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How smart creditors keep from losing too much in bankruptcy

On Behalf of | Apr 8, 2020 | Corporate Finance, Credit & Bankruptcy |

Some industries may deal with frequent bankruptcy problems although all creditors in any industry face the risk of needing to engage in credit collection efforts.  Some more frequently indebted businesses, such as retailers or manufacturers, which fail to meet targets or face other revenue challenges, can end up leaving creditors in the lurch for sometimes a significant amount of money. How the Bankruptcy Court works out how to assign and administrate any remaining assets of a commercial debtor to creditors will largely depend on the first, the debtor’s available assets for administration and two, the form of each creditor’s claim, whether that claim is secured or unsecured debt, and which type of bankruptcy proceeding was utilized to administrate over the alleged insolvent entity. This means that creditors need to play it smart to ensure that they can recover their losses when a customer or other obligating debtor files for bankruptcy protections.

Chapter 7 v. Chapter 11 bankruptcy

When filing for bankruptcy, companies will generally have the option to file for Chapter 7 or Chapter 11. With a Chapter 7 bankruptcy, the debtor will in effect surrender all of the assets to the hands of a bankruptcy trustee named by the court who will then liquidate the assets and use them to satisfy the outstanding debt, paying secured claims out first. This will often lead creditors without secured debt at the back of the pack, often resulting in no payments. Yet, when a company chooses to file for protection under Chapter 11 bankruptcy, the debtor will instead be reorganizing, which means that they will be shedding certain obligations and debts while keeping in place a reorganization plan to pay some creditors out over time.

No matter what the filing process, the proceedings will start with an administrative stay issued automatically upon the obligated party’s filing of a bankruptcy petition that will prevent most creditors from taking any further action to continue to collect on their debt. If they attempt to secure payment after the stay, they can be found to be violating a court order and risk severe sanctions.

** However, certain creditors are entitled to file a motion to avoid the administrative stay, and can continue to proceed against certain assets, even while the primary debtor is under general protections of the bankruptcy court.

How creditors can secure payment during a bankruptcy proceeding

The first step towards getting paid by the debtors is to promptly file a notice of claim, including status as a creditor and the amounts that the debtor owes. In this claim, all documentation supporting the payment should be included. This can be contracts invoices, and any other supporting documents proving the right to payment. This information needs to be submitted by the outlined deadline to even be considered.

Qualified creditors may wish to file a motion for relief from the administrative stay, or perhaps even an complaint for action in the Bankruptcy Court, known as an adversary proceeding.

Regardless, it is important for any creditor to be a constant presence during the bankruptcy process, which means filing objections to motions and plans when needed and doing so in a timely manner. This is especially vital if the motion is a relief sought by the debtor or any other creditor that could, in some way, inhibit your ability to collect on your outstanding debt.

Creditors should also maintain a dialogue with the debtor and their legal counsel about the option to negotiate some of the payment if permitted under the many rules of bankruptcy administration. This can be the difference between the creditor getting something or ending up with nothing.

Another key step to improving the chances of getting the debt collected is having counsel monitor and watch for the dismissal of the case, which can occur due to a number of reasons, such as the debtor failing to follow the requirements. When this occurs, the creditor can immediately resume their collection efforts, and by doing so they may be in a better position to collect some of the debt.

Since the bankruptcy process can be difficult to navigate, especially when trying to collect on unsecured debt, it is crucial for creditors to seek out experienced bankruptcy legal counsel to put a creditor in the best position practicable. Skilled creditor’s rights lawyers are not only familiar with the process of bankruptcy but can also help represent creditors in negotiations with the debtor’s counsel.