What Is a Contingent Bankruptcy Claim?

Learn how a contingent claim can slow down creditor payments in a bankruptcy case.

When an event has to occur before a borrower becomes responsible for paying a debt, the debt is considered contingent. In a bankruptcy case, the bankruptcy trustee assigned to manage the matter won’t pay a contingent claim until the triggering event occurs that establishes the liability of the debtor (the individual filing for bankruptcy) and the amount to be paid.

Contingent Claim Examples

Here are two contingent claims that often arise in bankruptcy cases.

  • The debtor is a guarantor who must pay her son’s car loan if he fails to pay. The lender will file a claim in the debtor’s bankruptcy case even if the son is current on the car payment. However, the trustee won’t pay the claim unless the son defaults on his loan, thereby giving the lender the right to act on the debtor’s guarantee.
  • The creditor is suing the debtor in state court for injuries sustained in a car accident. The debtor, however, denies responsibility. The claim will remain contingent (and unpaid) until the state court establishes liability for the accident or the participants settle the case.

Contingent claims are closely related to other uncertain claims in a bankruptcy case.

  • Disputed claims. The debtor and the creditor disagree on the amount of the debt or whether the debt exists.
  • Unliquidated claims. The claim exists, but the amount of the claim has yet to be determined.

It’s not unusual for claims to carry more than one type of uncertainty. For instance, a contingent claim will also likely be unliquidated. But regardless, the uncertainties must be resolved before the bankruptcy court can approve claim payment.

For more information, read When Is a Bankruptcy Claim Contingent, Unliquidated, or Disputed?

Accounting for a Contingent Claim

In a bankruptcy case, the trustee has a dilemma: how to account for a claim that is still contingent when it’s time to pay the rest of the claims.

A contingent claim can’t be paid until the triggering event happens, but it might be years before the event occurs, if at all. In the meantime, the trustee has marshaled the debtor’s property, liquidated it, and is ready to distribute the funds to creditors for allowed claims. Distribution might be limited until the trustee knows which claims are proper and in what amounts. As a result, a contingent claim can keep a bankruptcy case open for years.

To avoid making all the creditors wait for distribution until the contingent claim is resolved, with the bankruptcy court’s approval, the trustee can assess the likelihood that the triggering event will occur, and if so, how much the claim will be worth. The trustee will factor that amount into the payment schedule but hold back paying the contingent claim. If the claim never materializes, the trustee can later use the held back funds to make a supplemental distribution to the other claimants.

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