Many Homeowners who find the need to file a Chapter 13 Bankruptcy years after lenders has failed to modify their mortgage loans may find the needs to pursue the unscrupulous lenders through the  the special proceeding in the Bankruptcy law called “Adversarial Proceeding”.

When Homeowners in Chapter 13 Bankruptcy listed their lender as “Unsecured Credit”, the burden of proof usually shift to the creditor to show how its claims against the borrower is secured. Doing so, requires that the lender present the necessary documentary proof and then ascertain how it came about acquiring those payment rights or the right to institute and maintain foreclosure action against Homeowner’s property.

When lenders are listed as “Secured Creditors”, even though the word “secured” made it appear as if the lender has all the rights in the world to pursue the foreclosure, absolutely not. The bankruptcy law requires that all claimants listed on the Chapter 13 Bankruptcy timely file what is called a “proof of claim”, as to their entitlement for the interest they were claiming. Whether or not such “proof of claim” is timely filed by the lender determines how its interest if any, is going to be protected when the Trustee distributes the money. However, if Homeowners commenced what is know as “Adversarial Proceeding” within that Chapter 13 Bankruptcy proceedings, then lenders are forced to substantiate their claims. This is the point where all events in the mortgage loan transaction comes to light including but not limited to “assignments and transfers, possession of deeds of trust, mortgage or notes, recordings in the county, MERS issues etc. The burden thus still shifts to the lender to show how it came about with the rights of ownership or enforcement it is claiming against Homeowner’s property.

Ordinarily, the first step a creditor will take upon learning of a debtor’s bankruptcy case is to file a proof of claim to seek payment of money owed. A claim or interest that has been filed with the court will be allowed, and will serve as the basis for distribution of the creditors claim, unless a party in interest objects. Once filed, a proof of claim constitutes prima facie evidence of the validity and amount of the claim. Often times months or even years will go by before a creditor hears anything further about his claim from the debtor, trustee or any other party. Consequently, an objection to a claim may be brought long after the claim was filed. There is no absolute deadline in the Code or Rules for filing an objection to a claim. In Chapter 7 cases, objections should be filed prior to any distribution by the trustee and in Chapter 11 cases, oftentimes the plan of reorganization will include a deadline to object to claims. Typically, a claim objection is preceded by a letter requesting additional documentation from the claimant by the debtor or trustee.

If a Trustee or Debtor files an objection to claim, the objection becomes a “contested matter.” If the objection is joined with a demand for relief of the kind specified in Bankruptcy Rule 7001 (governing adversary proceedings), it becomes an adversary proceeding. At least thirty days notice of a hearing is required on an objection to a claim. Once an objection has been filed, the burden of proof shifts to the creditor to prove the amount and validity of the claim. The claimant bears the ultimate burden of establishing a valid claim by a preponderance of the evidence.

Filing a successful proof of claim is the key to unlocking a creditor’s right to recover against a debtor in bankruptcy. Only in limited circumstances may a creditor recover against the debtor’s estate without properly filing a proof of claim. This article addresses the various stages of filing, attacking and defending a proof of claim.

A proof of claim is “a written statement setting forth a creditor’s claim.” To aid creditors, the judiciary has created an “Official Form” for filing proofs of claim that comply with the Bankruptcy Code and Rules. The deadline for filing proofs of claim is fixed by the Bankruptcy Court.

The proof of claim serves to give notice to the Bankruptcy Court, the debtor-in-possession/trustee, and other interested parties of the creditor’s claim. Beyond alerting others to the existence of the claim, it also begins the process of establishing the amount of the claim, by requiring the creditor to specify the amount owed as of the petition date. Finally, the proof of claim identifies thetype of claim, such as whether it is a secured or unsecured claim, and any priority asserted by the creditor. The proof of claim is therefore more than just a “written statement” of the creditor’s claim, but also the opening salvo in the creditor’s attempt to obtain a distribution from the debtor’s estate which must be completed with care.

The Official Form requires a claimant to describe its claim as an unsecured or secured priority claim. Claims receive different treatment under the Bankruptcy Code, depending upon the priority, and accordingly, this required designation is more than a technicality. A secured claimant who has perfected a security interest in a particular piece of collateral is entitled to receive a distribution from that specific property before any other creditors can recover from that specific property. If the claim is unsecured, the Bankruptcy Code establishes a schedule of “priorities” giving the order in which unsecured claimants are paid back, based on the type of claim, until the debtor’s estate is exhausted. As a few examples, priority unsecured claims (in order) include domestic support obligations; wages, salaries and commissions; consumer deposits; and other unsecured claims.

More basic requirements for filing a proof of claim include a signature by the creditor or its authorized agent. Further, if the claim is based on a written document, the creditor should file a copy of the document; or if the document is no longer available, the creditor should explain how it came to be lost or destroyed. If the creditor possesses a security interest in the debtor’s property, the creditor should include evidence of the security interest’s perfection.

While the ultimate burden of persuading the Bankruptcy Court that the claim is valid always rests with the claimant, once a creditor files a proof of claim complying with these rules, the proof of claim becomes “prima facie evidence of the validity and amount of the claim.” If left unchallenged, the creditor will be entitled to receive distributions from the debtor’s estate in order to satisfy its claim. As courts have recognized, this effectively shifts the burden to objectors to present evidence casting doubt on the claim, with such evidence carrying at least equal evidentiary force as the details in the proof of claim. However, the objector having done so, the burden returns to the claimant to demonstrate the ultimate validity of its claim.

The Bankruptcy Code and Rules allow for a “party in interest” to object to the proof of claim. Such objections must be written and filed with the Bankruptcy Court. The objector must also serve a copy on the claimant at least 30 days before the hearing on the objection. The objector should also make it clear that this is an objection to a proof of claim filed in the case and specify which proof of claim is affected.

One typical tactic that objectors employ is the so-called “omnibus objection,” resulting from the fact that many claims are vulnerable to objections on the same basis. As a consequence, objectors will often set forth a general legal basis for a reduction or elimination of particular claims, and then attach as an exhibit a list of claims to which the objection applies. For example, claims that were filed late-that is, they were filed after the claims filing deadline, are often the subject of a so-called “omnibus objection.”

Before 2007, this type of objection posed additional challenges to claimants. It was often difficult for claimants to know whether they had been named in the objection because the Bankruptcy Rules did not require objectors to list claims in alphabetical or numerical order, meaning that a creditor could easily miss that its proof of claim was being challenged among the hundreds or even thousands of claims named in just a single omnibus objection. This required a careful inspection of the attached exhibit to determine if its claim was affected.

Seeing the need to impose limits on such unwieldy objections, the judiciary amended the Bankruptcy Rules to make omnibus objections more accessible to creditors. First, the amended Bankruptcy Rules allow omnibus objections only on limited grounds, including duplication, claims that were filed in the wrong case, amended claims, late claims and other procedural objections.

Other than circumscribing when an objector can employ an omnibus objection, the Bankruptcy Rules now also detail how the objection can be made, with the ultimate goal of making it easier for creditors to determine whether one of their claims has been named. The omnibus objection must list claimants alphabetically (and additionally list them by category of claims if appropriate) and provide a cross-reference to claim numbers. For each claim, the objector must state the grounds of the objection and cross-reference the pages in the omnibus objection pertinent to the stated grounds.

An omnibus objection must also explain, “in a conspicuous place,” that claimants receiving a copy of the objection should find their names and claims therein. These rules prohibit objectors from naming more than 100 claims per omnibus objection. Finally, the title of the objection must state the objector’s identity and its ground for objection and be numbered consecutively with the objector’s other omnibus objections.

The objection may assert the claim is not reflected in the debtor’s books and records, the amount of the claim or classification of the claim is incorrect or other grounds specific to the nature of the claim. Creditors have difficulty where the objection to their claim is not explicitly specific to their claim, as it may be combined with dozens of other claims in an Omnibus Objection. Often an Omnibus Objection results from having many claims that are vulnerable to objections on the same basis and thus, will contain the basis of the Objection and a corresponding list or chart identifying the creditor’s claim to which the objection applies.

At this point, it may be beneficial for the creditor to hire experienced bankruptcy counsel to defend their claim. If a timely response is not given to the objection, the claim will likely be disallowed and thus, the creditor receives nothing from the bankruptcy estate, despite having had a valid claim. If a timely response is filed, the Bankruptcy Court will conduct an evidentiary hearing to establish the validity of the claim, along with its amount as of the petition date. The hearing is usually scheduled when the objection is filed. The Court may however establish a discovery schedule prior to the hearing if the claim dispute so requires. Ordinarily, if an objection to a claim is raised, the court (after notice and a hearing) determines the amount of the claim as of the date of the filing of the bankruptcy petition, and allows the claim, unless it deems it not allowable under Section 502, such as a claim that is unenforceable due to a valid defense and a claim for post-petition interest on an unsecured claim.

Of course, if no objection is made, the creditor will be entitled to receive distributions from the debtor’s estate in order to satisfy its claim.

After an objection is filed, the creditor is required to submit a written response. If a timely response is filed, the Bankruptcy Court will conduct an evidentiary hearing to establish the validity of the claim, along with its amount as of the petition date. Often, the hearing is scheduled at the time the objection is filed; however, depending upon the size and nature of the claim, the court may establish a discovery schedule prior to the hearing. The court will generally look to non-bankruptcy law to determine whether to allow the claim.

The proofs of claim process demonstrates how important it is that the respective parties get their roles right. Creditors must be diligent in properly filing a proof of claim to recover from the debtor’s estate and in carefully filling out the Official Form to ensure that their claims are properly characterized and quantified. A party in interest must make a cogent objection to the proof of claim sufficient to overcome its presumption of validity and take heed of recent changes to the rules governing omnibus objections.

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