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Creditors’ rights when a debtor files for bankruptcy

On Behalf of | Apr 30, 2024 | Uncategorized

Learning that a customer, client or any debtor has filed for bankruptcy is rarely good news. However, it’s becoming more common for businesses to receive that kind of notification. Bankruptcy filings increased last year, and business bankruptcies rose almost 30%.

As a creditor, it’s critical to know your rights and be proactive about asserting them. You’ll likely be competing with multiple businesses to recoup as much as possible of what you’re owed.

Chapter 7 vs. Chapter 11

Most businesses file under Chapter 7 or Chapter 11 of the U.S. Bankruptcy Code. If a business has filed Chapter 7, the owners are closing the business and liquidating assets to pay their creditors. If the owners get approval to file Chapter 11, they plan to remain in business by reorganizing their finances. That reorganization plan needs to include paying their creditors.

Regardless of the type of bankruptcy used, repayment of creditors must be done in a specific order. After employees and tax obligations are paid, the next priority is creditors with debt secured by collateral, followed by those with unsecured debt. Unsecured debt is also prioritized, with creditors that most recently provided goods or services receiving top priority.

Filing a proof of claim

All creditors should receive a notice of the bankruptcy from the court and a proof of claim form. Returning this form is critical to getting payment. The more information and documentation you provide, the better your chances are of getting paid. If you don’t receive this notice and learn about the bankruptcy elsewhere, get the bankruptcy case number and find out from the court whether you’re on the list of creditors. If not, you have a right to file a proof of claim.

Attending the 341 (creditors’) meeting

Creditors have a right to attend and seek information from the debtor about the company’s financial state. Not attending, however, shouldn’t affect your ability to collect on the debt.

Seeking a lifting of the automatic stay

Once a debtor files for bankruptcy, the court issues an automatic stay that requires creditors to stop collection efforts. Individual creditors can seek the lifting of the stay. Typically, this is done with an asset securing a debt, like a property, is likely to lose value during the bankruptcy proceedings.

This is just a brief outline of creditors’ rights in bankruptcy. There are other rights that may pertain to your unique situation. It’s important to be aware of those rights and critical deadlines. Having legal guidance from the beginning can improve your chances of collecting as much as possible.