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Bankruptcy’s Three Little Words

By Cathy Moran, Esq. Filed Under: Bankruptcy Practice

Like waltz tempo, there’s an appeal in threes:

Larry, Moe, and Curly

Faith, hope, and charity

Tinkers, Evers, and Chance

In bankruptcy, the trio is unliquidated, contingent, and disputed.

They’re the prescribed adjectives for describing claims on the schedules.   We all love adjectives, don’t we?

Contingent

The definition of contingent,  in our context,  focuses  a right dependent on the occurence of some future event.  A creditor holding a contingent claim is entitled to have it estimated for purposes of allowance in a bankruptcy case.

c) There shall be estimated for purpose of allowance under this section—

(1) any contingent or unliquidated claim, the fixing or liquidation of which, as the case may be, would unduly delay the administration of the case; §502(c)
In 32 years of practice, including 10+ representing trustees, I don’t think I’ve ever seen a proceeding to estimate a contingent claim.  But there it is.

Disputed

Labeling a claim as disputed gives the trustee a heads up as to the appropriate treatment of the claim should there be a distribution to creditors in that class.  But more important, it raises the question of whether scheduling the claim, without noting it as disputed, constitutes an admission of the validity of the claim in the amount scheduled.

This seems to be a Procrustean dilemma, depending on your judge’s inclinations.  Dispute all claims, as to the calculation of the amount, and you risk a challenge to your good faith.  Fail to challenge the amount set out on the creditor’s bill and you may have admitted liability in that amount.

Here, it pays to know local inclinations and to anticipate, at the schedule preparation stage, what litigation looms.

Unliquidated

Unliquidated is the power lifter in this trio, in the Chapter 13 context.  Claims that are unliquidated are excluded from the debt calculation for Chapter 13 eligibility.

 

Only an individual with regular income that owes… noncontingent, liquidated, unsecured debts of less than $250,000 and noncontingent, liquidated, secured debts of less than $750,000, or an individual with regular income… may be a debtor under chapter 13  [debt limits outdated]

The implications here are powerful:  your client could have been the undisputed cause of a horrific negligent tort and still qualify for Chapter 13 relief if the amount of damages remains to be determined.   (note that contingent debts are excluded from the calculation as well, but in my experience, that is a far less common fact pattern).

Choose your words carefully.  You may have to live with them.

Image courtesy of mape_s

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Filed Under: Bankruptcy Practice

Comments

  1. Kyle says

    August 3, 2012 at 12:10 pm

    Very important words.  I once had to appeal a decision because the Chapter 13 Trustee and Judge agreed that a Personal Guarantee of a Business debt that was current, was not a contingent debt (this effectively meant that guarantors were the equivalent of co-signers).  This had far-reaching implications in bankruptcies that include business owners, because banks often require personal guarantees.

    The appeal was successful, but getting there cost my clients a lot of money.  Luckily they were able to stay in the Chapter 13, and continue to pay appropriately.

    So, ‘contingent’ does come up every once in a while.  Better be ready for it.

    • CathyMoran says

      August 3, 2012 at 12:57 pm

      This may also be a matter of state law, because I think under California law, a guarantee wouldn’t be contingent.

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