They're Bankrupt. Now What?
GDA Staff -- Gifts and Dec, 7/23/2011 6:13:43 AM
Every day seems to bring a report of another business that's filed for bankruptcy, or is about to. if that company is one of your customers or vendors, what impact will their bankruptcy have on your business? what can you do and not do? will you be paid and, if so, how much and when?
Don't let a vendor or customer owe you more than you can afford to lose. After the Meeting of Creditors and filing a Proof of Claim, it is just a matter of waiting - sometimes for a long time - to find out when and if and how much you will be paid.
There are no simple answers, but here are some starting points to understand the headlines and what they mean to you. When in doubt, ask your lawyer.
Chapter 7
Usually under a Chapter 7 proceeding, the debtor ceases business operations; assets will be liquidated under court supervision for the benefit of its creditors. A court-appointed Trustee will collect the Debtor's accounts receivable (by lawsuit, if necessary) and sell assets such as its inventory, equipment and real estate, as long as the assets aren't pledged as collateral to a bank or other secured creditor (like a mortgage or a car loan). Only after assets have been liquidated and secured creditors paid will any remaining funds be distributed to unsecured creditors (which is most of them). They get a proportionate share of what is left after secured creditors and creditors that the law gives priority to have been paid.
Chapter 11
Under Chapter 11 bankruptcy, the debtor continues to operate its business and proposes a reorganization plan, under which creditors receive more than they'd get through a Chapter 7 liquidation. In this scenario, a rep may be asked to continue to serve as a sales representative. If their continued services are critical to the success of the reorganization, they may be able to negotiate payment of commissions owed before the bankruptcy proceeding was started (if the court approves). But be careful, because Chapter 11 proceedings don't always work. They may be "converted" to a Chapter 7 liquidation, and then a creditor who kept selling - and racking up commissions owed - during the attempt to reorganize could find his or herself even deeper in the hole.
Notice and Proof
If you're a creditor of a company that declares bankruptcy, you don't have to worry about missing the news. You will receive an official Notice of Bankruptcy from the Clerk of the Bankruptcy Court. Make sure you read it right away, and seek professional advice about what it means if you're not sure. As soon as you get a Notice of Bankruptcy, you must immediately stop all collection efforts, including any pending litigation, unless otherwise allowed by court order. The Notice will also provide deadlines, the location of the particular court where the case is pending, whether it was filed as a Chapter 7 or Chapter 11 proceeding, who the Debtor's attorney and Trustee are, and the date of a Meeting of Creditors.
At the meeting, a representative of the Debtor (an owner or officer) will be examined under oath by the Trustee and any creditors (or their attorneys) in attendance. Depending on how you're owed, and where the meeting is, you may want to go, or send your lawyer.
The Notice will also say whether there's an immediate need to file a Proof of Claim form, and the deadline. (In some instances, when it initially appears that the Debtor has no assets and that a distribution is unlikely, the Notice of Bankruptcy will not provide a filing deadline.)
In a Chapter 7 case, a creditor must file a Proof of Claim form by the deadline to share in any distribution. No form, no money, even if it is the Debtor's only or largest creditor.
In a Chapter 11 case, in contrast, you don't need to file a form, as long as the debtor lists you in the Schedule of Creditors that it filed, the amount listed is correct, and your claim is not identified as being disputed or conditional. However to avoid any possible problem, file a Proof of Claim and supporting documents anyway. After the Meeting of Creditors and filing a Proof of Claim, it is just a matter of waiting - sometimes for a long time - to find out when and if and how much you will be paid.
Preference Claims
The only thing worse than being owed money by a bankrupt customer or vendor is having to return commissions or payments you received before the company filed for bankruptcy. But under certain circumstances, this can happen. A Bankruptcy Trustee has the right to recover "preferential transfers" made within 90 days prior to the Debtor's bankruptcy,
If such payments were made on account of "antecedent debt" - that is, for amounts already owed a creditor. Fortunately the Code does provide certain defenses.
We cannot prevent bankruptcy - or always predict where it will strike. Your goal should be to lessen the impact on your business. Don't let a vendor or customer owe you more than you can afford to lose. If necessary, terminate the relationship. Sometimes, saying "no" or "goodbye" may actually strengthen your bottom line.
We would love your feedback!
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