Proofs of claims are important in bankruptcies because they generally help ensure creditors receive payment of some or all of the debts owed to them when payment is possible. It is generally recommended to file a proof of claim if you are a creditor. However, situations arise where doing so may not be in a business’s best interests, such as when the cost vs. potential recovery is simply too high.
Cost vs. Potential Recovery
Before filing a proof of claim, a business should be aware of the costs and weigh them against the potential recovery. This balancing test will have different results for different groups and will depend heavily on the amount of the debt and the likelihood of its recovery.
One major concern that should be considered is that submitting a proof of claim form may ultimately be viewed as consent to jurisdiction. Whereas a bankruptcy petitioner may normally need to bring related third-party claims in other venues, the filing of a proof of claim may allow enough of a nexus to permit the bankruptcy court to assert jurisdiction, even over non-U.S. entities.
Make sure you consider whether filing a proof of claim will actually benefit your business in the long run.
Debtor Disputes the Claim
Another potential reason for not filing a bankruptcy claim arises when a debtor has a counterclaim. If a creditor submits their proof of claim to the bankruptcy court, the right to a jury trial is waived. Instead, the issue will be tried in equity, which can result in undesired consequences for the creditor.
Reputational Concerns
Now more than ever, businesses must take great care when it comes to their reputation. Very little is necessary to cause a once-thriving, popular business to take a turn for the worst because of one small hit to its reputation.
Although a creditor may have a legitimate debt interest, it may not be in the interest of the creditor’s reputation to file a proof of claim against a particular petitioner. For example, for some, lending money to a party that ultimately files for bankruptcy represents a lack of judgment or at least a poor decision. On the other side of the coin, it might also be a negative to be seen as a creditor in a situation involving a vulnerable or protected petitioner beloved by the public.
Often, reputational concerns can be adequately addressed in in-depth planning sessions with a seasoned attorney. Their experience helps them predict the reputational ramifications of filing a proof of claim.
Alternatives to Filing a Proof of Claim
If a business finds that it is not in its best interests to file a proof of claim, there are few alternatives available to recover the debt. Once a bankruptcy has been filed, petitioners and creditors must submit to the bankruptcy process. Therefore, during bankruptcy, no side deals or negotiations are permitted unless under the rules of bankruptcy.
Creditors and petitioners can negotiate new payment arrangements for the payment of the debt, even if the creditor has not filed a proof of claim. The law allows creditors to forgo filing a proof of claim if the claims are accurately listed by the debtor in the schedule of claims in their filing. However, the claims must not be disputed, unliquidated, or contingent in order for the creditor to default to the debtor’s schedule.
Houston businesses trust Weisblatt Law Firm for thorough and effective representation and document work. Contact Attorney Weisblatt for a complimentary telephone consultation or schedule an office visit. Call (713) 666-1981 today.
Timing Considerations When Filing a Proof of Claim
If your business decides to file a proof of claim, there are certain timing considerations to take into account. First, you may not want to file the proof of claim too early. Doing so may result in subsequent multiple modifications of the proof of claim as the bankruptcy process progresses, partial payments are made, and more information comes to light.
Second, waiting too long to file a proof of claim could risk a clerical error, compromising a creditor’s recovery efforts. For example, a small error is more easily corrected weeks or months before a proof of claim filing deadline than just days before. In every case, the services of an experienced debt collection attorney will impart the guidance necessary to protect a business’s interests.
Get the Business Law Guidance You Deserve
Business can be incredibly nuanced and often requires well-thought-out decisions. Business lawyers help owners and managers read between the lines and make decisions that ultimately benefit their operations. Weisblatt Law Firm works with Houston-area businesses to help them thrive while protected by the law.
If your business needs representation on debt matters, Weisblatt Law Firm is ready to listen and find effective solutions. Call (713) 666-1981 to schedule an in-house consultation or a free telephone consultation.
Attorney Andrew Weisblatt
Mr. Weisblatt has practiced continuously since becoming licensed in 1992 and has represented businesses ranging in size from one person start-up ventures to multi-national corporations employing hundreds of people in multiple countries. From 2005 through 2009 Mr. Weisblatt was in-house counsel and chief operating officer of a multi-national corporation in the steel products industry. That in-house position provided valuable insight into how businesses work and what they actually need from their lawyers – both in-house and outside counsel. Attorney Bio
