Chapter 11 allows bankrupt businesses to reorganize in order to resume financial stability under the court’s supervision. The process includes submitting a list of assets and debts owed to creditors, called the Schedule of Assets and Liabilities.
Creditors whose claims are not listed by the debtor can file a proof of claim with the court to include them in the Schedule. However, these claims are still subject to the debtor’s review. If the debtor finds wrong or inconsistent information in the proof of claim, they have the legal right to disallow it.
Common grounds for disallowing a creditor’s claim
The basis behind disallowing a creditor’s claim often lies with the contents of the proof of claim, a written statement listing the reason for the claim and the amount allegedly due. The debtor can invalidate a claim in any of the following circumstances:
- The creditor files the claim beyond the deadline.
- The creditor lists incorrect information, such as the amount of debt due and the security of the debt.
- The creditor applies false, excessive or unmatured interest or penalty charges on the debt.
- The claimant is an insider of the organization, making unreasonable claims for services.
- The claim is by a landlord pursuing damages for the termination of the lease under specific circumstances.
- The creditor fails to sufficiently support their claim with the necessary documentation.
As a matter of course, the debtor’s disallowance is still subject to the court’s review and resolution.
Facing financial crisis head-on
While its complexity challenges both debtors and creditors, bankruptcy law allows for a fair and just reconciliation between parties. Several considerations are at play in bankruptcy proceedings, and it is crucial for each party to come prepared.