Are You Owed Money from a Business that Filed for Bankruptcy?

Dollar signs

Suppose you've been doing business with a company that owes you money or has been late in paying for services you have provided. You might have even filed a lawsuit to obtain the payments. But then you receive a notice that the company has filed for bankruptcy.

This article will explain some of the rights and responsibilities that apply in this situation.

Know the Type of Bankruptcy Filed

Before you determine what to do, you should learn what bankruptcy chapter under which the company filed. The two likely chapters are as follows:

  • Chapter 7. The chapter of the Bankruptcy Code providing for "liquidation." (In other words, the sale of a debtor's "nonexempt property" and the distribution of the proceeds to creditors.)
  • Chapter 11. The chapter of the Bankruptcy Code providing (generally) for reorganization, usually involving a corporation or partnership. (A Chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. Businesses or individuals can also seek relief under Chapter 11.)

In a Chapter 7 bankruptcy, the company liquidates and creditors receive payment in priority of their claim. In a Chapter 11 bankruptcy, the company attempts to work out the bankruptcy and negotiate terms with the creditors upon approval of the court. Each of the chapters has different procedures that must be followed.

Filing a Claim

When the company files for bankruptcy, it is required to provide a list of its known creditors. This is how you will be notified. Upon receiving notice of the bankruptcy, you need to file a proof of claim. A proof of claim is a written statement and verifying documentation filed by a creditor that describes the reason the debtor owes the creditor money. (There is an official form for this purpose.)

After filing a claim as a creditor you can attend the "341 meeting." This is the 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/her financial affairs. It is also called a "creditors' meeting."

How Creditors are Paid

Claims are prioritized. Priority refers to the order in which unsecured claims are to be paid. (Secured claims are treated differently.)

A priority is the Bankruptcy Code's statutory ranking of unsecured claims that determines the order in which unsecured claims will be paid if there isn't enough money to pay all claims in full. A priority claim is an unsecured claim that is entitled to be paid ahead of other unsecured claims that are not entitled to priority status. Find out whether your claim should be prioritized.

Automatic Stays

When someone files for bankruptcy, there is an automatic stay, which is an injunction that automatically stops lawsuits, foreclosures, garnishments and all collection activity against the debtor from the moment a bankruptcy petition is filed. A creditor can motion to lift the automatic stay to allow the creditor to take action against the debtor or the debtor's property that would otherwise be prohibited by 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 is commenced by filing a complaint with the court.

Discharging of Debts

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

Therefore, it is extremely important for you to take action upon receiving notice of the bankruptcy, as well as being actively involved in the proceeding to protect your rights. Consult with your accountant and attorney about these critical issues.

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

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