What is a Contingent Claim?


If you create a contract and then file for bankruptcy, then the lender or creditor can file a "contingent claim" against your estate. A contingent claim that is based on some future event can be dealt with by the court in a number of ways.

Certain Conditions Must be Met

For the contingent claim to file, some certain events must have taken place in the preceding phases. Because the future event is not guaranteed to happen or the creditors cannot say with 100% condition that the bankruptcy will take place, the claim may or may not become valid.

Contingent claims are usually filed by the creditors when the debtor or potential debtor of an asset files for personal bankruptcy. The contingent claim is managed in accordance with Law of the State and court precedence.

Various Reasons to File

A creditor may file a contingent claim if it believes that a triggering event may occur that will make the claimant’s bankruptcy possible, and the debtor will become financially obligated to the money.

This type of circumstance can occur if, for example, the debtor has acted as a co-signer for another person's car loan financing. If the third-party borrower defaults on their loan payments, as per the agreement the debtor has signed, he becomes financially responsible for the repayment of the car loan.

Responsibility of Creditors

Creditors must file a contingency claim, unlike an absolute claim, which automatically factors into a bankruptcy proceeding and repayment schedule when applicable.

  • The creditors must file a contingent claim in the court if they wish to retain their right to recover the investment due from a debtor's estate.
  • The creditor must also show that the triggering event has occurred, with certain proof and thereby make the claim valid.

If the acting court decides to treat the claim as an absolute claim, the creditor will receive monies in the same manner as other creditors.

Making Payment

Based on the Law of the State, there are numerous ways in which a court can handle a contingency claim.

  • The debtor and their lawyers acting as a representative may decide to consider the value of the claim and pay it in a similar manner as an absolute claim.
  • Likewise, the court can decide to distribute the funds from the debtor's estate normally, while keeping the funds required to pay the contingent claim away, if it is found to be valid.
  • An estate may also be handed over to creditors, with the realization that they are liable for payments due on any contingent claim. Debts accumulated by an estate can be paid in any possible manner found suitable by a bankruptcy court.

Updated on: 04-Oct-2021

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