You might be wondering, how are creditors paid in a bankruptcy case? In many Chapter 7 cases, creditors will get nothing because the trustee will determine that the debtor has no assets. This is because the debtor gets to exempt quite a bit of his property. However, sometimes the debtor cannot exempt all of his property. In that case, the non-exempt property is sold by the trustee and distributed to creditors as cash payments.

But how does the trustee determine how much to pay each creditor? That is where the Proof of Claim comes into play.

What Is It?

The Proof of Claim is a form that is filled out by a creditor and filed with the bankruptcy court. The form is almost always available on the bankruptcy court's website. The form requires that the creditor indicate the name of the debtor, the case number, the creditor's name and address, and the amount of the debt. The creditor must also indicate whether the claim is secured or unsecured. Basically this means whether the debt is protected by collateral, such as a home mortgage. The creditor must fill out a few other technical details, such as if the claim is entitled to priority payment over other creditors (such as if it is a domestic support obligation like child support). Finally, the creditor must attach any documents that support its claim.

The creditor must complete the form and file it with the court by a deadline established by the court.

Trustee's Notice to File Proof of Claim

Generally, a proof of claim will only be filed by a creditor if the trustee declares the case an "asset" case. At that point a document will likely be generated by the court stating the deadline to file a proof of claim. However, sometimes at the beginning of a bankruptcy case, a creditor will file a proof of claim, before a determination of "asset" or "no asset" is even made. This is usually done by very large creditors such as national banks which do not wish to monitor the movements of every single bankruptcy case. This, however, does not mean that the creditor is entitled to a payment!

Which Creditors Are Paid First?

The trustee gets to pay himself a small percentage of anything he collects from the debtor. So this means that the trustee pays himself before all creditors. After that, priority debts are paid. Priority debts include domestic support obligations; wages, salaries, or commissions up to a certain amount and earned within 180 days of the bankruptcy; contributions to employee benefit plans; a certain amount of deposits for the purchase or rental of property; and taxes and penalties owed to governments.

Claims Trading

Something that has become very popular among creditors in bankruptcy is something called claims trading This involves selling and buying the claims of other creditors. Even a creditor not involved in the bankruptcy may wish to buy the claim of a creditor that is owed money by the debtor. A document indicating the claim trade must be filed with the bankruptcy court.

If I am a Creditor, What Should I Do?

If you are a creditor in a bankruptcy, you need to be aware of any deadlines to file a proof of claim. Therefore, you need to be very careful about reading all of the documents that you receive regarding the case. The best thing to do, as always, is to hire a bankruptcy attorney to help you navigate the bankruptcy case and to protect your rights as a creditor. Again, remember that just filing a proof of claim does not guarantee you a payment. In fact, most creditors will get nothing in a bankruptcy, particularly if you do not become involved in the case.