claim

The deadline to file a proof of claim varies from case to case and is set by the Federal Rules of Bankruptcy Procedure. In all cases, creditors will receive a notice of the bankruptcy which may include the deadline to file a proof of claim, also known as a bar date. In cases where a proof of claim is not required, the bar date may not be set at the time the bankruptcy notice is sent to creditors. Generally speaking, in a Chapter 7 or Chapter 13 case, a proof of claim must be filed no later than 70 days after the case is filed. In Chapter 11 cases, the bar date may depend on local practice or court order, and the amount of time provided to file a proof of claim can vary.

Filing a Proof of Claim

Even though there are some situations where the filing of a proof of claim is not required to receive distributions from the bankruptcy estate, absent unique jurisdictional considerations, it is a best practice to timely complete and file a proof of claim in every case. Not only does the proof of claim provide the creditor with the opportunity to present the specific amount, nature, basis, and priority of the claim, it also provides the debtor with accurate contact information for the creditor and allows the creditor to provide specific instructions for remitting distributions to the creditor.

Completing and filing the proof of claim form are often something that a company can do without the assistance of legal counsel, but if there is uncertainty, it is best to consult a bankruptcy attorney. Mistakes in completing the proof of claim can result in either a delay or outright denial of payment on your claim. While there is a right to amend a proof of claim, there are limitations, and amendment should not be relied upon to address errors. In many cases, the proof of claim is filed with the bankruptcy court. However, in large cases, the debtor may have retained a claims agent to administer the proofs of claim, and the claims agent almost always maintains a separate website with information concerning the bankruptcy, including specific instructions and requirements for properly filing a proof of claim.

After the proof of claim is filed, the company should confirm that it was received by the court (or the claims agent). The company should also monitor the bankruptcy case going forward and remain vigilant so it can respond to any objection that is filed to the claim.

Objection to Proof of Claim

Finally, if a proof of claim has been filed, any party in the bankruptcy case may object to it. In almost all cases, it is advisable to hire counsel to respond to the objection. Failing to respond will likely result in the disallowance of the claim, meaning you will not receive any distribution from the bankruptcy and may waive other important rights. Typical objections include disputes over the amount of the debt and the failure of a creditor to attach adequate supporting documentation to the proof of claim. Often, an objection to a claim can be resolved by agreement without the necessity of a hearing or adjudication by the bankruptcy court. In situations where there is a substantial amount at stake or strong disagreement, a creditor may be required to present evidence, including witnesses, at a hearing and allow the bankruptcy court to resolve the claim dispute.

Conclusion

Using the standardized forms for presenting a claim in bankruptcy is one of the simplest and most cost-effective ways to protect a company’s rights and maximize the chances of obtaining a recovery from customers in bankruptcy. Developing internal procedures for ensuring the timely completion and filing of proofs of claim is an essential function for any company’s credit account managers. To start, the company should consider using a simple checklist, like the one that follows.

Proof of Claim Checklist

1. When is the deadline for filing claims (aka the bar date)?
2. How much is owed?
3. Is the claim entitled to priority status?
4. What documents exist that establish the debt and are they confidential?
5. Where must the claim be filed?
6. Do I need to consult with a lawyer before filing the proof of claim?

Please contact Curtis Tuggle or Austin Alexander with any questions.