Perhaps the only thing worse than a
customer whose payments are 60
days overdue is one who notifies you that it is declaring bankruptcy. What
you do in the days after a debtor declares
bankruptcy has a major effect on what, if
anything, you collect.
“It is important to have a general understanding of how bankruptcy can affect
your ability to collect an outstanding debt
and the steps you should take to maximize that potential recovery,” says
Bradley C. Mall, attorney with Munck
Carter, P.C. in Dallas. “Even before the
current financial crises, we saw a sharp
increase in the number of bankruptcy
filings.”
In August 2008, bankruptcy filings
reached a new high of 4,476 per day. At
that time, predictions were that bankruptcy filings would top one million by
the end of 2008. Given the current financial times, actual filings are likely to be
significantly higher. What is a business
owner to do?
Smart Business asked Mall how a business owner should react to a client’s
bankruptcy filing.
If I hear that a client is declaring bankruptcy,
what should I do first?
The safest thing is to confirm that filing
by contacting the debtor and obtaining a
case number and/or name and telephone
number of the debtor’s attorney. Alternatively, most attorneys can confirm the filing through the bankruptcy court’s online
filing system, PACER.
Failing to confirm a filing can have
adverse consequences. Not only is any
action taken in the pursuit of collection
voidable post-filing, such action may
open you to monetary liability. Actions
taken in pursuit of debt collection —
even actions as simple as filing a lien —
violate the Bankruptcy Code’s ‘automatic
stay’ provisions and are voidable.
What is ‘proof of claim’?
In the business world, to receive payment for services rendered or products
supplied, you submit an invoice. In a
bankruptcy proceeding, creditors file a
proof of claim. You should attach any and
all documents that support your claim.
For example, if the claim is based on a
promissory note, attach the note. If the
debt is secured by collateral, attach confirming documents, such as a Uniform
Commercial Code Financing Statement
(UCC-1). A proof of claim is deemed
allowed upon filing with no more action
to be taken unless and until an objection
is filed as to the claim.
This does not mean that you will receive
all or any money from the debtor. Rather,
it establishes your claim and its position
within the hierarchy of claims payment.
You do not have unlimited time to file
proof of claim. In a Chapter 7 (liquidation) case, the deadline is usually 90 days
after the first meeting of creditors. In
Chapter 11 (reorganization) cases, the
court sets the deadline.
How do I move up in the payment hierarchy?
Vigilance in the processing and protection of your claim before bankruptcy is
filed is key to your position in the hierarchy of claims payment under the
Bankruptcy Code. Where your claim falls
in terms of payment is entirely dependent
upon the classification of your debt prior
to the bankruptcy filing. So, if your debt is
secured, your claim will have priority, i.e.,
be paid before general unsecured creditors. This does not mean that your claim
will be paid in full, or even at all.
Conversely, failure to properly perfect
and record your security interest may
cause your claim to be classified as unse-cured, which is close to last in line for
payment. Further, because the bankruptcy trustee (or the debtor in Chapter 11
cases) can avoid any transfer of an interest in the debtor’s property (such as filing
a UCC-1 or other lien documents) that
occurred up to 90 days before the filing, it
is important to ensure that you are timely
taking the necessary steps to perfect your
security interests and thereby protect any
potential claim should the debtor file for
bankruptcy protection.
What is this going to cost me?
This depends on numerous variables
that should be analyzed in considering
how best to proceed. Just because a
debtor files for bankruptcy protection
does not mean you should throw up your
hands and write off the debt. Chances are
you will not receive 100 cents on the dollar. But, if you take the necessary steps
during the course of your everyday business activities to perfect and protect your
claim, chances are good that you will
receive some return.
In any case, consult a bankruptcy attorney who can explain the process and
your options and help you determine an
appropriate course of action.
BRADLEY C. MALL is a shareholder with Munck Carter, P.C., practicing in the Litigation Section. His practice focuses on commercial
disputes and includes trials, arbitration, mediation and appeals. Reach him at [email protected].
