5 Factors Impacting the Status of Bankruptcy Claims
In a bankruptcy case, all claims and supporting documents are reviewed by the debtor and the court before creating a plan of reorganization. However, there are certain factors that can affect the status of bankruptcy claims, leading to changes or updates by the court.
1. Invalid Claims
Claims can be deemed invalid if a creditor fails to file a proof of claim by the deadline, known as the Bar Date, or files late without proving excusable neglect. A claim can also be deemed invalid if it contains false information or was filed for unethical reasons. In such cases, the debtor must file an objection to have the claim discharged.
2. Rejected, Disallowed, and Discharged Claims
The debtor or their trustee can reject a creditor's claim, which reduces the overall debt owed and simplifies the restructuring process. Objections can be filed if a proof of claim contains false information, is miscategorized, lacks sufficient documentation, or was filed with unethical intentions. Debtor objections will be addressed in court, and if deemed reasonable, the claim will be disallowed and discharged at the end of the case. However, creditors can dispute the court's decision by filing their own objection.
3. Claim Subordination Within a Class
Claim subordination happens when priorities are rearranged based on equitable principles, resulting in reduced priority levels and delayed or reduced payouts for certain claims within a creditor class.
4. Reduced Claims
Claim status determines a creditor's priority level and the order in which they receive payment. High-priority claims are paid in full before lower-priority claims. Therefore, lower-priority or unsecured claims are likely to be reduced, resulting in partial payment or recharacterization of the debt as equity.
5. Claim Impairment
When formulating a plan of reorganization, the debtor proposes how claims will be paid out. An impaired claim results from the proposed plan's affected repayment terms, while an unimpaired claim remains unaffected. Impaired claims are eligible to vote on the debtor's plan of reorganization, while unimpaired claims are not.