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Know The Law: What to do When a Customer Files for Bankruptcy

Written by: Steven J. Dutton

Published in the Union Leader

Q: We received written notice from the Bankruptcy Court that one of our customers with a large outstanding balance just filed bankruptcy. What does this mean to us and do we need to file a proof of claim?

A: If you received written notice from the Bankruptcy Court, this means that the debtor listed you as a creditor. Among other things, when a creditor gets notice that a debtor has filed for bankruptcy, it is important for the creditor to determine whether it needs to file a proof of claim in the debtor’s case to preserve its rights to receive payment from the debtor’s estate. The notice from the Bankruptcy Court will usually provide for a deadline for filing proofs of claim, or in the event of a no asset case, instruct you not to file a proof of claim unless you receive further notice.

A proof of claim is a written statement describing the reason for and amount of the debt allegedly owed by the debtor to the creditor. In a Chapter 7 or 13 bankruptcy case, the creditor will not share in any distribution of funds from the bankruptcy estate unless if has filed a timely proof of claim. In a Chapter 11 case, a creditor must file a proof of claim if its claim is not listed in the debtor’s schedules, or if it is listed as disputed, contingent or unliquidated.

By filing a proof of claim in a bankruptcy case, a creditor asserts its rights to receive a distribution from the bankruptcy estate, if any. Filing a proof of claim, however, does not guarantee a distribution to the creditor. A proof of claim may be objected to and disallowed in whole or in part. No distributions to creditors will be made if there are no assets in the bankruptcy estate.

Filing a proof of claim form, however, is not without some potential risks, including, but not limited to, submitting the creditor to the bankruptcy court’s jurisdiction, subjecting the creditor to discovery regarding its claim, and waiving the right to a jury trial. For example, the debtor may object to the proof of claim and seek information by discovery. In addition, filing a proof of claim may invite a counterclaim, possibly resulting in the creditor being forced to adjudicate the claim in the bankruptcy court chosen by the debtor. Therefore, although a creditor may have a valid claim in a bankruptcy case, it should carefully consider the potential risks in filing a proof of claim.

Steven Dutton can be reached at [email protected].

Know the Law is a bi-weekly column sponsored by The McLane Law Firm.
We invite your questions of business law. Questions and ideas for future columns should be addressed to: Know the Law, The McLane Law Firm, P.O. Box 888, Manchester, NH 03101 or emailed to [email protected].  Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.

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