Understanding the Concept of a Claim in Bankruptcy

 

The concept of a claim in bankruptcy can be misunderstood by a layman not familiar with the use of the legal term within this context. This article addresses the definition and types of claims in bankruptcy.

Definition of a Claim in Bankruptcy

A claim in bankruptcy is a formal written assertion by a creditor of their right to a payment from the debtor during the process. The claim can be paid through the liquidated proceeds collected for distribution to creditors or through a payment plan approved by the bankruptcy court.

A claim in bankruptcy must be made by all creditors wanting to get paid during the process. The creditors formally stating their claim allows the bankruptcy court to legally deal with all debts the filing debtor has listed in their bankruptcy petition for bankruptcy protection. The formal act protects the integrity of the bankruptcy estate. Any claim not made by a creditor within a certain time frame may be subject to being discharged by the bankruptcy court. By making a valid claim, the bankruptcy court recognizes the creditor’s potential right to participate in the bankruptcy process.

There are Three Different Types of a Claim in Bankruptcy

As to how the court handles a claim in bankruptcy, there are three different types of claims that can be paid during the process. Depending on the type of bankruptcy filed, these three different types of claims are prioritized according to bankruptcy laws. These claims are:

  1. Priority claims. These claims are normally paid first where there has been no special arrangement made by the court and debtor to pay outside of a bankruptcy plan. Priority claims can normally include: student loans; legal costs associated with the bankruptcy case; certain taxes; spousal and child support; certain wages and commissions; certain court penalties and fines; certain types of court restitution; and contributions to employee benefit plans. Except for student loans, most priority claims or their arrears are normally paid off in full during a reorganization plan.

  2. Unsecured claims. If a debt is not secured by collateral then a creditor has an unsecured claim. There are two types of unsecured claims, priority and non-priority. Most unsecured claims that have top priority are listed above in the priority claims list. Non-priority unsecured claims include such things as credit cards, bills, personal signature loans, and unsecured lines of credit.

  3. Secured claims. Creditors with a lien against your property have a secured claim in your bankruptcy. In bankruptcy terms, these are not necessarily considered priority claims but under certain circumstances, can be treated as such. They are certainly one of the three types of claims that can receive payment during a bankruptcy proceeding. As a matter of fact, you must keep current on your secured payments if you want to keep your assets during a repayment plan, and your secured payment is prioritized by exemption status. Secured claims have their own special rules regarding how they are to be treated in any particular bankruptcy.

 

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