It’s no secret that filing for bankruptcy after suffering a financial setback can leave your creditors in the lurch—but it isn’t always true. When the bankruptcy trustee sells assets in a Chapter 7 bankruptcy case, or when a bankruptcy filer makes payments through a Chapter 13 repayment plan, a pool of money becomes available to pay creditors, and they can request payment by filing a “claim.” If you (the bankruptcy filer, the trustee, or another creditor) don’t agree with some part of the claim, you can file an objection as long as you have “standing,” or the right to object, that is.
The remainder of this article explains who has the right to object to a claim and when it makes sense to do so.
Creditor’s Proof of Claim
When you prepare your bankruptcy papers for filing, you provide detailed information about your debts on two bankruptcy forms: Schedule D: Creditors Who Hold Claims Secured by Property and Schedule E/F: Creditors Who Have Unsecured Claims. Once filed, the court clerk sends a notice of your bankruptcy to all of the listed creditors. If money is available to pay claims, the notice states that the case is an “asset case” and that creditors must file a Proof of Claim form by a certain date. A filed Proof of Claim typically contains the following information:
- the creditor’s name
- the amount of the debt, and
- other information, such as whether the claim is secured (mortgages, car loans) unsecured (credit card debt, student loans, medical bills), or a priority claim (taxes, domestic support obligations).
The creditor must attach any available written documentation, such as an invoice or contract, which proves the validity of the debt. Creditors do not file claims in a “no asset case.” If funds become available at a later date, the court will instruct creditors to file a claim. (You can view a copy of the Proof of Claim (Form 410) by visiting the U.S. Court’s website.)
Who Can Object to a Claim?
The court allows the bankruptcy trustee—the person charged with finding and distributing assets to creditors—to pay all claims unless someone files an objection. However, only a “party in interest” has the right to object. To be a party in interest, you must have “standing,” or a financial stake in the claim. The most common interested parties include the person (or business) that filed the bankruptcy, the trustee, or another creditor.
Here are examples of interested parties commonly found in bankruptcy cases.
Certain creditors. In most Chapter 7 and Chapter 13 cases, the trustee divides the available money among multiple claims. If the court were to deny one claim, the other creditors would likely receive more money. Because they stand to gain from another creditor’s denied claim, all creditors will have standing to object to any creditor’s claim.
The bankruptcy filer in a Chapter 7 bankruptcy. The rule just explained isn’t necessarily true for a Chapter 7 bankruptcy filer—that person can’t object to any creditor’s claim. The bankruptcy filer will have standing only if the objection could affect how much the debtor is left owing creditors after bankruptcy, or if money would be returned to the filer when the case is over. If all of the filer’s debts would be discharged (wiped out), and no money would be returned, the filer won’t have standing.
The debtor in Chapter 13 bankruptcy. By contrast, the filer will almost always have standing to object to a claim in a Chapter 13 case, because the debtor’s future earnings fund the Chapter 13 plan. One less claim might mean the filer will put less money into the repayment plan or that the plan can be shorter in duration.
Example 1. Suppose that you filed for Chapter 7 bankruptcy and that $1,000 is available to pay claims. You owe $1,300 to your cell phone provider, $1,000 for a payday loan, and $5,000 for a six-year-old department store account. In this situation, all three of your creditors have standing to object to a claim of one of the others, because if successful, the other two creditors would receive a larger portion of the $1,000. You, on the other hand, would have standing only if the dispute would lower your creditors’ claims enough to return some part of the $1,000 to you.
Example 2. Suppose instead that you filed a Chapter 13 case and your plan proposes to pay your creditors 10% of their claims. If a creditor claims that you owe $10,000 when you only owe $2,000, you can object. If the court agrees, that creditor will receive only $200 instead of $1,000, saving you $800.
How Do You Object to a Claim?
After a creditor files a claim, you can review it to make sure that you agree with the reported information. If you disagree with anything, you can file a written objection stating why the court shouldn’t allow the claim. Here are a few common objections:
- the creditor doesn’t have the right to make the claim
- the claim is for the wrong amount
- the filer already paid the claim
- the creditor claims a debt deserves priority when it does not (see Nondischargeable Debts: Debts You Can’t Discharge in Bankruptcy), or
- the creditor failed to attach proof to support the claim.
You must file the objection with the court, along with a “notice” that tells the creditor, the trustee, and the debtor the date the court will hear the matter. Finally, you’ll file a “proof of service” stating that you served both the notice and objection on everyone involved.
What Happens at the Hearing?
At the hearing, the judge will decide whether to allow, deny, or modify the claim in some manner. If the creditor doesn’t file a response or fails to appear at the hearing, the judge will deny the claim. If the creditor files a response, the judge will usually give you an opportunity to file a written reply and set a new hearing date for the objection. The hearing might include presenting evidence and witnesses. However, the judge will often rule based upon the written documents submitted by each side.
Objecting to claims is a complicated process that requires an understanding of both the law and the procedures of your local court. If you find the need to object to a claim, you should strongly consider retaining the services of a bankruptcy attorney.
Questions for Your Attorney
- What should I do if a creditor’s claim is inaccurate, but I don’t have standing to object?
- What happens if I want to pay off my taxes in my Chapter 13 bankruptcy but the IRS fails to file a claim?
- Can a creditor file a claim after the deadline if I forgot to list a debt on my bankruptcy petition?