When a business customer files for bankruptcy, it can feel like a complete loss, leaving you to worry about accounts receivable that may never be recovered. However, filing for bankruptcy does not automatically erase the debt owed to your business. While the process of commercial debt collection changes significantly, creditors still have rights and options to maximize their recovery. Understanding the different types of bankruptcy and the proper steps to take is crucial for protecting your financial interests.
The Immediate Impact of the Automatic Stay
The most critical consequence of a debtor filing for bankruptcy is the activation of the automatic stay under 11 U.S.C. § 362. This powerful injunction immediately and automatically stops most collection actions against the debtor or the debtor’s property.
For commercial creditors, the automatic stay means you must cease all efforts to collect the debt. This includes:
- Initiating or continuing lawsuits.
- Making collection calls or sending demand letters.
- Attempting to enforce a judgment or lien.
Violating the automatic stay can result in severe penalties from the bankruptcy court. If you receive notice that a customer has filed for bankruptcy, your first step must be to stop all collection activity immediately.
Protecting Your Interests: Filing a Proof of Claim
Once the stay is in place, your next step is to participate in the bankruptcy case by filing a Proof of Claim. This is a document filed with the bankruptcy court that officially establishes your right to payment from the debtor’s estate. If you fail to file a Proof of Claim by the established deadline (the “bar date”), you may lose the opportunity to receive any distribution from the debtor’s assets.
In a Chapter 7 case with no assets, creditors are generally not required to file a claim unless they receive notice that the trustee has found assets available for distribution. However, in Chapter 11 cases or asset-rich Chapter 7 cases, filing the claim on time is non-negotiable.
Chapter 7 vs. Chapter 11: Understanding the Difference in Collections
The collection strategy you pursue will depend heavily on the chapter of the Bankruptcy Code under which your customer filed:
Chapter 7: Liquidation
Chapter 7 involves the appointment of a trustee who liquidates the debtor’s nonexempt assets and distributes the proceeds to creditors. For a corporation or partnership, Chapter 7 means the business is ending. For a creditor, recovery relies solely on the existence of nonexempt assets. If the case is deemed a “no asset” case, unsecured creditors may receive nothing.
Chapter 11: Reorganization
Chapter 11 is typically used by businesses seeking to continue operations while they restructure their finances. In a Chapter 11 case, the debtor (often called the Debtor in Possession) proposes a Plan of Reorganization. Your interest as a creditor is to scrutinize this plan, as it outlines how and when your debt will be paid. Creditors often form committees and negotiate with the debtor to ensure the plan offers the maximum possible recovery. This process is complex and often requires experienced legal counsel.
Secured vs. Unsecured Creditors: Differential Treatment
The type of claim you hold drastically impacts your rights and potential recovery in bankruptcy:
- Secured Creditors: If your debt is secured by collateral (e.g., a commercial mortgage or a UCC security interest on equipment), the bankruptcy process may not extinguish your lien. You may have the right to seek relief from the automatic stay to recover your collateral, or you may receive adequate protection payments during the case.
- Unsecured Creditors: Most commercial collection matters involve unsecured debt, meaning there is no collateral. Unsecured creditors are often the last to be paid and may only receive a fraction of the debt or nothing at all, particularly in Chapter 7 liquidation cases. However, in Chapter 11, the reorganization plan must still be fair and equitable to unsecured creditors.
The Value of Experience: When to Hire a Collection Law Firm
Navigating the Bankruptcy Code’s complexities, filing deadlines, and mandatory court appearances is challenging for even sophisticated businesses. When a major customer files for bankruptcy, the decision to hire debt collection attorneys can make the difference between a write-off and a significant recovery.
A dedicated collection law firm can:
- Immediately stop internal collection efforts to comply with the automatic stay.
- Accurately prepare and file your Proof of Claim.
- Represent your interests in Chapter 11 reorganization plan negotiations.
- File motions for relief from the automatic stay if you are a secured creditor.
- Investigate the debtor’s financial transactions, potentially uncovering preferential transfers that the trustee can recover and use to pay creditors.
Goldberg & Oriel Attorneys at Law offers more than sixty years of combined expertise in commercial debt collection. We have the know-how and experience to guide you through the intricacies of bankruptcy court across the nation. Our aggressive approach ensures debtors understand we mean business from the moment we make contact. When you are owed money, you need a law firm dedicated to maximizing your recovery quickly. Delay only reduces your chances of success.
Our nationwide debt collection practice provides every client with clear, written fee agreements, and because we often work on a contingency basis, our goal is perfectly aligned with yours: collect the money owed as soon as possible.
Take Action Now to Maximize Your Recovery
Receiving notice of a customer’s bankruptcy filing is your signal to act decisively. Do not try to navigate the complex world of bankruptcy court alone. Consult your firm quickly when a debtor files for bankruptcy to maximize your chances of recovery.