PAXTIBI LLP

What Is a Bankruptcy Claim? A Clear Guide to Understanding Your Rights When a Business Fails

Bankruptcy is a complex but critical legal process that decides what happens when someone or a company can't pay what they owe. If you've ever wondered what happens when a platform or business declares bankruptcy, and what that means for your money, this guide will help you understand the essentials.

What Is a Bankruptcy Claim?

A bankruptcy claim is a creditor's formal request for payment from the assets of someone who has filed for bankruptcy. Whether you're a supplier, employee, customer, or investor, if you're owed money when a company or individual goes bankrupt, you become a creditor, and to have any chance of recovery, you must file a claim.

Legally, a claim is defined very broadly. In U.S. law, for example, it's any 'right to payment' whether the amount is known, disputed, or even conditional (U.S. Bankruptcy Code Section 101(5)).

The Types of Bankruptcy Claims

Not all claims are equal in bankruptcy. Your position in the priority order determines how likely you are to get paid.

Secured Claims

Backed by collateral, like a mortgage or car loan. If the debtor defaults, the creditor has legal rights to the associated asset.

Unsecured Claims

Not backed by collateral and often include credit card debt, unpaid invoices, or customer accounts.

Priority Unsecured Claims

Certain unsecured claims, such as taxes, domestic support, and employee wages, are given priority under the law and get paid before other unsecured claims (U.S. Courts).

How the Bankruptcy Process Works

While bankruptcy procedures vary between countries, the general steps are similar:

  1. A bankruptcy case is filed, and the debtor's assets become part of a 'bankruptcy estate.'
  2. A neutral trustee or administrator takes control of the assets.
  3. Creditors are notified and must file claims by a set deadline.
  4. Claims are verified or disputed in a review process.
  5. Assets are sold, and proceeds are distributed to creditors in order of priority.
  6. The case is closed, and remaining discharged debts are wiped out.

In most cases, there is not enough money to pay all creditors, especially those in lower-priority classes. For example, general unsecured creditors receive only partial repayment in many cases (often less than 10%).

Why Bankruptcy Claims Matter

Understanding your position in a bankruptcy case isn't academic; it can mean the difference between recovering your money or losing out. This is especially true today, where more financial relationships take place on digital platforms.

What happens when platforms like crypto exchanges go bankrupt? Are account holders treated like customers or creditors? We'll explore these real-world scenarios in upcoming region-specific breakdowns.

Next up: Bankruptcy claims in the United States, with a deep dive into the FTX collapse, and what it taught us about protecting digital assets in insolvency.