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Notes on Bankruptcy
General Business News
August 1999
Notes on Bankruptcy
Rules to Know About Bankruptcy
Bankruptcy is a scary word that can be devastating if it happens to you. Even if you are secure financially and so is the business you work in, companies you are doing business with may not be. If a company you are working with goes bankrupt, there are a few key things that will help insure you get paid and the loss is not distributed to you or your company.
The first thing that you must do is have a good rapport with either the bankruptcy trustee or the person left in charge of the company. Maintaining these good personal relationships with honest people goes a long way in collecting what you are owed when a customer files for bankruptcy. Following are tips you need to know to protect yourself and your company.
Different Chapters of Bankruptcy
Under the Federal Bankruptcy Act, individuals and organizations can file for bankruptcy through one of various chapters. The chapters most frequently used are 7,11, and 13. A Chapter 7 bankruptcy usually leads to full liquidation of a company's assets. Under Chapter 11, the most common form of bankruptcy, the debtor company files a reorganization plan that generally allows it to remain in control of its business and assets while it tries to get back on its feet. Chapter 11 also frees the debtor from the threat of lawsuits by creditors, provided that a majority of the creditors agree on the reorganization plan. Chapter 13 is used by individuals and sole proprietorships. The debtor agrees to pay back as many creditors as possible.
If you get notification that a customer has files for bankruptcy, respond immediately and with a reclaim demand - a document files to recover all or part of what you are owed. This must be filed with the bankruptcy court no later than 20 days after the goods have been delivered.
Your Claim must be Validated
If you are a creditor and file a "proof of claim" to validate debts that are owed in a Chapter 7 proceeding, this shows you expect to be paid back. There is no need to file the document if your customer files for bankruptcy under Chapter 11 and the notice you received is accurate concerning the amount your firm is owed and any collateral the customer might have put up.
Contact with Customer
You can call the customer for information about the bankruptcy case, financial performance, and prospects for payment. Don't call the customer and ask for money after you receive notice of the filing. You can be held in contempt of court or even sent to jail if you pursue a debtor after bankruptcy has been filed.
Secured Collateral
If you did not secure collateral from your customer, as is the case with most business creditors, a bankruptcy filing under Chapter 11 or Chapter 13 gives you a better chance of collecting at least some of what you are owed. If your customer files under Chapter 7, you likely will receive nothing if you are an unsecured creditor.
Liquidation
A secured creditor could be better off if the customer files under Chapter 7. Sometimes it is best for the creditor if the debtor liquidates quickly. The creditor might have to take some lumps but the value of the collateral will not have a chance to deteriorate.
Important Notices
You should consider attending a creditors' meeting and any court hearings to stay well informed about your chances of repayment. You should also be very attentive to all notices received by mail for discharge or dismissal notices. A notice of discharge in a Chapter 7 bankruptcy case means the liquidation is complete and in a Chapter 11 case it means that the debtor has met all the terms of the reorganization plan. If a case is discharged, you will receive no more payments. A notice of dismissal means that a Chapter 11 reorganization plan has not been followed or that the debtor has committed fraud. If a case is dismissed, you can to after the debtor for the full amount you are owed.
Creditors Committees
In most Chapter 11 cases, a creditors committee is formed. If there is a lot of money at stake, try to get on this committee. If you can join forces with other creditors by getting on this committee, you can save attorney fees and acting as a group raises the chance of getting paid.
Chapter 11 Debtor
If asked to sell to a Chapter 11 debtor, do your homework before making this decision. In some cases, this is the most appropriate decision. If the reorganization plan is viable, you could stand a better chance of collecting what the debtor owes your firm by selling more goods to the debtor and helping the business stay afloat. Most post-bankruptcy sales are cash on delivery. Selling after a Chapter 11 bankruptcy petition can be risky but at least you have the court watching over you and protecting your position.
If your claim is more than $10,000 it's a good idea to consult an attorney. Working through a bankruptcy is not always as bad as the word sounds itself. Information is the key to protecting yourself. Remember that sometimes adding value to the bankruptcy by continuing to provide service to your customer can sometimes result in payment to you.
Bankruptcy is a scary word that can be devastating if it happens to you. Even if you are secure financially and so is the business you work in, companies you are doing business with may not be. If a company you are working with goes bankrupt, there are a few key things that will help insure you get paid and the loss is not distributed to you or your company.
The first thing that you must do is have a good rapport with either the bankruptcy trustee or the person left in charge of the company. Maintaining these good personal relationships with honest people goes a long way in collecting what you are owed when a customer files for bankruptcy. Following are tips you need to know to protect yourself and your company.
Different Chapters of Bankruptcy
Under the Federal Bankruptcy Act, individuals and organizations can file for bankruptcy through one of various chapters. The chapters most frequently used are 7,11, and 13. A Chapter 7 bankruptcy usually leads to full liquidation of a company's assets. Under Chapter 11, the most common form of bankruptcy, the debtor company files a reorganization plan that generally allows it to remain in control of its business and assets while it tries to get back on its feet. Chapter 11 also frees the debtor from the threat of lawsuits by creditors, provided that a majority of the creditors agree on the reorganization plan. Chapter 13 is used by individuals and sole proprietorships. The debtor agrees to pay back as many creditors as possible.
If you get notification that a customer has files for bankruptcy, respond immediately and with a reclaim demand - a document files to recover all or part of what you are owed. This must be filed with the bankruptcy court no later than 20 days after the goods have been delivered.
Your Claim must be Validated
If you are a creditor and file a "proof of claim" to validate debts that are owed in a Chapter 7 proceeding, this shows you expect to be paid back. There is no need to file the document if your customer files for bankruptcy under Chapter 11 and the notice you received is accurate concerning the amount your firm is owed and any collateral the customer might have put up.
Contact with Customer
You can call the customer for information about the bankruptcy case, financial performance, and prospects for payment. Don't call the customer and ask for money after you receive notice of the filing. You can be held in contempt of court or even sent to jail if you pursue a debtor after bankruptcy has been filed.
Secured Collateral
If you did not secure collateral from your customer, as is the case with most business creditors, a bankruptcy filing under Chapter 11 or Chapter 13 gives you a better chance of collecting at least some of what you are owed. If your customer files under Chapter 7, you likely will receive nothing if you are an unsecured creditor.
Liquidation
A secured creditor could be better off if the customer files under Chapter 7. Sometimes it is best for the creditor if the debtor liquidates quickly. The creditor might have to take some lumps but the value of the collateral will not have a chance to deteriorate.
Important Notices
You should consider attending a creditors' meeting and any court hearings to stay well informed about your chances of repayment. You should also be very attentive to all notices received by mail for discharge or dismissal notices. A notice of discharge in a Chapter 7 bankruptcy case means the liquidation is complete and in a Chapter 11 case it means that the debtor has met all the terms of the reorganization plan. If a case is discharged, you will receive no more payments. A notice of dismissal means that a Chapter 11 reorganization plan has not been followed or that the debtor has committed fraud. If a case is dismissed, you can to after the debtor for the full amount you are owed.
Creditors Committees
In most Chapter 11 cases, a creditors committee is formed. If there is a lot of money at stake, try to get on this committee. If you can join forces with other creditors by getting on this committee, you can save attorney fees and acting as a group raises the chance of getting paid.
Chapter 11 Debtor
If asked to sell to a Chapter 11 debtor, do your homework before making this decision. In some cases, this is the most appropriate decision. If the reorganization plan is viable, you could stand a better chance of collecting what the debtor owes your firm by selling more goods to the debtor and helping the business stay afloat. Most post-bankruptcy sales are cash on delivery. Selling after a Chapter 11 bankruptcy petition can be risky but at least you have the court watching over you and protecting your position.
If your claim is more than $10,000 it's a good idea to consult an attorney. Working through a bankruptcy is not always as bad as the word sounds itself. Information is the key to protecting yourself. Remember that sometimes adding value to the bankruptcy by continuing to provide service to your customer can sometimes result in payment to you.
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.
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