Think Again Before you Ignore the Notice of Customer Bankruptcy

Posted by Lydia M. Hilton on

If a customer that owes you money files bankruptcy, the temptation is to simply ignore the notice because you “won’t get paid anything anyway.” Frankly, this is not a good plan. Below are three important steps and considerations that can help to save money in the long run.

#1: Seek knowledgeable advice. Without proper advice, money has the potential to be lost. For example, an experienced bankruptcy lawyer can ascertain what needs to be done and will ask the right questions in a few minutes. By contrast, it may take you or your bookkeeper 5 -10 times longer and you still may not know if you are correct. A few simple points to begin with include:

  • File a proof of claim. This may require more than you think. The rules and mechanics for filing proofs of claims have changed over time.
  • Identify what category of claim to file and what documentation to submit. Be careful. You may think you only have an unsecured claim. However, you may be entitled to administrative-claim priority or have a claim that can be perfected post-petition. Again, the counsel of an experienced practitioner is very valuable here.

#2: Will the bankrupt business continue to operate? If so, continuing to do business with the debtor post-petition may present opportunities to get paid in full and receive special treatment.  Experienced counsel will identify quickly when this is possible and how to go about it. While a bankrupt company’s secured lenders have enormous leverage in the case, they don’t hold all the cards (even though they let you believe that).

#3: Determine if you could be the target of a preference or fraudulent transfer case. If this could be in your future, you want to be in the best position possible to defeat or deflate it. Bankruptcy laws permit a debtor or a bankruptcy trustee to recover certain payments made to creditors within the 90 days before the bankruptcy if the payments were made by or for the debtor’s benefit on account of an antecedent debt and permit the creditor to receive more than it would get in a Chapter 7 case. It’s not unusual for a trustee to merely go through the debtor’s checkbook, identify every creditor that got paid in the 90 days before bankruptcy and then demand return of the payment without further investigation. If the money is not returned, then the trustee files a “Preference Action.” In that same lawsuit, the trustee or debtor will almost always accuse you of getting a “fraudulent transfer.” A fraudulent transfer can be a dishonest transaction or, more often, a “sweetheart” deal at the expense of the debtor that happened years before the case was filed.

The deadline for bringing these claims is two years after the case is filed or one year after certain other events, if they occur before the two-year anniversary of the filing.  Quite often, avoidance actions are filed just before the deadline expires (and it’s no fun being sued long after you have forgotten all about the claim). Whether your claim was filed, its priority, the sequence of payments, and whether you did business with the debtor after the case was filed may provide defenses and set-offs against these avoidance actions. But if you have waived your right to payment through the case and given up any leverage you may have had by ignoring the case, then you may be damaging your defense and your position in the long run.

No one likes not getting paid, but be prudent in your business decisions on how to save money. With bankruptcy, a few minutes spent with a knowledgeable bankruptcy attorney can often give peace of mind in an otherwise complicated proceeding – and save you money in the long run.