Though it is possible for certain debts to be discharged when you file for bankruptcy, there are also cases in which creditors are paid the money they are owed – or at least a portion of it. If you file for Chapter 13 bankruptcy, you will pay your creditors back through a repayment plan that is arranged by the court. In Chapter 7 bankruptcies, assets that are not exempt are sold by the trustee and creditors are paid from the proceeds to those sales.
In order to determine how much each creditor is paid, the trustee is given Proof of Claim from the creditor.
Proof of Claim forms include the amount of the debt, the creditor’s name and contact information, and the debtor’s name. Creditors also identify whether a debt is secured or unsecured, and if they believe it is a priority claim, and then they attach any documents they have to support their claim. In order to receive payment from the court, the creditor must complete and submit the form by the deadline they are given by the bankruptcy court.
Usually, Proof of Claim forms are only filed if the case is determined to be an asset case. Proof of Claim forms might not even be available for a case that is not an asset case, but a creditor might be able to file the document early, before it is determined if there are assets. You often find this to be the case with larger creditors who deal with so many bankruptcies they don’t have time to closely monitor proceedings in each case. They might receive nothing, but they file a Proof of Claim the moment they realize an account has gone to bankruptcy.
How are Payments Distributed?
Trustees pay their own fee out of the proceeds from the sale of the debtor’s assets or from the monthly chapter 13 payment. They then pay priority debts, which are things like childcare, wages or salaries, and taxes owed to the government. Once priority debts are paid, the remaining funds are distributed to the debtor’s unsecured creditors.
Keep in mind that filing a Proof of Claim does not automatically mean anyone will receive any money. And if the Proof of Claim is not filed by the deadline, there is almost no chance the creditor will receive anything. In many bankruptcy cases, creditors are never paid, especially if they don’t take an active and aggressive role in seeking repayment for the debt. Of course, if you are filing for bankruptcy, it will be up to the judge and trustee to determine which creditors receive payment and which debts are left unpaid.
If you are considering bankruptcy or you have questions about bankruptcy, we can help. Contact the law office of Frank J. LaPerch, PC at 845.942.5500 to discuss your case.