For a credit manager attempting to force payment of a delinquent account through e-mails and past due notices, the customer's filing bankruptcy forces an end of all collection efforts. Upon the filing of a bankruptcy petition, payments to unsecured creditors are suspended and the vendor is entitled to assert a claim for the unpaid value of their goods and services against the debtor. By virtue of the automatic stay, which arises upon the filing of the bankruptcy, creditors are enjoined from attempting to collect on their unsecured, pre-petition debt and instead must file a proof of claim (in most cases).

The Bankruptcy Code, Bankruptcy Rules and Local Rules provide the deadline and contents of a proof of claim, which is discussed below. However, the bar date requires the creditor to strictly comply with the last day to file a claim. If the creditor misses the bar date, the claim may be disallowed. Indeed, creditors in recent bankruptcies have learned painful lesson of missing bar dates, wherein courts have shown their inflexibility where creditors have missed bar dates and disallowed the late filed claims. These decisions are discussed below. What are a creditor�s alternatives when the bar date is missed? Is the creditor�s mistake �excusable�?

I. Filing Your Proof of Claim

The Bankruptcy Rules have different filing requirements depending on whether the debtor has filed a Chapter 11, Chapter 7 or Chapter 13 bankruptcy petition.

A. Chapter 11 Bankruptcy

Chapter 11 of the Bankruptcy Code provides for the reorganization of a debtor�s assets and liabilities, and existing management continues to operate the business. The bankruptcy court serves creditors with notice of the bankruptcy filing and a form proof of claim.

1. Who Must File

A Chapter 11 debtor must file Bankruptcy Schedules and Statement of Financial Affairs within 15 days of the bankruptcy filing, unless the bankruptcy court extends the time period. A debtor must list all its prepetition debts in its schedules. If a creditor agrees with the debtor�s scheduled amount of its claim, and the claim is not listed as disputed, contingent or unliquidated, a creditor need not file a claim. However, a debtor may schedule a creditor�s claim as disputed, contingent or unliquidated by checking a small box contained on the schedules next to the creditor�s claim. An unsecured creditor whose claim is scheduled as disputed, contingent or unliquidated must file a claim by the bar date, or the claim will be subordinate to the unsecured creditor class, which means the claim, as a practicable matter, will be disallowed. A devious debtor may schedule all of its unsecured claims as disputed, contingent or unliquidated in hopes that creditors will not file proofs of claims.

Where a Chapter 11 case is converted to Chapter 7, a creditor must file a proof of claim, whether or not a claim was filed in the Chapter 11 case.

2. When a Claim Must be Filed

With a Chapter 11, the bankruptcy court will establish a deadline in which all prepetition creditors must file their claims, which deadline is generally requested by the debtor. The deadline to file a claim is referred to as the bar date. The purpose of a bar date is to facilitate the efficient and orderly administration of claims against the estate. A claim filed after the bar date is disastrous for the creditor, as the late-filed claim is subordinate to unsecured claims and will not be paid unless there is surplus assets. A creditor scheduled by the debtor will receive written notice of the bar date. Depending on the complexity and size of the debtor, a bar date is usually set within the first 120 days of the Chapter 11.

3. Where a Claim Must be Filed

A creditor must file its claim with the bankruptcy court that is administering the Chapter 11 case. If a creditor does not file in the proper District the claim will be disallowed. The creditor must list the bankruptcy case number and the name of the debtor as stated in the bankruptcy petition.

B. Chapter 7 and 13 Bankruptcy

Chapter 7 of the Bankruptcy Code provides for liquidation of a debtor�s assets by a trustee, an independent party, usually a lawyer or accountant, whose primary responsibilities are to gather the assets, liquidate the assets to cash and distribute the proceeds. Chapter 13 of the Bankruptcy Code deals with individuals with regular income attempting work out their financial difficulties.

1. Who Must File

With a Chapter 7 or Chapter 13, a creditor must file a proof of claim to participate in any distribution, whether or not the claim is scheduled as disputed, contingent or unliquidated.

2. When a Claim Must be Filed

With an individual Chapter 7 case, the bankruptcy court will send written notice that creditors need not file a claim unless assets are recovered. Otherwise, with a Chapter 7 or Chapter 13, a creditor must file a claim within 90 days after the First Meeting of Creditors. Late-filed claims are subordinate to unsecured creditors.

3. Where a Claim Must be Filed

A creditor must file its claim with the bankruptcy court that is administering the Chapter 7 or Chapter 13 case.

C. Proof of Claim Form

1. The Contents and Purpose of Formal Proof of Claim

A formal proof of claim must contain the following: the name of claimant and the capacity of the signatory; the amount of debt; the basis for the liability; the documents upon which liability is based; payments made, credited and deducted; and whether the claim is secured. The official bankruptcy proof of claim form (Form B10) is the recommended form and can be obtained from the clerk of the bankruptcy court.

Invoices, or a summary of the invoices if too voluminous, or other documents must be attached to the claim as evidence.

2. Informal Proof of Claim

Where the credit professional has failed to timely file a formal proof of claim, all may not be lost. Courts have permitted certain writings, filed before the bar date and furnishing the information that a formal proof of claim would provide, to serve as a proof of claim to avoid the harsh results of strict enforcement of a bar date. This courtmade exception has been labeled the "informal" proof of claim. To constitute an informal proof of claim, courts generally require an explicit demand establishing the nature and amount of the claim against the debtor, and evidence of an intent to hold the estate liable.

The vendor meets the first part of the test with the presentation of writings, prior to the bar date, bringing to the attention of the court the nature and amount of the claim. With regard to the second part of the test, courts have deemed a variety of documents to express a creditor�s intention to hold the estate liable and thus to constitute an informal proof of claim, including a letter with a balance sheet attached sent to the trustee, a letter with two tax bills sent to the trustee, invoices sent to the debtor on four occasions, an involuntary bankruptcy petition filed by a creditor, a complaint filed objecting to discharge and an objection filed opposing confirmation of the debtor�s plan of reorganization.

On the other hand, conversations by a vendor with counsel for the creditors� committee, conversations between the debtor and counsel for a vendor, filing of a notice of appearance in the proceeding, and litigation in a non-bankruptcy forum have been found insufficient to constitute an informal proof of claim.

A timely filed informal proof of claim alone does not permit a vendor to participate in a distribution of proceeds with like claims. Rather, a timely filed informal claim must be amended by the filing of a formal proof of claim within a reasonable time after the bar date. The formal claim is deemed to relate back to the filing date of the informal claim. Amendments to claims are liberally allowed if the purpose of the amendment is to cure a defect in the claim.

However, an amended claim seeking recovery on a new or different claim will be denied. An amendment changing the amount of the claim does not constitute an untimely attempt to assert a new or different claim.

Given the creditor�s duty to file a proof of clam, two court decisions concerning missing a bar date are considered.

III. The Kmart Ruling and A Creditor’s Excusable Neglect

Kmart filed Chapter 11, and established July 21, 2002 as the deadline for filing proofs of claim. (Original Bar Date). The bankruptcy court established a supplemental bar date of January 22, 2003 (Supplemental Bar Date) for a limited set of pre-petition date creditors who had not previously been sent notice of the Original Bar Date.

A person was injured in a Kmart store prior to Kmart�s bankruptcy. The creditor asserted a claim against Kmart for $750,000. Notice of the Original Bar Date was sent to her address as listed in the files of Kmart. The creditor asserted that she never personally received the notice. The creditor�s attorney had actual knowledge of the Original Bar Date, as counsel had filed timely proofs of claims for over two dozen other Kmart creditors.

The creditor�s proof of claim was received by Kmart one day after. Kmart considered the claim late filed � although filed but one day after the bar date. The creditor requested the bankruptcy court allow the lat-filed claim be deemed timely filed.

Evaluating whether the creditor�s late filing was the result of excusable neglect, the bankruptcy court considered four factors.

The bankruptcy court denied the creditor�s request to deem the claim timely filed. The creditor again tried to avoid the effect of her late filing by moving to have her claim covered by the Supplemental Bar Date. The Court of Appeals for the seeks to determine if the bankruptcy court has abused its discretion.

Factor 1: Danger of Prejudice to Debtor

The bankruptcy court determined that allowing the creditor�s claim would prejudice Kmart�s creditors. The court noted that allowing similarly situated creditors could induce other late-claimants to so petition the bankruptcy court.

Factor 2: Length of the Delay and its Impact on Judicial

Proceedings

While the proof of claim was merely one day late, the creditor waited 81 days to file the motion to allow the late-filed claim. While the creditor did not realize that the claim was late until receiving a notice from Kmart 53 days after the Original Bar Date. However, the court observed that a bar date order is integral to Chapter 11.

�A bar order serves the important purpose of enabling the parties to a bankruptcy case to identify with reasonable promptness the identity of those making claims against the bankruptcy estate and the general amount of the claims, a necessary step in achieving the goal of successful reorganization. If individual creditors were permitted to postpone indefinitely the effect of a bar order so long as adversary proceedings were pending, the institutional means of ensuring the sound administration of the bankruptcy estate would be undermined."

The Appellate Court concluded that the bankruptcy court's finding as to the length of delay and its concomitant negative impact on judicial proceedings was not clear error.

Factor 3: Reason for the Delay

The creditor stated that the reason for the delay was nothing more than an innocent mistake in mailing the claim. The court concluded this was a poor reason. The court observed that the creditor left the filing of the proof of clam until the latest possible time. The creditor could have taken measures to verify that the proof of claim arrived on time, but failed to do so. It was her own fault.

Factor 4: Creditor’s Good Faith

The creditor waited to file her proof of claim until the "eleventh hour," and failed to follow up with the third-party claims processing agent.

In summary, the Kmart decision reminds creditors that a court may not be willing to forgive the creditors for missing a bar date, even if only by a day.

IV. Another Court�s View: Mail Your Claim On Time And To The Proper Party�Or Lose!

Outboard Marine filed bankruptcy. The notice of bar date required creditors to mail their proofs of claims to a claims� agent by a specific date. A creditor, who was owed $1.1 million, faxed its proof of claim on the trustee�s counsel, but not on the claims agent, as set forth in the notice of bar date. The trustee objected to the claim as untimely, and the bankruptcy court sustained the objection.

The bankruptcy court appointed a claims agent because of the large number of proofs of claims that were to be filed and to streamline the process. The claims agent designated a post office box as the repository for all proofs of claim. The bar date notice specified the method of transmittal, and emphasized that the claims had to be received by the bar date and sent to the post office box. The bar date notice did not provide a fax number. The claims agent received more than 5,300 proofs of claim, valued at $3.5 billion.

On appeal, the creditor argued that it complied with the bar date by faxing its proof of claim to the claims agent on the bar date. The creditor also asserted that its faxed claim to the trustee should be deemed timely, and that its claim should be characterized as a timely-filed informal claim.

The Court of Appeals for the Seventh Circuit was not persuaded. The court noted the bar date notice only permitted one method of transmittal: claimants were required to mail proofs of claim to a designated post office box so that they would be received by the claims agent by the specified date. Instead of following the instructions contained in the bar date notice, the court observed, the creditor faxed its proof of claim to the trustee�s counsel. The court found that the bankruptcy court did not error in finding that the creditor�s eleventh hour fax was not timely filed.

The creditor also advanced two equitable arguments in an attempt to allow its claim. Under one argument, the creditor argued that Bankruptcy Rule 5005(c) allowed a bankruptcy court to backdate papers, such as a proof of claim, that are erroneously delivered to the wrong official in a bankruptcy proceeding. Second, the creditor asserted that its fax to the trustee amounted to an informal proof of claim because it stated the existence, nature, and amount of the claim, and because it evidenced the creditor�s intent to hold the debtor liable for its debt. The appeals court rejected these arguments.

The appeals court determined that creditor failed to offer convincing justification or explanation for its untimely filing. The court observed that the creditor�s problem was self inflicted. Although the creditor�s claim of $1.1 million was a small fraction of the $3.5 billion in claims asserted against the bankruptcy estate, the court considered that it was not deminimis. If the creditor�s mistake were accepted, the court reasoned, the efficient administration of the bankruptcy case would be upset. The appeals court upheld the lower courts, and the creditor�s claim was disallowed.

Conclusion

The courts rulings impress on the credit executive that bar date notices should be immediately recorded, with reminders. As evidenced by the courts rulings here, courts are reluctant to upset the bar date filing deadline, especially where the creditor failed to act.

However, if you find the bar date has slipped by, and were required to file a proof of claim, review your files to determine whether you have provided documents that may be construed as an informal proof of claim. If you have provided documents filed or presented prior to the bar date that show the existence of a claim against the debtor, and these documents demonstrate an intention to hold the estate liable, you may be able to establish an informal proof of claim to support amendment with a formal claim.