Contingent Claims in Bankruptcy

In bankruptcy, a creditor’s claim is a right to payment by a debtor. In turn, a debt is defined as a liability on that claim. So in other words, when we say that a creditor has a claim in a bankruptcy case, they have a right to be paid from the proceeds on any Chapter 13 Repayment Plan or from the selling of property in a Chapter 7 bankruptcy. Contingent claims in bankruptcy are debts in which a certain action or event must take place before a borrower becomes liable for the debt. A Bankruptcy Trustee won’t pay a contingent claim in bankruptcy until the debt has become legally established.

Example of a Contingent Claim

One example of a contingent claim that is quite common in bankruptcy proceedings is when you are in the middle of a civil lawsuit in which damages could be awarded to the plaintiff (the creditor) from you (the debtor). If an injury lawsuit is still ongoing, the court hasn’t yet established liability for the accident and therefore will be treated as a contingent claim. The reason why this would be a contingent claim is that if you are determined to owe someone money, this becomes another debt that the Bankruptcy Court must take into account when considering your case.

How Contingent Claims are Handled in Bankruptcy

A continent claim depends on a certain event happening to validate the claim, they are handled differently than other creditor claims in bankruptcy. The bankruptcy trustee will usually move forward with liquidating and distributing funds to creditors but won’t pay any money to a contingent claim until more information about the dollar amount and legal standing of the claim comes to light. The trustee will hold back an estimate of the funds, however. Once the contingent claim is resolved the bankruptcy trustee will either pay the amount to the now valid claim or if the even never occurs pay that withheld money to the other valid creditors.

When you file for bankruptcy you must list all assets, income, and liabilities and this includes both money you may receive when in a court case or money you may have to pay in one. For this reason, it’s important to mention any lawsuits that you are involved with upfront so that your Sacramento bankruptcy attorney can ensure that your bankruptcy schedules are properly filled out and that all bankruptcy estate matters are handled accurately.