I’ve discussed “noncontingent claims” a couple times recently in the context of bankruptcy dollar amount adjustments and involuntary bankruptcy without explaining what they are (and what they’re not), or what they’re worth. A claim is “contingent” if a triggering event must occur before it must be repaid. Before the event is triggered, the claim isn’t real. Noncontingent claims are debts that require no condition to trigger their payment. When people think of debts, they mostly think about noncontingent claims, like mortgages. One common contingent claim is money from a pending lawsuit whose outcome is unknown. Unless the debtor wins, the claim doesn’t really exist. A claim against a debtor can be contingent too, such as a co-signed loan that becomes a claim if the co-debtor defaults and the creditor pursues the debtor.
Contingent claims shouldn’t be confused with noncontingent claims of debatable value. If someone who’s insolvent owes a specific sum of money to a debtor, that claim is contingent, even if the person who owes the money might not ever repay it. Contingent claims, by contrast, might or might not be clearly specified, but they come with the added issue of the likelihood of the triggering event occurring. A debtor’s lawsuit for a breach of a contract against another party will probably have a clear amount of underlying damages, but if the arguments are weak, then it won’t matter much.
Crucially, irrespective of whether a debt is contingent or noncontingent, it must be listed on the debtor’s bankruptcy schedules. This is precisely why some people’s non-bankruptcy lawsuits are dismissed: The debtor didn’t include the lawsuit in the bankruptcy, obtained a discharge, but then proceeded with the lawsuit anyway. The defendant asserts a judicial estoppel claim against the debtor, and wins without a fight on the merits.
This is all fine and good for debtors who have contingent claims with clear dollar amounts, but what about those who don’t? In those circumstances, two issues will need to be resolved. One, the parties will need to estimate the liquidation value of the contingent claim, and two, they will need to decide how to pay the creditors assuming the condition is triggered. Usually, it’s better to calculate a liquidation value for the contingent claim than wait for the triggering event to occur. Otherwise, it may be years before the bankruptcy case is closed, which is something no one wants.
The Bankruptcy Code doesn’t outline a procedure for valuing unliquidated claims. As a result, it can use information from the debtor, creditors, and trustee to reach its own valuation. From there, the debtor pays the liquidated value into the bankruptcy estate, and then the trustee either withholds it from the contingent creditor until the triggering event occurs, or the trustee can repay all the other creditors provided they repay the contingent creditor upon the triggering event.
Because there are no set rules for handling contingent claims in bankruptcy, debtors with them should consult with an experienced bankruptcy attorney to maximize their outcomes.
For answers to more questions about contingent claims in bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy attorney Brooklyn NY Bruce Weiner for a free initial consultation.
