What is a Claim in Bankruptcy?

A claim in bankruptcy is a legal claim a creditor files with a court during bankruptcy proceedings to indicate a right to funds distributed after liquidation of the debtor's estate. When someone prepares to file bankruptcy, notices must be sent to any known creditors to give them a chance to respond with a claim form. The claim forms are processed by the court as part of the bankruptcy proceedings to establish a list of people with claims on the estate and to determine their priority when it comes to distributing funds.

This document is also known as a proof of claim. Creditors must file claims in bankruptcy by a set time, or lose the chance of recovering funds from the estate during the liquidation. The court sets a deadline and provides information in the notice sent out to creditors. In some regions, people must also publish a public notice in the newspapers with information about the case so creditors can file claims in time to make the deadline.

The claim in bankruptcy includes information about the debt, including what it is for, the amount, and whether the debt has been sold or subcontracted to the claimant. The default on the part of the court is to accept the claim, adding the creditor to the list of people who deserve compensation. It is possible to challenge a claim in bankruptcy, in which case a separate court session will convene to hear the details, and the judge will decide if the claim should be upheld or thrown out. A debtor may claim that a debt was already settled and provide evidence, for example, to get the court to reject the claim.

In a bankruptcy, a value estimate of the debtor's estate is made. This will be the basis for deciding how to pay out on claims. Creditors are ranked by type of debt and priority, with high priority debtors being most likely to recover the full amount of their claims. After the liquidation of the estate and the distribution of funds, debts not satisfied by the liquidation will be written off as part of the bankruptcy. There are a few exceptions; some debt may persist through bankruptcy, although the proceedings may give the debtor a brief grace period before payments on the debt must begin again.

Debtors going through bankruptcy should closely inspect any claims made against their estates. Mistakes are sometimes made, and if the debtor does not challenge the claim in bankruptcy at the time, it may be more difficult to disprove later. The debtor should research and verify all debts appearing unfamiliar, or those with erroneous details like a misstated balance. If the claim in bankruptcy appears to be invalid, it is worth filing a challenge to reject or adjust it.