From majestic entertainment giants to world famous department stores, the coronavirus devastated certain parts of the U.S. economy. Falling consumer demand and reduced pleasure spending took its toll on many areas of the retail industry, along with its endless vertical and horizontal supply chains.
While a bankruptcy doesn’t automatically mean that a company will go completely out of business, it does impact on whether or not you will receive some small part of your current receivable or nothing at all.
When a customer does declare bankruptcy, what is initially revealed comes in the form of a “341” notice. This notice spells out:
- the type of bankruptcy filed
- the date the case was filed
- the court in which the case is being heard
- the deadline to file a proof of claim
- the time, date, and place for the first meeting of creditors
- the rules for collecting what’s owed to you
Although bankruptcy procedures generally follow the same format, the unique nature of each company’s financial situation can make the bankruptcy proceedings go from quite simple and fast to very complex and drawn out. Regardless of the uniqueness involved, here are some important guidelines to be aware of and follow.
1. All contact with the customer/debtor needs to cease – Once a business files for bankruptcy, any and all collection activity must cease. If you make contact to try to collect your money, you will violate the bankruptcy code and you could actually put yourself and business into legal jeopardy. Even if you have previously filed a lawsuit against the client, it gets stayed until the bankruptcy is completed. You can, however, contact the attorney or court appointed trustee to work out an arrangement on how your debt is handled in the bankruptcy.
One important caveat to this is that if for some reason you are not listed in the bankruptcy petition as a creditor who is owed money, then you will have the right to keep collecting on the debt. However, as this may be an oversight, it’s best to clear this with your own corporate counsel in order to not be perceived to be in violation of the bankruptcy code.
2. How much is on the table and where do you stand in the line of creditors? – If for example, the debtor’s business grosses over $1,000,000 but has over $2 million in debts, owes you $5,000 and has a long line of 20 unsecured creditors who are already behind a few large secured creditors, is it worth it to pursue? Sometimes letting go of a relatively small A/R balance is better than continuing to spend a lot of time and money if the outcome potential is almost next to nothing.
3. What kind of bankruptcy are we dealing with?
- Chapter 7 is available to both individuals and businesses. Its purpose is to achieve a fair distribution to creditors of the debtor’s available non-exempt property. If debts outweigh the value of the assets, whatever is liquidated gets split up among the creditors.
- Chapter 11 is primarily used by corporations. The purpose of Chapter 11 is to give the debtor a breather from creditors while the company attempts to reorganize and come up with a better, more profitable way of doing business.
- Chapter 13 is for individuals or sole proprietors. It is designed for someone with regular income whose debts do not exceed certain amounts. It is used to budget some of the debtor’s future earnings under a plan through which creditors are paid in full or in part. The average case takes four to seven months to submit and approve a repayment plan.
4. File a Proof of Claim – Check the bankruptcy filing notice to see what the deadline is to file a claim with the bankruptcy court, detailing what you are owed and why. Apart from extenuating circumstances, failure to file a claim timely definitely will eliminate any chance you have of getting paid. If there is any money left after the bankruptcy proceeding, the trustee appointed by the court will be charged with paying various creditors what’s leftover. Proof of claim is a one-page form downloaded that you can usually fill out yourself but if you’re more comfortable, you can always request your corporate counsel to do this. (https://www.uscourts.gov/sites/default/files/form_b_410_0.pdf)
5. Wait in Line – Where you fall in the rank and file of creditors will determine how likely you are to get any of what you are owed. Secured claims, which include banks and lenders, rank higher than unsecured claims, such as goods sold or services rendered. There are also fees that have to be paid to the trustee and administrators. Schedule A and Schedule B of the bankruptcy petition will list secured debts while Schedule E or Schedule D will list unsecured debts. If the debt is secured, you have a stronger leg to stand on. But even if there is a chance you will get your money back, it’s typically 10 cents on every dollar owed.
6. Attend the “341” Creditors Meeting – This is a meeting with the court-appointed trustee, the debtor, and creditors. At this meeting, the debtor explains how their situation declined and what’s going to be done about it. Here is where you, as a creditor, can ask questions to the debtor. You can object to the repayment or reorganization plan if you feel the debt owed to you is not being treated fairly. If you believe some type of fraud is being committed, you can make that assertion but you need proof to back it up.
7. Review Any Proposed Repayment Plan – For the first 120 days, the debtor has the right to come up with a reorganization plan. If the court-appointed trustee decides the plan is workable, it’s sent out to all the creditors for review. For the plan to be approved, the debtor needs to have the consent from more than 50 percent of the total number of creditors and from more than two-thirds of the debt owed. Look at the disclosures to see how the debtor plans on paying each of the creditors.
8. Follow PACER (Public Access Court Electronic Records (https://pacer.uscourts.gov) – This allows users to obtain case and docket information from bankruptcy courts online. You can create a username and password to look up what is essentially public information. You can see for yourself what is going on with a bankruptcy filing.
As the pandemic continues its impact on the economy and industries that were once rock solid face ongoing hardships, I hope the above guide will be of help should a bankruptcy notice come in your mail sometime soon.
Your thoughts and comments (nseiverd@cmiweb.com) are most welcome!
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