Proof of Claim

A proof of claim is a formal written statement filed by a creditor in bankruptcy court that establishes the nature, amount, and priority of their claim against the debtor. In mortgage note investing, filing a proof of claim is the mechanism by which a note holder asserts their right to receive distributions from the bankruptcy trustee and ensures they are recognized as a party of interest in the case. Missing the filing deadline can result in receiving nothing — even when the investor holds a valid, secured lien against the borrower's property.

Why Filing Matters

When a borrower files for bankruptcy, an automatic stay halts all collection and foreclosure activity. The case is administered by a court-appointed trustee who reviews creditor claims, manages the debtor's assets, and distributes available funds according to the Bankruptcy Code's priority rules. A creditor who does not file a proof of claim is effectively invisible to the trustee — they have no seat at the table when distributions are made.

For note investors, the stakes are straightforward: if a borrower enters a Chapter 13 repayment plan that includes payments to secured creditors, only creditors with filed proofs of claim receive those payments. If a Chapter 7 trustee liquidates non-exempt assets and distributes proceeds, only creditors with filed claims participate.

What a Proof of Claim Contains

The proof of claim is filed using Official Form 410 prescribed by the U.S. Bankruptcy Court. It requires:

The supporting documentation is critical. A proof of claim filed without the underlying note and mortgage can be challenged by the debtor or trustee, potentially resulting in the claim being disallowed.

Filing Deadlines

The bankruptcy court sets a claims bar date — the deadline by which all proofs of claim must be filed. Deadlines vary by chapter:

• Chapter 7 — typically 70 days after the filing date of the bankruptcy petition
• Chapter 13 — typically 70 days after the petition date, though secured creditors may have additional time in some jurisdictions

Missing the bar date is one of the most common and costly mistakes in note investing. When a claim is filed late, the court may disallow it entirely, stripping the creditor of their right to distributions. In a Chapter 13 case where the borrower's plan includes payments to the secured creditor, a missed filing means those payments go elsewhere.

Who Files the Proof of Claim

In practice, the proof of claim is usually filed by the note investor's loan servicer or bankruptcy attorney — not by the investor directly. When a borrower files for bankruptcy, a well-managed servicer will:

1. Receive the bankruptcy notice (triggered by the borrower's filing or the recorded assignment of mortgage)
2. Notify the note holder of the filing
3. Prepare and file the proof of claim with all required supporting documentation
4. Monitor the case on PACER for developments — plan amendments, motions, and discharge or dismissal orders

Investors should confirm with their servicer that proofs of claim are being filed on their behalf and verify through PACER that the filing appears on the case docket. Relying on the servicer without verification is a risk — particularly when loans are acquired in bulk and bankruptcy accounts may not be flagged immediately during loan boarding.

Proof of Claim in Chapter 7 vs. Chapter 13

The practical significance of a proof of claim differs by bankruptcy chapter:

In Chapter 7 no-asset cases — which represent the majority of Chapter 7 filings — the proof of claim may seem unnecessary because no distributions are expected. However, filing protects against the possibility that the trustee later discovers assets, or that the case converts to Chapter 13 where a filed claim is essential.

Common Mistakes

• Not filing at all — Some investors, especially those new to non-performing loan portfolios, are unaware that a proof of claim must be filed. Bulk purchases compound the risk when bankruptcy accounts are not identified during due diligence.
• Filing after the bar date — Late filings are generally disallowed. Calendar the bar date immediately upon learning of the bankruptcy.
• Incomplete documentation — A proof of claim without the original note, mortgage, or payment history can be objected to by the debtor or trustee.
• Incorrect amounts — The claim must accurately reflect the total amount owed. Overstating or understating the balance invites objections and delays.

Monitoring After Filing

Filing the proof of claim is not the end of the process. Note investors should monitor the bankruptcy case through PACER for:

• Objections to the claim — the debtor or trustee may challenge the amount, secured status, or validity of the claim
• Plan amendments — in Chapter 13, the borrower may file amended plans that change the treatment of secured creditors
• Dismissal or discharge — a dismissed case voids proposed lien strips and restores the investor's full rights; a discharged case finalizes the plan's treatment of the claim

A proof of claim is not a one-time filing that can be forgotten. It is the starting point of active case management that continues until the bankruptcy concludes.