Are You Owed Money From a Business That’s Filed for Bankruptcy?

Suppose you’ve been doing business with a company that owes you money for your products or services. Things get so bad that you file a lawsuit to force them to pay up. But then you receive a notice that the customer has filed for bankruptcy.

What now? Let’s explore some of the rights and responsibilities that apply in this situation.

Type of Bankruptcy Filed

Before you determine what to do, you should know under which chapter of the U.S. Bankruptcy Code the company filed. The two most common are:

• Chapter 7, which provides for liquidation, whereby the debtor’s “nonexempt property” is sold and the proceeds are distributed to creditors by priority of claim.
• Chapter 11, which generally provides for reorganization of, typically, a corporation or partnership. A Chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and negotiates terms to pay creditors over time. Individuals can also seek relief under Chapter 11.

Each of the chapters has different procedures that must be followed.

Filing a Claim

When a company files for bankruptcy, it’s required to provide a list of its known creditors. This is how you — as one of those creditors — will be notified. Once you receive a notice of the bankruptcy, you need to file a proof of claim. This is a written statement and verifying documentation that describes the reason the debtor owes the money. (There is an official form for this purpose.)

After filing a claim, you can attend the “341 meeting.” This is a meeting of creditors required by Section 341 of the Bankruptcy Code where the debtor is questioned under oath by creditors, a trustee, an examiner or the U.S. trustee about his or her financial affairs. It’s also called a “creditors’ meeting.”

After that meeting, claims are prioritized or put in the order in which unsecured claims are to be paid if there isn’t enough money to pay all claims in full. A priority claim is an unsecured claim that’s entitled to be paid ahead of other unsecured claims that aren’t entitled to priority status. Obviously, at this stage of the game, you want to find out whether your claim can be prioritized. (Secured claims are treated differently.)

Automatic Stays

When someone files for bankruptcy, an automatic stay is triggered. This is an injunction that stops lawsuits, foreclosures, garnishments and all collection activity against the debtor from the moment a bankruptcy petition is filed. A creditor can file a motion to lift the automatic stay in order to take action against the debtor or the debtor’s property, which would otherwise be prohibited under the automatic stay.

Whether or not the motion is granted depends on the facts and legal support for the motion. There can also be adversary proceeding as set forth in the Bankruptcy Code, which is a lawsuit arising in or related to a bankruptcy case that starts by filing a complaint with the court.

Discharging Debts

Ultimately, the debtor is attempting to discharge its debts. A discharge prevents creditors from taking any collection action against the debtor. The discharge also prohibits creditors from communicating with the debtor regarding the debt, including telephone calls, letters and personal contact.

Therefore, it’s extremely important for you to take action upon receiving notice of the bankruptcy. Thereafter, stay actively involved in the proceedings to protect your rights. For further information, consult your CPA and attorney.

Federal courts have exclusive jurisdiction over bankruptcy cases. This means that a bankruptcy case cannot be filed in a state court.

This article appeared in Walz Group’s June 29, 2022 of The Bottom Line e-newsletter