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

Posted on Wednesday, August 29, 2018

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

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

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 know under which chapter of the Bankruptcy Code the company filed. The two likely chapters are:

Chapter 7 provides for liquidation, where the debtor's "nonexempt property" is sold and the proceeds are distributed to creditors in priority of their claim.

Chapter 11 generally provides for reorganization, usually involving 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 is required to provide a list of its known creditors. This is how you 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 is entitled to be paid ahead of other unsecured claims that aren't entitled to priority status. Find out whether your claim should be prioritized.. (Secured claims are treated differently.)

Automatic Stays

When someone files for bankruptcy, there is an automatic stay, which 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 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 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 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 financial advisor and attorney about these critical issues.

Posted in Tax And Accounting Topics For Business

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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