Legal Definitions - proof of debt

Proof of debt refers to the formal process by which a person or entity (known as a creditor) demonstrates to a court, trustee, or administrator that another party owes them money. This demonstration typically involves submitting specific documentation, such as invoices, contracts, or a sworn statement (an affidavit), following a prescribed legal procedure. It is a necessary first step for the creditor to potentially recover the owed funds, often from a bankrupt individual's assets, a deceased person's estate, or an insolvent company's remaining property. This term is sometimes also referred to as a "proof of claim."

Here are some examples illustrating how "proof of debt" applies in different situations:

• Example 1: Personal Bankruptcy

  Imagine a person files for personal bankruptcy because they can no longer pay their bills. Among their creditors is a credit card company to whom they owe a significant balance. To ensure they are considered for repayment from any assets the bankrupt individual might have, the credit card company must submit a proof of debt form to the bankruptcy trustee. This form would detail the exact amount owed, the account number, and any supporting statements or agreements.

  This example illustrates proof of debt because the credit card company (the creditor) is formally establishing the existence and amount of the debt owed to them by the bankrupt individual, following the specific legal procedure required in bankruptcy proceedings to potentially recover their money.

• Example 2: Deceased Estate Administration

  Consider a situation where an elderly individual passes away, and their estate (all their assets and liabilities) needs to be managed by an executor. Before the executor can distribute any inheritance to beneficiaries, they must settle the deceased's outstanding debts. If the deceased had an unpaid utility bill, the utility company would send a proof of debt to the executor, typically an itemized statement showing the services provided and the outstanding balance.

  Here, the utility company (the creditor) is formally presenting its claim against the deceased's estate, providing the necessary documentation to the executor to verify the debt before it can be paid from the estate's assets.

• Example 3: Corporate Liquidation

  A small manufacturing company faces severe financial difficulties and enters liquidation, meaning its operations cease, and its assets are sold to pay off its creditors. A raw material supplier, who delivered goods to the company just before its collapse, is owed money for several invoices. To be considered for payment from the limited funds available, the supplier must submit a proof of debt to the appointed liquidator, attaching copies of the unpaid invoices, purchase orders, and delivery receipts.

  This demonstrates proof of debt as the supplier (the creditor) is formally verifying the amount and validity of the debt owed by the insolvent company to the liquidator. This process is critical for the liquidator to accurately assess all claims and distribute the company's remaining assets fairly among all creditors.