In most cases, a bankruptcy claim is an amount that a creditor hopes to recover from bankruptcy funds. The claim is unliquidated if the creditor doesn’t know how much the debtor (bankruptcy filer) will eventually owe. Some factor prohibits the creditor from establishing the final amount.
Before the bankruptcy trustee—the official responsible for overseeing the case—can pay a creditor in bankruptcy, the creditor must prove several things:
Many debts, like loans and credit cards, are based on contracts between the parties. The contract explains the duties, liabilities, and terms, such as payment amount and interest rate. A balance usually isn’t difficult to figure out at any given time. It’s a relatively simple calculation of principal amount borrowed, plus fees and interest, minus payments. However, sometimes something must occur before the creditor will know how much is owed.
Example. Suppose you’re involved in an automobile accident and the other driver’s insurance company sues you. The monetary cost to the injured person (damages) can’t be determined because the other party’s medical treatment is ongoing. Those costs won’t get finalized until the treatment ends. You also won’t know the total cost that your attorney will charge for defending you. Both the insurance claim and your attorney’s claim are unliquidated. The amounts will be liquidated (known) after the case settles or goes to trial and the court enters a judgment.
Unliquidated Claims in a Chapter 7 Bankruptcy Case
When the trustee finds money to pay claims, the unsecured creditors will usually only receive a pro rata share (a percentage of the funds available). The trustee can’t calculate the pro rata share if unliquidated claims exist. The trustee must know each creditor’s claim amount. Therefore, a Chapter 7 bankruptcy case can’t end before the claims get liquidated.
The same holds true for claims the trustee might have against other parties. Trustees often enter into litigation to recover money owed to the debtor (the bankruptcy filer) by people not involved in the bankruptcy. The trustee’s claims must be liquidated so that the trustee knows how much money will be available to distribute to creditors.
(For more information, see When Is a Bankruptcy Claim Contingent, Unliquidated, or Disputed?)