Bankruptcy Short List to Help Creditors

Next month an amendment to the bankruptcy law goes into effect, making it easier for creditors — especially smaller ones — to collect what they're due.

An amendment to the bankruptcy law that goes into effect on December 1 should make it easier for creditors to track when their claims are being challenged by trustees of insolvent companies. Dubbed Rule 3007, the mandate limits the number of claims objections that can be included in a single omnibus filing.

The omnibus format allows a trustee to consolidate similar claims under a single filing, thus streamlining the claims-objection process. For instance, if a trustee believes that 500 creditors filed their claims late, it can use an omnibus objection that lists the creditors, rather than file 500 separate objections.

But the format has caused problems for creditors, especially those involved in large bankruptcy cases in which the list of claimants can grow into the tens of thousands. Currently there is no limit to the number of creditors that can be listed in an omnibus objection. What’s more, many of the objections list creditors by claim number, rather than alphabetically, making finding the objection akin to digging out a needle in a haystack, said bankruptcy attorney and claims agent Jonathan Carson of Kurtzman Carson Consultants.

By law, trustees must send objection notifications to creditors, and creditors must respond within a specific timeframe. If a creditor does not do so, the claim can be expunged, unless the creditor has a valid excuse to explain its tardiness.

At some point during a big corporate bankruptcy, a voluminous omnibus objection printout, listing hundreds or sometimes thousands of companies and individuals in tiny type, will land on the desk of a creditor or a creditor’s attorney. If the creditor is involved in a so-called mega-bankruptcy — one the size of Enron or Kmart — several of these volumes will be delivered to creditors over the course of case.

The problem for many creditors, especially the smaller ones, says Carson, is that they often miss the response deadline for mundane reasons, such as not thoroughly checking the list (it is not always alphabetized), not having the time or inclination to slog through the volume (is it worth it for a $50 claim?), or the list being delivered to an incorrect address because the creditor has not notified the court of an address change.

The new amendment addresses some of theses omnibus procedural snags. For instance, Rule 3007 limits the number of creditors listed on an omnibus objection to 100, unless the trustee receives a waiver from the court. Also, the amendment requires that the creditors be listed in alphabetical order and crossed-referenced by claims numbers.

“The change is significant because is makes it a bit easier for lawyers and their clients to realize that a claim has been objected to,” Dean Kirby, a bankruptcy attorney with Kirby & McGuinn, told CFO.com. In addition, he noted that as a strategy to hold on to as much cash as possible, companies in Chapter 11 often try to make the claims process as difficult and cumbersome as possible. “It’s exactly that strategy that the rule is designed to curtail,” added Kirby, who also authors a blog on bankruptcy issues.

Kirby asserted that many insolvent companies will object to claims even if they don’t know anything about the demand, because there is a “good chance that the creditor won’t respond.” But Kirby counsels creditors that to pass the first threshold of collecting a bankruptcy claim, the claimant “has to show up.”

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