Why Creditors Can’t Afford To Ignore Objections To Bankruptcy Claims

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It’s been several years since I last posted about objections to bankruptcy claims, and the topic is so important to creditors that it’s time to revisit it.

File And Forget? When a customer or other party with which you do business files bankruptcy, it’s important to file a proof of claim on time by the deadline (also known as a “bar date”) set in the case. Once you do, however, months or even years can go by before you hear anything more about your claim from the debtor, bankruptcy trustee, or other party responsible for reviewing claims and ultimately distributing money to creditors. In fact, the only thing you may hear about your claim for quite some time is an offer to purchase it made by one or more claims buyers.

No News Is Not Necessarily Good News About Your Claim. Unfortunately, the passage of time may lull you into thinking that no objection will ever be filed to your claim. However, the urgency of reorganizing a debtor’s business or liquidating its assets means that the claim objection process is typically left until near the end of the bankruptcy case, often after a plan of reorganization has been confirmed in a Chapter 11 case. Likewise, a Chapter 7 trustee may put off filing claim objections until it’s clear there will be money to distribute to unsecured creditors. As a result, an objection to your claim may be brought long after you filed it, often years later.

Is That An Objection To My Claim? When an objection is filed, it may not always be obvious at first that it applies to your claim. In smaller cases the title of a claim objection may list your name as the target of the objection, but don’t count on that in larger cases. In cases with hundreds or thousands of claims, the debtor or other estate representative will almost certainly combine an objection to your claim with others. Instead of a pleading specifically mentioning your name in its title or text, the objection will likely have the word “omnibus” in it and may have a name such asNotice of Debtors’ One Hundred Fifteenth Omnibus Objection To Claims (No Liability)” or some similarly titled document.

  • Be careful: the format of these objections can be a trap for the unwary. Buried within the objection’s many pages of text and attached exhibits may be just a few lines, often only in a list or chart, identifying your claim as one of dozens to which an objection has been filed.
  • Given the passage of time, the debtor may have sold — and changed — its name, so the name of the debtor listed on the objection may not even be familiar to you (although the old name should appear near the new one).
  • When filed, the objection may assert (1) your claim should be zero, (2) the amount doesn’t square with the debtor’s books and records and should be less, or (3) your claim should be reclassified as some lower priority claim (for example, from a priority claim to a general unsecured claim).
  • Whatever the objection’s name or format, the point is the same: ignore it at your peril. If you don’t file a formal response with the bankruptcy court by the deadline set in the objection (and there’s always a deadline) your claim could be disallowed in its entirety. If that happens, you will recover absolutely nothing from the bankruptcy estate.

Stay Vigilant To Protect Your Rights. Protecting your rights in a bankruptcy case requires diligence and timely action – often no easy task. In mega bankruptcy cases, literally thousands of pleadings can be filed during the course of a case. Many will be served, whether in paper or electronic form, and yet only a few may be directly relevant to you or your claim. For this reason, it’s critical that you or your attorney keep track of the pleadings served in a bankruptcy case. The bottom line is, if you see anything that looks like a claim objection, review all of the pages carefully, including the exhibits. If an objection to your claim is filed, you have to respond on time and defend your claim. Otherwise, despite your efforts earlier in the case to file a timely proof of claim, you may well find yourself with a disallowed, and worthless, claim.

Image Courtesy of Flickr by Sam Howzit

 

Topics:  Consumer Bankruptcy, Creditors, Debtors, Proof of Claims

Published In: Bankruptcy Updates, Civil Procedure Updates, General Business Updates, Finance & Banking Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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