Your customer owes your business money, and you were expecting to get paid.
Maybe you had already sent invoices, followed up about the overdue balance, or discussed a payment plan. Then, instead of receiving payment, you learned that the customer filed for bankruptcy.
That can be frustrating, especially when the unpaid balance affects your own cash flow, payroll, inventory, or ability to meet other business obligations. It can also leave you wondering whether the bankruptcy means the debt is gone and whether there is anything your company can still do to collect.
A bankruptcy filing changes the collection process, but it does not necessarily mean you should simply write off what you are owed. If your South Jersey business is a creditor in a bankruptcy case, the first steps you take can matter.
Do You Have to Stop Trying to Collect the Debt?
In many cases, yes.
When a bankruptcy petition is filed, an automatic stay generally takes effect. The stay stops most efforts to collect debts that arose before the bankruptcy filing, including collection lawsuits and demands for payment.
That means the approach you were using before the bankruptcy may no longer be appropriate.
Continuing to send payment demands, pursue a pending collection lawsuit, enforce a pre-bankruptcy judgment, or take other collection action after the filing could violate the automatic stay. Before taking another step, your business should determine whether the stay applies to the action you were planning.
The Bankruptcy Code contains exceptions to the automatic stay, and a creditor can ask the bankruptcy court for relief from the stay in appropriate circumstances. Whether either applies depends on the particular debt, property, and case, so a creditor should not assume it can continue collection activity simply because an exception might exist.
The safer starting point is to confirm that a bankruptcy case has actually been filed and determine how the filing affects the particular debt your business is owed.
What Should You Look for in the Bankruptcy Notice?
If your business is listed as a creditor, you may receive a notice from the bankruptcy court.
Do not set the notice aside with ordinary correspondence. Check the debtor's name, bankruptcy case number, chapter, court, meeting information, and any stated deadlines so you understand which case has been filed and what dates could require your attention.
The notice can provide important information about the case, including:
- The debtor's name and bankruptcy case number
- The chapter of bankruptcy filed
- The court handling the case
- The bankruptcy trustee, when one has been appointed
- The date of the creditors' meeting
- Deadlines that could affect your rights
You should also review how your business and its claim are identified in the debtor's bankruptcy schedules. A customer could list a balance that differs from your records or identify the debt as disputed, contingent, or unliquidated. Those classifications can become particularly important when determining whether your business needs to file a proof of claim.
The important point is not to assume that receiving a bankruptcy notice or seeing your business listed in the case means everything about your claim has been handled correctly.
Does Your Business Need to File a Proof of Claim?
A proof of claim is a document that tells the bankruptcy court that a creditor asserts a right to payment and provides information about the debt.
Whether and when your business should file one depends on the bankruptcy case.
In a Chapter 11 case, a creditor generally does not need to file a proof of claim when its claim is correctly listed in the debtor's schedules and is not identified as disputed, contingent, or unliquidated. If the debt is omitted, listed incorrectly, or identified as disputed, contingent, or unliquidated, the creditor generally must file a proof of claim by the applicable deadline to preserve its ability to participate in voting or distributions in the case.
Chapter 7 can work differently. Some Chapter 7 cases are initially administered as “no asset” cases because there are no assets available for distribution to unsecured creditors. In that situation, creditors generally are told not to file proofs of claim unless the court later notifies them that assets have been recovered and claims should be filed.
For that reason, your business should pay close attention to the notices and deadlines in the actual case rather than assuming there is one filing rule that applies to every bankruptcy.
If a proof of claim is required, supporting documents can also matter. Contracts, invoices, account statements, purchase orders, delivery records, judgments, security agreements, and other records may help establish the amount and nature of the claim.
Does the Type of Bankruptcy Affect What Happens to the Debt?
Yes. The bankruptcy chapter can tell you a great deal about what the customer is trying to accomplish.
Chapter 7 generally involves a trustee gathering and liquidating property of the bankruptcy estate that is available for distribution to creditors under the Bankruptcy Code. By contrast, a business that files Chapter 11 may continue operating while attempting to reorganize, sell assets, or otherwise address its obligations through the bankruptcy process.
An individual customer may instead file Chapter 13. In that type of case, the debtor generally proposes a repayment plan and makes payments over time through a Chapter 13 trustee, who distributes funds to creditors according to the plan. How your business's claim is treated can therefore depend not only on what you are owed, but also on the chapter the customer filed and the terms that govern payment of creditor claims in that case.
From a creditor's perspective, those differences matter.
If a commercial customer files Chapter 11 but continues doing business, your company may need to think about more than the old unpaid balance. You might also need to decide whether you will continue supplying goods or services, what payment terms you will require going forward, and how new transactions will be handled.
Bankruptcy therefore does not always end the business relationship. Sometimes it changes the terms on which continuing that relationship makes sense.
Does Bankruptcy Mean Your Business Will Never Get Paid?
Not necessarily.
Whether a creditor ultimately receives payment can depend on several factors, including the type of bankruptcy, the assets available, the nature and priority of the claim, whether the debt is secured, and what happens as the case moves forward.
An unsecured creditor whose customer has few assets could recover little or nothing. Another creditor could have collateral, a judgment lien, or another legal interest that places it in a different position. In a Chapter 11 case, the treatment of creditor claims can also be addressed through a proposed reorganization plan.
The balance shown on an unpaid invoice does not, by itself, tell you how much your business is likely to recover through the bankruptcy process. Two businesses owed similar amounts can have very different prospects for recovery depending on the documents supporting their claims and how those claims are treated in the case.
What Records Should You Preserve?
Once you learn about the bankruptcy, gather the records connected with the account.
Start with the underlying agreement, invoices, payment history, statements, correspondence, purchase orders, delivery confirmations, and any documents showing efforts to resolve the balance before the bankruptcy.
If your company obtained an existing judgment or has a security interest, preserve those records as well.
You should also reconcile your own accounting records against the amount the debtor reports owing your business.
This step can help identify discrepancies early, while there is still time to determine whether action needs to be taken in the bankruptcy case. It also gives you a clearer picture of the business problem itself.
Those records can also help clarify the nature of your business's claim. An unsecured unpaid invoice can present different issues from a debt supported by collateral, a perfected security interest, or an enforceable judgment lien.
The Law Offices of Howard N. Sobel can review these records with your business and help you evaluate how the nature of the claim and the bankruptcy filing affect the steps available to you.
What Should Your Business Do as the Bankruptcy Case Moves Forward?
That depends on the claim and what happens in the case.
For some creditors, the immediate task is to confirm that the debt is accurately scheduled, file a proof of claim if one is required, and monitor notices from the bankruptcy court.
Other creditors may need to address a disputed claim, protect an interest in collateral, evaluate whether to seek relief from the automatic stay, review a proposed Chapter 11 plan, or respond if the debtor challenges the amount or enforceability of the debt.
The amount at stake matters, but so do the documents supporting the claim, whether the debt is secured, whether your company expects to continue doing business with the customer, and the cost of pursuing additional action.
The goal is to identify which steps are necessary to preserve your rights and which steps make business sense under the circumstances.
Protecting Your Business When a Customer Files for Bankruptcy
An unpaid account is difficult enough. Once the customer files for bankruptcy, ordinary collection efforts can be restricted and your business may need to address the debt through the bankruptcy process instead.
For businesses in Voorhees and throughout Camden, Burlington, Gloucester, and surrounding South Jersey counties, the key is to respond deliberately. Confirm the filing, respect the automatic stay, review the bankruptcy notice and schedules, determine whether a proof of claim or another filing is necessary, preserve your records, and evaluate the practical value of the claim.
The Law Offices of Howard N. Sobel represents businesses in commercial collection matters and creditors in bankruptcy proceedings. If a customer has filed for bankruptcy while owing your company money, Howard N. Sobel, Esq. and his team can review the circumstances, explain how the bankruptcy affects your claim, and help you evaluate the steps available to protect your interests.
To discuss your situation, contact the Law Offices of Howard N. Sobel to schedule a confidential consultation.
Disclaimer: The articles on this blog are for informational purposes only and are no substitute for legal advice or an attorney-client relationship. If you are seeking legal advice, please contact the law firm directly.