Bankruptcy Claims 101: Know What You Own
When a company fails, what you're owed doesn't simply disappear—it becomes a legal asset called a "claim," and you have enforceable rights to it. Most creditors don't understand what a claim is, when to file it, or why the timing matters. Miss a deadline by one day, and you forfeit everything. This guide walks you through the system.
What is a Claim?
A bankruptcy claim is a legal right to money owed by a defunct company. You possess it. It has a market value. You can trade it, sell it, or hold it for eventual distribution. If you're owed anything by a bankrupt entity—whether $50 or $500K—you have a claim. Examples:
- Money left in a brokerage, exchange, or wallet account
- An unpaid invoice for goods or services you provided
- A gift card balance that's now worthless
- A loan the company hasn't repaid
- Wages or benefits owed to an employee
- A security deposit for rent or services
Your claim is an asset — it can be valued, traded, and sold just like any other asset. This is why claim trading markets exist.
Claim Classes
Bankruptcy law treats claims hierarchically. Your claim's class determines your recovery rank. Understanding your place in the queue is everything.
Secured Claims
Backed by collateral—a lien on equipment, a mortgage on property, or pledge of specific assets. Banks that financed inventory or real estate typically hold secured claims. They can seize their collateral and recover first. Recovery is typically 80–100% because the claim is asset-backed.
Unsecured Claims
No collateral. Most creditors land here: gift card holders, depositors, vendors with unpaid invoices. You stand in line behind secured and priority claimants. Recovery ranges 10–70% depending on estate assets and competing claims. You're only paid if money remains after higher classes extract their share.
Priority Claims
Statutory priorities: unpaid employee wages (capped by law), alimony and child support, certain tax claims. Congress decided these matter more than garden-variety vendor claims. They recover before general unsecured creditors but after secured claims and administrative costs.
Administrative Claims
The operating costs of the bankruptcy itself: trustee compensation, legal fees, court fees, claims administrator charges. These are paid first, before anyone else gets a dime. Heavy administrative expenses erode the pool available for creditor recovery.
Proof of Claim: File or Lose
Being owed money doesn't entitle you to distributions automatically. You must file a formal proof of claim, or your claim is void. The bankruptcy system requires affirmative action from you. Passivity costs you everything.
The Bar Date: Absolute Deadline
The court sets a bar date—typically 70–120 days post-filing—by which you must submit a proof of claim. Miss it, and you're barred from recovery, with rare exceptions. Courts don't grant extensions for convenience or oversight. Once the deadline passes, it's closed.
Check the official case website immediately. If a bar date hasn't passed, file the same day you learn about it. Waiting is betting with money you don't have.
Filing: The Mechanics
Filing is free. Online submission is required in most cases:
- Locate the case on the bankruptcy court docket or the administrator's website (typically Stretto, CMs, or similar)
- Download Form 106Sum/1 (the official proof of claim form)
- Fill in your name, address, claim amount, and the basis for the claim (invoice, receipt, contract, etc.)
- Upload or mail the completed form before the bar date deadline
- Retain your confirmation; you'll need it later
Never pay anyone to file your claim. Ever. Filing is costless. Anyone charging you is committing fraud.
The Distribution Waterfall
When estate assets exist, they flow down through a statutory hierarchy. Your claim's position determines whether you get paid at all.
Typical Distribution Waterfall
- Administrative Expenses: Trustee fees, lawyer fees, court costs. Paid first.
- Priority Claims: Employee wages (capped), certain taxes, support obligations. Paid second.
- Secured Claims: Collateral-backed claims. Paid third (with collateral proceeds).
- General Unsecured Claims: Everyone else (gift card holders, vendors, depositors). Paid fourth, and only if money remains.
- Equity Holders: Owners and shareholders. Paid last, if anything remains (rarely).
In many cases, the estate is depleted by the time money reaches general unsecured creditors. In better cases, recovery is 10–70%. Often it's zero.
Chapter 7 vs. Chapter 11
Chapter 7 (Liquidation): Assets are sold, distributions occur once. The company dies. Timeline: 6–24 months. Faster but potentially lower recovery if assets are minimal.
Chapter 11 (Reorganization): Company attempts to survive, distributions happen over years through confirmed plans. Timeline: 18 months to 5+ years. Potentially higher recovery if the company emerges profitably, but requires you to wait.
Large bankruptcies (crypto, major retailers) typically use Chapter 11. Small bankruptcies use Chapter 7. Chapter 11 timelines are longer but recovery can exceed Chapter 7 liquidation prices if the company succeeds.
After Filing
Administrator reviews: The claims administrator checks your filing for completeness. If it passes, your claim gets registered officially.
Objections happen: The debtor or rival creditors may challenge your claim—disputing the amount, the basis, or your standing. You'll need to defend it with docs (invoices, emails, receipts, contracts).
Classification: Your claim is classified by law (secured, unsecured, priority). Your leverage and recovery percentage depend on this classification.
Distributions commence: Once a plan is confirmed, money flows to creditors according to the waterfall. Your share depends on your classification and available assets.
Selling Your Claim
Once filed and accepted, your claim is tradeable. Institutional buyers exist specifically to purchase claims at discounted prices, converting your uncertain future payout into cash today.
- List your claim on a trading platform
- Buyers submit bids (typically 20–70 cents per dollar, depending on case strength)
- Accept an offer and get paid immediately
- The buyer owns all future distributions
You trade away upside for certainty. Most creditors should sell. The bird in hand beats years waiting for plan confirmation.
The Essentials
A claim is your legal right to money owed by a dead company. File a proof of claim by the bar date or lose everything. Claims are hierarchical; your class determines recovery. Once filed, sell immediately for cash or wait years for distributions that may never come.
Your Rights as a Creditor
Bankruptcy law grants you specific protections:
- File a claim: Formal assertion that you're owed money, protected by statute
- Access information: Court dockets, case filings, and debtor disclosures through PACER
- Object to other claims: Challenge competing creditors' proofs if they're overstated
- Vote on plans: In Chapter 11, creditors vote on the reorganization proposal
- Transfer your claim: Sell it to another party—it's a tradeable asset
Federal bankruptcy law protects these rights. Courts enforce them. The system is designed to be fair, but only if you know the rules and act within them.