Why would a debtor want to file a proof of claim on behalf of a creditor?
Basically, the debtor wants to file a claim on behalf of a creditor when the debtor wants that creditor to be paid.
In bankruptcy, a proof of claim is the basic document that asserts a right to payment by a creditor. In Chapter 7 and Chapter 13 bankruptcy, a proof of claim is necessary for a creditor to be paid on its debt. Without a claim, the debt goes without payment, and, if dischargeable, is discharged without payment. Proof of claims are a standard part of chapter 13 cases, as creditors are requested to file claims in every chapter 13 case. They are less common in chapter 7 cases, as in many chapter 7 bankruptcy case the debtor's property is completely protected by exemptions and the case proceeds as a no-asset chapter 7.
In some situations, it is clearly to the benefit of the debtor if a creditor fails to file a proof of claim. Many debtors would leap at the chance to leave a credit card debt unpaid simply because the lender, after proper notice, failed to file a claim. This is not true for all debts. In general, there are three categories of debts that a person in bankruptcy would prefer to have paid:
- Debts proposed to be paid under the debtor's chapter 13 plan. Most of the time, there was a good reason for proposing to pay the debt in the plan. More on this below.
- Non-dischargeable debts, such as a student loan. If the debt isn't going away at the end of the bankruptcy, it is better for more money to go to these sorts of debts during the bankruptcy.
- Friendly creditors (such as family members), who the debtor wants to pay.. As with non-dischargable debts, it is better to use plan money to pay debts that might be paid anyways latter.
To understand the latter two cases, one must consider how unsecured debts are typically paid in a bankruptcy case. A certain pool of funds is available to unsecured creditors, which is distributed pro-rata based on the size of claims. So, for example, a $10,000 pool with a $5,000 claim and a $15,000 claim would be distributed $2,500 and $7,500. If an additional $20,000 was filed, the distributions for the first two claims would go down to $1,250 and $3,750. It follows that if first two claims were dischargeable and the last one non-dischargable, the debtor wants the last claim filed because it shifts money from dischargeable debts to non-dischargable debts, saving money in the long-run. Note that this rationale doesn't apply if the claims are being paid a fixed percentage (such as 10%, 25%, or even 100%), as some bankruptcy plans might propose.
One would observe that the last two categories concern optimizing the outcome of the bankruptcy case. The same is not true for the first category, debts proposed to be paid under the debtor's chapter 13 plan. There lie some dangerous consequences to a claim not being filed.
Claims Needed to Execute Chapter 13 Plan
Several kinds of debts are often proposed to be paid in a chapter 13 plan: secured debts, such as mortgages and car loans; priority debts, such as child support claims; and specially classified debts, such as a claim with a co-signer present. Secured debts can pose the biggest problem if no proof of claim is filed. Imagine if a bankruptcy plan has $2,000 payments, most of which service a mortgage obligation. If a claim isn’t filed for that mortgage, the mortgage isn’t being paid. Worse, there is a risk the trustee will start paying other claims with the money intended for the mortgage, leaving no funds available once the mortgage lender finally decides it wants to be paid. For cars, the issue is similar. In the long run, payment is necessarily to keep the collateral.
Priority debts have additional issues. Non-payment of certain domestic support obligations during a chapter 13 case can prevent the debtor from obtaining a discharge. Taxes are a different story, and the non-filing of a priority tax claim may not necessarily be bad, but such is a topic best left for another day.
Claims for unsecured debts placed in a special class are somewhat context sensitive. If the plan payment is higher to pay these debts, it may be desirable to ensure that those extra funds go to their intended destination. If the special classification is a matter of allocation amongst unsecured creditors of funds which must be paid anyway, the motivation for having the claim filed is similar to the non-dischargable debt example discussed above.
Mechanics of Debtor-filed Proofs of Claim
A debtor (by and through his or her attorney) cannot file a proof of claim for a creditor at any arbitrary time. Instead, the bankruptcy code (11 USC 501(c)) and bankruptcy rule 3004 provide that the opportunity for the debtor to file a claim is immediately after the creditor has failed to file a proof of claim by the claims deadline (the bar date) set in the case. The debtor then has 30 days to file a claim, although local rule may provide a different time.
In our office, claims are reviewed following the claims deadline for any missing claims. If a claim is missing, we will request assistance locating any needed supporting documents. It is also a good idea to independently review the claims summary sent by the trustee for anything missing or otherwise anomalous.