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A Business or Person Who Owes You Money Has Filed for Bankruptcy. Now What?

Client Alert
November 16, 2022

You have received a notice in the mail stating that a business or person who owes you money has filed for bankruptcy. Now what do you do? It is important to act quickly to determine your rights in the bankruptcy process and to protect them. You should review the particulars of the debt owed to you with your attorney, as well as the debtor’s bankruptcy filings.

Here are some of the preliminary issues to consider in order to protect your rights as a creditor.

First, you will want to review the debtor’s bankruptcy petition to see what type of bankruptcy they have filed. The most common types of bankruptcies are:

(1) a Chapter 7 bankruptcy in which the individual or business is liquidating their assets in order to repay a small, if any, percentage of the debts owed to creditors;
(2) a Chapter 11 bankruptcy in which a business is seeking to restructure and to pay creditors some or all of what is owed to them in order to continue to operate; and
(3) a Chapter 13 bankruptcy in which an individual enters into a plan to repay creditors, in full or in part, over a period of three to five years.

The type of bankruptcy filed can greatly impact your rights as a creditor and the amount you can expect to be repaid on the debt owed to you.

Second, you will want to review the debtor’s bankruptcy schedules to see if they have accurately listed your creditor information, including your contact information, the basis for the debt owed to you, the amount of the debt, and whether they have identified you as having a secured or unsecured claim. Secured claims are generally based upon a creditor having an interest in assets of the debtor as collateral for the debt owed to them, such as through a mortgage, lien, or UCC financing statement filing. Secured claims typically receive priority and are paid more through the bankruptcy than unsecured claims that have no collateral securing them.

Third, find out when the first meeting of creditors will be held in the bankruptcy and decide with your attorney whether to attend. The first meeting of creditors is an opportunity for the bankruptcy trustee and creditors to ask the debtor preliminary questions about their assets, employment, and intentions in filing the bankruptcy. As a creditor, you will typically receive a notice of the first meeting of creditors in the mail. However, having your attorney check the online bankruptcy docket for the first meeting of creditors and other deadlines in the case is a good idea.

Fourth, file a proof of claim in the bankruptcy setting forth the total amount you are owed by the debtor, the basis for the debt, and whether it is an unsecured, secured, or priority claim. Priority claims that are paid first in bankruptcy can include, but not be limited to:

(1) child and spousal support obligations;
(2) contributions to employee benefit plans;
(3) wages or commissions earned 180 days before the bankruptcy; or
(4) deposits given to the debtor to secure products, services or housing in the future.

You will also want to attach relevant documents supporting your claim to the proof of claim. The bankruptcy court will set a deadline to file a proof of claim and it is important to meet the deadline so that your bankruptcy claim is not waived.

Fifth, monitor the proposed treatment of your claim in the bankruptcy and any deadlines for objecting to the proposed treatment of the claim. In a Chapter 11 or Chapter 13 bankruptcy, a plan will be provided to creditors, showing the percentages of their claims that are being proposed to be paid, as well as the timeframe for payment. In a Chapter 7 case, the bankruptcy trustee will propose percentages of payment to creditors.

Sixth, consult with your attorney regarding whether you may have grounds to object to the debtor receiving a discharge of the debt owed to you, such as child support and alimony, or debt that was incurred by fraud.

Finally, be aware that if you are continuing to do business with the debtor or have provided goods to the debtor soon before the bankruptcy was filed, you may have additional rights in the bankruptcy that need to be asserted quickly. These can include, but are not limited to, making a reclamation claim to recover possession of goods sold to the debtor; obtaining critical vendor status in the bankruptcy; or filing an administrative claim for expenses incurred during the bankruptcy. Discuss your rights as a creditor in these areas and others with your attorney. 

Partner Matt Duncan is experienced in representing creditors preserving and asserting their rights in bankruptcies and would be happy to speak with you regarding your situation. Please email Matt at mrduncan@bmdllc.com. 

bankruptcybusiness and corporate law
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