Creditors usually should file a proof of claim when the borrower files a bankruptcy case. In Chapter 7 cases where there are assets in the bankruptcy estate and in Chapter 11, 12 and 13 cases, the creditor should file a proof of claim. Here are some of the basics involved in preparing and filing proofs of claim.
When must a proof of claim be filed?
Courts usually set a date by which time a creditor’s proof of claim must be filed. This date is called a “bar date” because failure to file a proof of claim on time may “bar” a creditor’s claim. If the bankruptcy court does not set a formal date for the filing of proofs of claim, the Federal Rules of Bankruptcy Procedure provide that in Chapter 11 cases, a creditor must file its proof of claim by the date on which the debtor must file its disclosure statement.
How will I know when to file a proof of claim?
In Chapter 11, 12 and 13 cases, and in Chapter 7 cases where the debtor has assets, it is good practice to file your proof of claim as soon as possible after the bankruptcy case is filed. If the court sets a bar date, all creditors will receive a notice from the court.
However, these notices are sent to the address that the debtor uses in filling out its statement of affairs. Often, debtors use the remittance address, which means that all notices from the court are going to be sent to the remittance address, which is often a lockbox.
If you learn or suspect that a customer has filed bankruptcy, it is good practice to immediately check with the bankruptcy court to be sure.
What information is contained in the proof of claim?
The creditor must set forth its correct name and address, as well as the amount of the debt as of the date on which the bankruptcy case was filed. The creditor also must designate whether the claim is secured or unsecured, show a calculation of interest and other fees and charges that are due, and attach copies of the documents that evidence the claim.
What documents do I attach to a proof of claim?
Typically, in addition to the form proof of claim, we usually attach a calculation of the claim (itemizing and totaling principal, interest, fees and costs), a list of exhibits, followed by copies of the promissory note, all amendments (often called “Change in Terms Agreements”), the loan agreement signed by the borrower, the security agreement signed by the borrower, the UCC-1 financing statement (including all amendments and continuation statements), and the deed of trust and assignment of rents signed by the borrower.
Occasionally, there are other documents to attach. For instance, where the guarantor is the bankruptcy debtor, the creditor must file copies of the promissory note and amendments and the guaranty and amendments. If the guaranty is secured, then the creditor also files a security agreement signed by the guarantor, the UCC-1 financing statement (including all amendments and continuation statements), and the deed of trust and assignment of rents signed by the guarantor.
These are part of the loan document package that you should send to counsel as soon as a commercial customer files a bankruptcy case. I also ask my clients to send me the current outstandings (principal, interest, fees and costs) that are due as of the date the bankruptcy case is filed.
What if part of my claim is secured and part is unsecured?
For example, assume that the bank made a $5,000,000 secured loan and a $250,000 unsecured loan to a customer who files bankruptcy. In this case, it is good practice to file two separate claims – one for the secured loan and a second claim for the unsecured loan. Why? Assume further that before she filed bankruptcy, the customer was having cash flow problems and made sporadic payments on both of her loans for several months. In this case, it is possible that the payments made by the debtor on the $250,000 unsecured loan within 90 days before she filed bankruptcy are preferences and could be avoided (clawed back) by the debtor in possession or if there is one, a bankruptcy trustee. Payments made by the debtor on the $5,000,000 secured loan are not going to be avoidable preferences. By filing two separate claims, the creditor’s larger secured claim is deemed allowed and is not held hostage until there is a resolution of the avoidance claim against the smaller unsecured claim.
Similarly, if a creditor has a liquidated (amount fixed) claim and an unliquidated (amount in dispute or subject to calculation) claim, filing two separate claims is good practice.
What happens if the creditor does not file a proof of claim?
The liens of secured creditors generally pass through bankruptcy, but filing a proof of claim establishes the amount of the claim and makes administration of the case easier and less costly. Unsecured creditors could be left out of any distribution of dividends if they do not file a proof of claim.
This seems simple. Do I always need a lawyer to file a proof of claim for me?
Preparing and filing a proof of claim can be very simple, and in cases where the debt is small, the collateral has little value and the Bank does not intend to engage counsel, the workout professional may choose to file the Bank’s claim herself. However, it is important to make sure that the proof of claim is accurate, as a proof of claim filed in error or with errors may generate an objection or an avoidance action. If either of those are filed, the Bank should engage counsel promptly. We will discuss objections to claims and avoidance actions in later columns.
The JMBM Special Assets Team can help you file a proof of claim and can work with you to minimize unnecessary objections and avoidance actions.
This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what’s new in the World of Workouts.
Year after year, day after day, workout professionals in the know rely on JMBM’s Special Assets Team™ to handle problem commercial and real estate loans. Whatever problem loans you have, chances are, we’ve seen it. Give us a call.
Our Perspective. JMBM represents commercial banks, special servicers, private lenders, asset-based lenders, hard money lenders and factors. We help lender clients throughout the United States craft business and legal solutions to their commercial and real estate troubled loans. For more information, please contact Dick Rogan at RRogan@JMBM.com, or (415) 398-8080.
Richard A. Rogan is Chair of the JMBM Special Assets Team™. He also serves as the co-managing partner of JMBM’s San Francisco office and co-chair of its Bankruptcy Practice Group.
JMBM’s Special Assets Team™ has represented hundreds of lenders in California and throughout the United States. We regularly appear in bankruptcy courts, district courts and superior courts. We are proud to serve as trusted counsel and advisors who look for a business solution and try to help lenders find the best possible resolution for each troubled loan. Whether a loan is being newly documented, restructured or litigated, JMBM’s Special Assets Team™ has the skill, know-how and experience to solve your problem in a practical no-nonsense way.
NOTE TO CONSUMERS: As a matter of Firm policy, JMBM does not represent individual consumers who have disputes with their lenders. Many lenders have specialized consumer workout professionals who have the time to help consumer borrowers. There are many fine attorneys who specialize in representing consumers. Individuals with consumer lending problems should contact a lawyer or law firm who specializes in consumer insolvency and bankruptcy in their local area. When in doubt, we suggest you contact your local bar association’s Lawyer Referral Service. [For example, see Bar Association of SF or LA County Bar Association Lawyer Referral Services]
JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.