Money isn't always available to distribute to creditors in bankruptcy, but when it is, each creditor must provide proof of how much the creditor is owed. A creditor does so by filing paperwork called a “proof of claim” with the court.
Creditors aren't guaranteed to get paid automatically, however. For instance, the amount the creditor claims is due might be incorrect, or the statute of limitations (time allowed) for collecting a debt might have passed. Anyone who will be affected by an erroneous payment (an interested party) can object to the proof of claim.
(For a more detailed explanation, see What Is a Proof of Claim in Bankruptcy.)
Typical Chapter 7 bankruptcy filers don't have much in the way of assets. They can often protect everything that they own with bankruptcy exemptions. As a result, most Chapter 7 cases are “no asset” cases because funds aren't available for distribution. In those cases, creditors won't be asked to submit a proof of claim. Some Chapter 7 cases are asset cases, however, and in those matters, creditors will file a claim with the court.
Once a proof of claim is filed, any party in interest—someone who will be impacted negatively by the payment of the claim—has the right to file an objection. A typical party in interest would include the bankruptcy trustee, other creditors in the same bankruptcy case, and, in some situations, the debtor. For instance, a Chapter 7 debtor will have standing to object—and thereby be an interested party—only if doing so might put money in the debtor's pocket.
The most common way this situation might arise would be if there is an error concerning a nondischargeable debt (a debt that the debtor will have to pay after the case). In that situation, the debtor will understandably want to be sure that each creditor is getting paid no more (or possibly no less) than what's owed.
The above holds true in a Chapter 13 case, with one exception—a Chapter 13 debtor is always an interested party with the right to object to a claim.
A proof of claim will stand if no one objects. If, however, an objection gets filed, the burden shifts to the objecting party to prove to the court that the claim is invalid and should not be paid. Some of the more common reasons to object to a proof of claim include:
An objection to a proof of claim must be in writing and filed with the bankruptcy court. A copy of the objection and the notice of court hearing date must be mailed to the creditor, the trustee, and the debtor at least 30 days before the hearing. If the creditor fails to respond to the objection by the time set forth by the court, the objection will be upheld. If the creditor responds to the objection, the issue will go before a bankruptcy judge who will either uphold the objection and disallow the claim or overrule the objection and allow the claim. Keep in mind that the process of objecting to a claim may vary from court to court so you should always review the local court rules before filing an objection.