It usually arrives as an ordinary-looking envelope from a federal court, or as an email from the customer’s lawyer with a case number in the subject line. Either way, the news lands hard. A customer who owes you thousands of dollars has filed for bankruptcy, and your first thought is probably that the money is gone.
Sometimes it is. But not always, and the decisions you make in the first few weeks can make a real difference in how much you recover. The worst thing a creditor can do is panic, and the second worst is to do nothing at all.
Stop collecting, right away
The moment a bankruptcy petition is filed, a federal “automatic stay” goes into effect under 11 U.S.C. section 362. It bars most collection activity against the debtor: no calls, no demand letters, no new lawsuits, and no continuing the one you already filed. Wage garnishments and bank levies generally have to stop too. The stay applies whether or not you’ve received formal notice, and creditors who willfully violate it can be ordered to pay damages, including attorney’s fees in some cases.
So tell your billing team, your sales reps, and any outside agency to put the account on hold immediately. Even an automated reminder email can cause trouble. It feels backwards to stop chasing someone who owes you money, but following the rules here protects your position for everything that comes next.
The stay has limits, though, and this is where many creditors leave money on the table. It protects the debtor who filed. If the owner of the company signed a personal guarantee, or another business is liable on the same debt, those parties are usually not protected by the company’s bankruptcy unless they file their own case. A creditor can often keep pursuing a guarantor while the company’s case moves forward.
Figure out what kind of case it is
Not all bankruptcies are the same, and the chapter tells you a lot about what to expect. In a Chapter 7 case, a trustee gathers whatever non-exempt assets the debtor has, sells them, and distributes the proceeds to creditors. For a business, Chapter 7 usually means the company is closing. Unsecured creditors often receive little or nothing, though that varies with the assets.
Chapter 11 is a reorganization. The business keeps operating and proposes a plan to pay creditors over time, frequently at a discount. Small businesses may use Subchapter V, a streamlined version of Chapter 11. In these cases, creditors can actually have a voice, by voting on the plan, objecting to it, or serving on a creditors’ committee in larger cases. If the customer is a sole proprietor, you may see a Chapter 13 instead, where an individual pays creditors through a court-approved plan.
Your status matters just as much. A creditor with a security interest, like a recorded lien or a properly filed UCC financing statement, stands in a much stronger position than an unsecured trade creditor. A contractor or supplier with a valid mechanics lien may be treated as secured on that claim. Pull your documents before deciding what your claim is worth.
Get your claim on file
To share in any distribution, you generally need to file a proof of claim with the bankruptcy court. Deadlines are strict. In Chapter 7 and Chapter 13 cases, the deadline under Federal Rule of Bankruptcy Procedure 3002(c) is generally 70 days after the petition date (in Chapter 7 cases where it first looks like there are no assets, creditors are often told not to file until notified). In Chapter 11, the court sets a “bar date.” Missing it can mean losing your right to share in any payout, so put the date on the calendar the day you learn about the case.
Attach your invoices, contract, account statement, and any security documents. Also go to the meeting of creditors, sometimes called the 341 meeting after the Bankruptcy Code section that requires it. It’s a chance to hear the debtor answer questions under oath about assets, recent transfers, and where the money went.
Watch for the less obvious issues
Two issues catch creditors off guard. The first is preference claims. If your customer paid you within 90 days before filing, the trustee may try to recover those payments under 11 U.S.C. section 547, on the theory that you were paid ahead of other creditors. There are defenses, including payments made in the ordinary course of business and new value you supplied after the payment, so a preference demand letter is not something to pay without a careful review.
The second is that some debts can’t be wiped out. If the debtor got your goods or services through fraud or false financial statements, for example, the debt may be nondischargeable under 11 U.S.C. section 523. These claims arise most often in individual cases, and the deadline is short. A complaint usually must be filed within 60 days after the first date set for the meeting of creditors.
It also helps to keep an eye on the docket after the early deadlines pass. Debtors sometimes sell assets, reject contracts, or ask the court to approve settlements, and creditors who receive notice of those motions have a chance to object. In a Chapter 11 case, read the proposed plan and disclosure statement carefully, because the treatment of your class of claims is spelled out there, and your vote can matter more than you’d think when the creditor pool is small. If the case is dismissed rather than completed, the stay generally ends and ordinary collection options can come back into play.
A bankruptcy filing is a turning point, but it isn’t always the end of the road. Between guarantees, secured rights, a well-documented claim, and a debtor’s own conduct, there are often more options than the notice suggests. The sooner a creditor understands the case, the more of those options stay open.
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Contact us today for more information or discuss your concerns with one of our expert debt collection attorneys at 1-888-401-4008 or visit us online at https://collectionattorneyusa.com/. We will give you a detailed plan and use legal tools to ensure you get back your money quickly.
