Bankruptcy filings have have never been higher than in the post-pandemic era. If you’ve received notice that a customer with an outstanding balance has sought debt relief through a bankruptcy court, you wouldn’t be alone. Bankruptcy can be filed for both businesses and personally. In the business world, when dealing with an insolvent client or customer, it’s important to understand your rights as a creditor and the remedies available to you to mitigate losses, seeking remediation, and improve your chances for recovering some of the money that you are owed. . .
Business Bankruptcy
Types of Business Bankruptcies
There are three main bankruptcy filing options available for businesses:
- Chapter 7 is another term for liquidation. If qualified, the business that uses Chapter 7 as the tool for the complete liquidation of the credit line in determination. The complete amount is “liquidated” hence no amount can be claimed as owed at any time after the bankruptcy, and must be completely wiped out, hence written off. This option is available to all business structures including sole proprietorship.
- Chapter 11 is a process the reorganizes the failing business debts so that debt can be made in smaller payments to creditors, hence wiping out some of the debt owed. It allows the business to continue operating by terms of reorganization, however, the business needs to have enough incoming cash each month to make the new payments. This option is available to all business structures including sole proprietorship.
- Chapter 13 is similar to Chapter 11 except that it is only available to individuals, including sole proprietorship non-corporate partnerships, etc. The main difference between Chapter 11 and Chapter 13 is that certain amounts of assets are able to obtain the businesses right to retain some of the assets, like of that which is possible with a Chapter 7 bankruptcy–except the amounts owed are not completely liquidated.
Interesting Circumstances Look as Though a Business is Moving Toward Bankruptcy
Make sure that you heed the warning signs. Although some of these may not be possible to view, some of the defined general warning signs include:
- A change to the business hours
- Not returning calls
- Mailbox for voicemail being full
- Not responding to emails
- Not responding to texts
- Obvious discontinuation or lulling of companies services
- Building not being maintained properly
- Websites are shut down
- Visible fleet shrinkage
- Company moving to a different and often times smaller space
- More. . .
When an Official Notice That a Client Has Filed Bankruptcy is Received
If you learn that a client with past due invoices has filed for bankruptcy, you can take these steps in order to help to preserve all available remedies to recover what is owed:
- Stop any goods in transit and arrange for return of the goods to your warehouse. Creditors always have the right to stop goods in transit when notified of a client’s bankruptcy, provided products have not been prepaid or delivered to the customer or its agent. Once shipments are received by customers after a bankruptcy petition has been filed, the goods may become part of the bankruptcy estate–unless creditors exercise reclamation rights.
- Stop all collection efforts! It may seem counterintuitive to stop payment demands, but debtors in bankruptcy are protected by an automatic stay, due to the laws protecting an insolvent business that has the seal of the bankruptcy court. Like an injunction, the automatic stay orders issued by the bankruptcy court directs creditors to cease all debt collection actions, garnishment, and repossession. Failure to do so could land you into litigation and possibly be considered harassment.
Document everything with a long paper-trail. Creditors should organize and preserve all documentation pertaining to their relationship with the insolvent client. This includes:
- Records of supplied products or services
- Returned goods
- Received payments
These records are very important to court proceedings (including the 341 Meeting of Creditors-Common Bankruptcy Trustee Questions), and for defense against future litigation, as debtors and trustees have two years to bring claims against creditors over pre-bankruptcy transactions.
Should I seek Assistance and/or Hire an Attorney
If the amounts are large enough to not consider forgoing, consult with an attorney that specializes in preserving and upholding of creditors’ rights. After receiving notice of a customer’s bankruptcy filing, businesses will need to:
- Take all decisive steps to preserve their rights as creditors
- Assess the viability including any future relationship with the client whether or not the business is reorganized
- Ensure compliance with special rules and procedures
Missteps can have real ugly consequences, so you should consult an experienced creditors’ rights lawyer to identify the best course of action based on your unique situation and contractual obligations.
Providing Steps/Procession to the Bankruptcy Court
File a proof of claim, if necessary:
- If your claim is not listed on the schedule of debts filed by the debtor
- Is listed incorrectly
- Is designated as disputed
- Is designated as unliquidated
- Is designated as contingent
You will need to file a written proof of claim to preserve right to payment. Though brief, these forms must be accurate and timely, as courts will deny incomplete and untimely claims.
Time Doesn’t Exactly Heal
Get in line for repayment, because the bankruptcy courts prioritize certain debts for repayment first. The following debts get paid before unsecured debt:
- Secured debt (such as mortgages)
- Administrative and trustee fees which are critical to obtaining the administration of the bankruptcy
- Post-petition claims for goods or services that are reasonable and critical to the survival of the business
- Some debts (including yours) may qualify for a discharge, meaning the debtor is no longer legally required to pay the debt, and you, as the creditor, are barred from taking any form of collection action.
The Business Filed Chapter 7
The debt is considered terminated by the bankruptcy court. Period. The total amount owed must be written off completely. It cannot have an attempt to collect the amount, under any circumstances. It also must not be reassigned or sold to a collection agency. You must above all not try to collect the amount due.
Should I Do Business With A Client In Chapter 11 or 13?
If your client is a Chapter 11 or 13, they are considered a “debtor in possession” (i.e., in possession of property and continuing to do business as usual). A client is then legally permitted to pay for services and goods in the ordinary course of business after a bankruptcy petition is filed without discrimination due to the terms of protection granted. Terms and conditions in the present form of contractual agreement hence forward are valid. More factors that should be considered include:
- Depending on the size of the client, contractual terms, and nature of your relationship, you will have to determine whether to continue business with your client or terminate the relationship. As a creditor, you will also need to know the rules for dealing with clients in Chapter 11 and how you are paid for any post-bankruptcy sales or service.
- Beware of contractual obligations: Creditors with material obligations to perform under an executory contract established prior to the customer’s bankruptcy must continue performance as usual, unless the debtor rejects the contract, and the court approves their non-performance.
- Make a demand for adequate assurance. Suppliers have the right to demand in writing an adequate assurance of the client’s future performance, and the ability to pay and to suspend performance of a contract until such assurance is provided (UCC § 2-609). Creditors that make these type of demands typically file a motion with the court seeking adequate assurance.
- If there are no contract obligations in place, the creditors that provide goods or services via an individual transaction or purchase agreement may generally be open to choose if they wish to continue to do business after a bankruptcy filing. The business may negotiate new terms, such as requiring cash in advance. In any situation where business continues after a bankruptcy filing, the creditors should still seek approval from the court prior to delivering goods or services, especially for post-petition transactions with terms outside the scope of “ordinary course,” such as an unusual or large purchase.
It is best practice for creditors to re-evaluate if customers have sufficient liquidity to satisfy post-petition claims, and to ascertain the client’s financial situation, before furnishing goods or services or extending post-petition credit. Notices, meetings of creditors, and monthly financial reports filed with the court can provide such information. An attorney can really help review your contract and ensure that you are in compliance with bankruptcy rules.
Discuss Your Rights & Options With A Proven Creditors’ Rights Lawyer:
Receiving a notice that a client has filed for bankruptcy starts the clock for the creditor. If you are owed money from a business that has filed for a type of bankruptcy, you will need to navigate what are often unfamiliar proceedings. There is no insurance offered to protect your company from doing business that will foot the bill for a business that doesn’t have to pay you back due to a court ruling bankruptcy instead of insolvency.
Business Bankruptcy
The last thing that the busy business owner wants to hear is the bad news of not being able to collect on an owed debt. Every year, these things happen despite precautionary planning. If large enough one bankruptcy can even lead to your own in the business world. Bankruptcy is perhaps one of the more complex facts of life.
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#Bankruptcy #Bankruptcies #Chapter7 #Chapter11 #Chapter13
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DISCLOSURE: I have had to deal with a recent business that I am not certain whether or not they went bankrupt or not Lurvz definitely displayed all the telltale signs of a bankruptcy. The amount the company owed me was not large enough to justify action other than reporting them to the Federal Trade Commission. They put my company in jeopardy because they authorized a giveaway, and never made good on it. They did not return emails and phone calls. The company moved. I made good and bought the product for the winner of the giveaway through Amazon directly. It is such a shame, because the product was so good, that I even endorsed the product line. The people I dealt with were amazing before a reorganization. You really can never tell if and when a business goes bankrupt.
Business Bankruptcy
