Business Bankruptcy:
Questions Frequently Asked By Creditors
- I've heard that my customer might file for bankruptcy. Is it ok for me to accept payment of past due invoices?
- I received a notice that my customer filed for bankruptcy. What should I do?
- I received a notice that my customer filed for bankruptcy. Should I go to the Section 341 meeting?
- I have an open account relationship with a customer who filed for bankruptcy. If the customer is a business, is it o.k. to continue filling orders and on what credit terms?
- I shipped goods just before the bankruptcy. Can I get them back?
- I shipped goods before the bankruptcy. What happens if I don't send a timely reclamation notice?
- I have a long-term contract to supply my customer. How does my customer's bankruptcy affect the contract?
- My key supplier filed for bankruptcy. Do I have to pay for goods I ordered before it filed?
- How certain can I be that my source of supply will continue after my supplier files for Chapter bankruptcy?
- I have a long-term contract with my supplier. How does the supplier's Chapter 11 bankruptcy affect the contract?
- My supplier is in bankruptcy, and its creditors' committee or its bankruptcy trustee has demanded that I pay back money the supplier paid me before bankruptcy. Should I pay?
- I was invited to serve on a bankruptcy creditors' committee. What does that mean and what should I do?
- How do I file my claim against a bankrupt company?
- My commercial tenant filed for bankruptcy. What should I do?
- I made an unsecured loan, or provided credit on open account, to an individual who has filed for bankruptcy. What should I do?
- I made a secured loan (e.g., mortgage, car loan) to an individual who has filed for bankruptcy. What should I do?
- What should I do if I receive a ballot asking me to vote on a plan in Chapter 11?
- What should I do if I receive a Chapter 13 plan?
- Should I file an involuntary bankruptcy petition against someone who owes me money?
- I've heard that my customer might file for bankruptcy. Is it ok for me to accept payment of past due invoices?
Yes, but for payments received within 90 days before bankruptcy, you might end up having to pay it back.
- I received a notice that my customer filed for bankruptcy. What should I do?
Cease all collection efforts for goods or services provided, or loans made, pre-bankruptcy. File a proof of claim in the bankruptcy court.
- I received a notice that my customer filed for bankruptcy. Should I go to the Section 341 meeting?
Attending the Section 341 meeting probably is not a good use of time, unless you want to serve on a Chapter 11 creditors' committee.
- I have an open account relationship with a customer who filed for bankruptcy. If the customer is a business, is it o.k. to continue filling orders and on what credit terms?
If your customer filed a Chapter 11 bankruptcy case, it is o.k. to continue to fill orders, subject to your credit underwriting policies. The credit terms you require may be influenced by what type of financing the debtor has obtained to fund its post-bankruptcy operations, and your assessment of the likelihood that the company will emerge from Chapter 11 instead of being liquidated. That said, there is a risk of nonpayment, so underwrite carefully.
If your customer is a corporation, partnership or limited liability company and filed a Chapter 7 bankruptcy case, then it should not be operating, so you should not be filling orders.
If your customer is an individual and filed a Chapter 7 bankruptcy case, you can fill orders, subject to your credit underwriting policies, because post-bankruptcy debts are not discharged in Chapter 7. There could be further credit risks, however, if the customer converts his case to Chapter 13.
If your customer is an individual and filed a Chapter 13 bankruptcy case, there are some payment risks associated with continuing to extend credit. Further analysis will be required.
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- I shipped goods just before the bankruptcy. Can I get them back?
The answer is complicated, but here is a general answer to which additional exceptions apply. You may get the goods back after bankruptcy only if: (a) No one has acquired a lien on the goods between the time the debtor received the goods and the bankruptcy filing; (b) the debtor was insolvent when it received the goods; (c) the debtor received the goods within 45 days before bankruptcy; and (d) you make a written demand to reclaim the goods (i) no later than 45 days after the debtor received the goods, or (ii) no later than 20 days after the bankruptcy case starts, if the 45-day period expires after the bankruptcy case starts.
You are going to have to file a motion or a lawsuit in the bankruptcy court to actually get the goods back. Self-help remedies are not permitted in this context.
Note that different rules apply if the customer does not go into bankruptcy. Under Connecticut law, if the customer does not go into bankruptcy, you may reclaim the goods provided that you make written demand within 10 days after delivery. The 10-day limit under Connecticut law does not apply if the customer made a misrepresentation to you regarding its solvency in writing within 3 months before delivery. Important: If you can meet the 10-day deadline, do so.
- I shipped goods before the bankruptcy. What happens if I don't send a timely reclamation notice?
You get a priority claim in the bankruptcy case as long as (a) the debtor received the goods within 20 days before bankruptcy; and (b) the debtor purchased the goods in the ordinary course of its business.
- I have a long-term contract to supply my customer. How does my customer's bankruptcy affect the contract?
In a Chapter 11 bankruptcy, the contract continues in effect, so you are either going to have to continue to perform the contract or get permission from the bankruptcy court to terminate it (unless your customer terminates the contract in bankruptcy, in which case you get a claim for damages).
- My key supplier filed for bankruptcy. Do I have to pay for goods I ordered before it filed?
Yes.
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- How certain can I be that my source of supply will continue after my supplier files for Chapter bankruptcy?
If the supplier files for Chapter 11, the answer depends on (a) how confident you are that the company will continue in business, and (b) on what type of post-bankruptcy credit facilities have been put in place. If the supplier files for Chapter 7 it is out of business and no longer will supply you.
- I have a long-term contract with my supplier. How does the supplier's Chapter 11 bankruptcy affect the contract?
You have to continue to honor the contract, or get permission from the bankruptcy court to terminate it.
- My supplier is in bankruptcy, and its creditors' committee or its bankruptcy trustee has demanded that I pay back money the supplier paid me before bankruptcy. Should I pay?
If the amount of the demand merits paying legal fees, then this is one of those times that you need a lawyer. The demand almost certainly will be based on a claim that the money you received was a preference. There are numerous defenses to a preference demand.
- I was invited to serve on a bankruptcy creditors' committee. What does that mean and what should I do?
If you accept the invitation you will be part of a committee that has a voice and a say at all court hearings. If you serve on the committee, you will be required to act in the best interests of all creditors. An active creditors' committee can maximize recovery to unsecured creditors, and serve as a watchdog on what the company is doing in bankruptcy. The time commitment can be substantial.
- How do I file my claim against a bankrupt company?
You fill out a proof of claim form, sign it, and follow the instructions you have received about where and how to file it. Note that filing deadlines are for receipt by the court or claims processor, not date of postmark.
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- My commercial tenant filed for bankruptcy. What should I do?
If the lease has not terminated by its terms, then (a) stop all efforts to collect past due rent; and (b) stop any pending summary process case. If you want to evict the tenant for nonpayment of rent, seek bankruptcy court permission to start an eviction proceeding. Anticipate that the debtor is either going to seek to reject the lease, assume the lease, or assume and assign the lease. If the lease is rejected you will need to calculate your damages claim based on a formula in the bankruptcy law, and file a timely claim for that amount. If the lease is assumed, you are entitled to have all pre-bankruptcy and post-bankruptcy arrearages cured, and you are entitled to adequate assurance the debtor will stay current in the future. If the lease is assumed and assigned, you are entitled to have all pre-bankruptcy and post-bankruptcy arrearages cured, and you are entitled to adequate assurance that the new tenant will stay current in the future.
If the lease has terminated by its terms before bankruptcy, or after the bankruptcy was filed, then stop all efforts to collect past due rent. If you want to evict the tenant for nonpayment of rent, you may commence or continue summary process without seeking bankruptcy court permission. File a proof of claim for the pre-bankruptcy past due rent. File a request for payment of an administrative priority expense claim for any unpaid post-bankruptcy rent for periods during which the debtor occupied the property.
- I made an unsecured loan, or provided credit on open account, to an individual who has filed for bankruptcy. What should I do?
Take no further steps to collect the debt. File a proof of claim. Review your file and the bankruptcy court's file to determine whether the individual gave you a false financial statement to induce you to extend credit. If so, consider suing to have your debt excepted from the discharge.
- I made a secured loan (e.g., mortgage, car loan) to an individual who has filed for bankruptcy. What should I do?
Stop pending collection, repossession and foreclosure efforts. If you want to repossess a car that is collateral for a loan, and the debtor is in default, seek bankruptcy court permission to repossess. If you want to foreclose real estate that is collateral for a loan, and the debtor is in default, seek bankruptcy court permission to foreclose.
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- What should I do if I receive a ballot asking me to vote on a plan in Chapter 11?
Read the disclosure statement. Consider whether the plan makes sense. You may vote to accept or reject the plan. Follow the instructions for filling out the ballot and return it to the entity who is collecting the ballots.
- What should I do if I receive a Chapter 13 plan?
Read the plan. Consider whether the plan makes sense. If you have concerns about how the plan treats your claim, consult an attorney.
- Should I file an involuntary bankruptcy petition against someone who owes me money?
Usually no, unless you are absolutely certain that (a) you can find at least two other creditors who, combined with your claim, are owed $13,475 of noncontingent, undisputed, unsecured claims against the debtor; (b) you can prove at a trial that the debtor is not generally paying its debts as they become due; and (c) you are willing to suffer the consequences (sanctions) if (a) or (b) turns out not to be true. Usually, an involuntary bankruptcy petition makes sense only when you have significant concerns that the debtor is transferring assets of considerable value in order to hide the assets from creditors, or to prefer insiders or a few creditors, or that the debtor is being horribly mismanaged and that you will be better off if the company is subject to oversight by the bankruptcy court.
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