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Giving Bankruptcy Advice to Your Creditor Client

Every business that extends credit has had to deal with customers filing bankruptcy. If you receive a frantic call from a client who has just received notice that a customer who owes on an account has filed or is going to file bankruptcy, you’ll need to be able to give the client some solid advice on next steps.
 
Initially, be sure to advise your client that a debtor has the benefit of an "automatic stay" immediately upon filing a bankruptcy petition. That stops a creditor from taking any further action to try to collect the debt unless or until the bankruptcy court decides to the contrary. So what’s a creditor to do?
 
File a Proof of Claim
 
The creditor should file a timely file a Proof of Claim in the bankruptcy. In the usual case, creditors will receive a notice of the bankruptcy that will have a form for the proof of claim on the backside of the notice. The notice should provide the creditor with instructions on how to fill out the form and will provide a deadline by when it must be filed. By filing a Proof of Claim, the creditor will be included with the list of other creditors who may eventually end up being paid a slice of the remaining pie of the debtor's assets.
 
Is There Someone Else to Pursue?
 
If someone personally guaranteed the account, making a demand on that person would naturally be the next step. Are there any possible remedies against the management or owners of any business that owes the money?
 
Are there any co-debtors? The most common example may be spouses who are "jointly and severally liable" on the same debt. Even if the spouses happen to be divorced and only one of them ran up the debt obligation, it's possible that they may both be held liable for the debt if they were married at the time either of them signed the paperwork.
 
Are There Other Alternatives?
 
There are many different options a creditor in a bankruptcy can pursue. They include the following: 
  • Petitioning the bankruptcy court for relief from the automatic stay. This may encourage the debtor to make arrangements for paying the creditor in an amount at least equal to the value of the collateral.
  • Request permission from the bankruptcy court to continue with any lawsuit the creditor had already started at the time the bankruptcy was filed. A judgment creditor may be repaid sooner than a general unsecured creditor.
  • Petition to have the bankruptcy dismissed, if the debtor isn't complying with the bankruptcy rules or the orders of the bankruptcy court.
  • Petition the bankruptcy court to create or be a part of a creditors committee to oversee the operations of the bankruptcy debtor
  • Petition to have a bankruptcy trustee appointed if the debtor filed a Chapter 11 proceeding that generally doesn't require that a trustee be appointed
  • Sue other creditors to try to force them to give money back to the bankruptcy proceeding if they were paid in "preference" to other creditors. A "preference" is a preferential payment that a debtor makes on old debt within three months of filing bankruptcy (or within a year if the payment is made to a family member or some other insider who has a special relationship with the debtor).
  • Petition the bankruptcy court to deny a discharge of the debt in whole or in part, if there is a possibility that the debtor has acted fraudulently.  
When Should a Creditor Pursue One of These Remedies?
 
In deciding whether to pursue the matter further, the creditor client must consider the following: 
  • How much money is involved? If this is but one account out of hundreds that the client has, it may not be worthwhile pursuing beyond filing a proof of claim - unless substantial dollars are involved.
  • Is there enough money involved to justify retaining a lawyer for representation in bankruptcy court? The bankruptcy laws are so complicated that most lawyers steer completely clear of bankruptcy court. The average businessman will be a fish out of water in bankruptcy court, so counsel is a must.
  • Is the client a secured or unsecured creditor? If unsecured and the debtor's liabilities greatly exceed the assets, the client may be pursuing a worthless cause. If the client has a security interest in collateral that still has some value, it may be worth going the next step.
  • How much time can the client afford to spend on the matter? Even if you hire an attorney, pursuing a debtor in bankruptcy is going to require a lot of your time. You may have to attend hearings and possibly even participate on a creditors' committee.
  • What kind of bankruptcy is involved? The likelihood of a creditor getting paid is going to depend on whether or not the debtor is simply giving up the ghost and trying to obtain a discharge of all his or her debts (for example, with a Chapter 7 bankruptcy) or is trying to restructure or reorganize debts and eventually pay them off (for example, a Chapter 11 or Chapter 13 bankruptcy).