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If a creditor files an improper claim against you in a bankruptcy case and you fail to object, that claim will be allowed and cut off all your rights to later contest the same.  More significantly, failing to object will also eliminate all counterclaims and defenses you may later want to bring against that creditor in the future.

An allowed claim can have significant repercussions. In chapter 13, that means part of your plan payments may go to that creditor, and if a trustee is administering any assets in a chapter 7 case, payments may be made to that creditor from liquidated property.  And in the Ninth Circuit, there are other significant ramifications..

In the Ninth Circuit case of Siegel v. Federal Home Loan Mortgage Corp., 143 F.3d 525 (9th Cir. 1998), the Appeals Court held that a bankruptcy court’s implicit allowance of a claim is a final judgment giving rise to res judicata, even though no other separate order exists on the claim.

In that case, the creditor filed proofs of claim relating to two properties. Neither the debtor nor the bankruptcy trustee file any objection to the proof of claims. The claim was deemed allowed pursuant to 502(a).  Later on, the debtor attempted to sue the creditor in Federal Court for tort and breach of contract actions.  The court dismissed his case and the Ninth Circuit explained:

What . . . can deemed allowed mean? It must mean deemed allowed by the court. In other words, it is deemed that the court has acted on the claim and ordered allowance. Congress has relieved the court of the task of actually endorsing its allowance of the claim on that document or on a separate form or order. . . . It would be most peculiar if the effect was that uncontested and allowed claims had less dignity for res judicata purposes than a claim which at least one party in interest thought was invalid or contestable in whole or in part. We see no reason to embrace that rather peculiar result. Rather, we see  502(a) as a recognition of the fact that people can raise objections and litigate them, if they see something wrong with a claim, but if they do not, the claim will be treated in all respects as a claim allowed by the court itself.

Thus, claim allowance has res judicata effects, and an allowed claim will bar (or preclude) all future litigation of the same issues between the same parties. This can have quite significant ramifications and reek havoc to a debtor in the future for failing to object. The following examples illustrate why:

Priority Claim: If an improper tax claim, support claim, or other priority claim is filed, and for some reason is not paid in full in chapter 13 or paid at all in chapter 7, that claim will survive the bankruptcy with the creditor having recourse against the debtor.  Thus an entirely non-existent claim that mistakenly gets filed in a bankruptcy case will be considered lawfully due and owing if an objection is not filed.

Secured Claim: If a vehicle, real estate, or other secured claim is filed, the validity of that claim is no longer subject to attack.  That means if the creditor files an incorrect claim wherein all payments are not reflected, charges improper fees, improperly inflates the contract balance, or otherwise submits inaccuracies which increase the claim or actual value of the property, that mistake can not later be challenged. Such mistakes are very significant in real estate cases where improper fees and charges are routinely added to the mortgage balance.

Counterclaims: The most significant and detrimental impact for failing to object to a proof of claim is the loss of all counter claims and defenses. Thus in the mortgage context, if you have TILA, RESPA, HOEPA, or other counterclaims against a lender and fail to raise the same in a claim objection, those claims are forever lost.  Likewise, if there are counterclaims against credit card companies for abusive debt collection practices arising from the FDCPA and State FDCPA statutes, those counterclaims are forever lost as well.

So always examine all claims that are submitted in your bankruptcy case for error.  Failing to do so will validate the error and essentially immunize that claim from any future attack or counterclaim.  In other words, failing to object to a claim purifies the claim wherein the only way to remove it is through payment in full.

Written by Michael G. Doan- Owner of the Carlsbad Bankruptcy Office, Michael not only manages his business, but is also a highly skilled Bankruptcy Attorney with over 17 years of experience.  Michael is currently concentrating his practice solely in Bankruptcy Law and is a Board Certified Specialist in Consumer Bankruptcy Law by the American Board of Certification, one of only fourteen such attorneys in all of California. 

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