What to do When a Client files for Bankruptcy?

We live in a world where people are constantly confronted with bankruptcy and debt problems. Wanting a fresh start and relief from the courts they decide to file for bankruptcy and solve their financial problems.

But what happens to the other side of the story, with the creditors who gave you money when you needed it most. The situation is getting complicated for them also and detailed steps need to be taken so that the debt will be returned or at least some part.

Unfortunately, with the economic state of the country, bankruptcy filings are becoming increasingly more common. Because of this, one day surely you will receive mail informing you that your client filed for bankruptcy. So what happens next? Which steps do you take to recover at least some of the money back? How to manage this new situation that has put your company at risk? Will you be able to negotiate some resolution in your favor?

What-to-do-when-a-client-files-bankruptcy

Courtesy: WikiHow

This process can be costly, but not following the rules of the bankruptcy process can cost you significantly more. Here we will explain the types of bankruptcy, the rules of the process and the steps to take that will leave you out of trouble and help you get some or all of your money back.

 

Here are guidelines to help you go through this process and give you a better chance of getting paid the money:

  • Stop contact with the debtor. After the debtor files for bankruptcy, you need to stop your collection of debt activities.  If you don’t do this you are exposing your company, and you can actually be sued. If you were in the process of suing the client, the suit will be stayed until the bankruptcy is complete. You can contact an attorney or court appointed trustee to discuss all of your options when it comes to how your debt will be handled through the bankruptcy process.
  • Type of bankruptcy. If your client has filed for Chapter 7 you need to know that the debtor’s assets will be distributed equally between the creditors. There’s a system in the order of payments, though, so if there are a number of secured creditors or priority unsecured creditors and not enough to go around, you might not get paid at all. Under Chapter 13, the debtor pursues a court-approved plan to pay back all groups of creditors. It is likely that you will get paid some, but over time. If a Chapter 11 reorganization, your business may have longer to wait, but is more likely to get back what is owed. The average case takes four to seven months to submit and approve a repayment plan.
  • File a proof of claim. Check the deadline for filing a claim and write what you are owed and why.  If you don’t do this action in time you will lose any chance you have of getting paid. This is a form used to inform the debtor and the trustees that declare your right to a share of the distribution. You’ll need to include the bankruptcy case number, amount owed, the basis for your claim and information about whether the debt was secured or unsecured.
  • Do a cost benefit analysis. You will need to assess whether it is even worth your time or should you simply take the loss. In most cases, small companies or consumers filing bankruptcy aren’t going to have tangible assets that the trustee can sell and then distribute to any and all creditors.
  • Review any proposed repayment plan. If a debtor has a repayment plan he will send it to all the creditors for review. For the plan to be approved the debtor needs to have consent of more than 50 percent of the creditors. You need to have a close look at the disclosures and to review it. The plan should detail exactly how much the debtor plans to pay you. Those creditors who hold a greater share of the debt have proportionally greater vote count.
  • Get in line and wait. Once a bankruptcy is complete, debts are paid back in an order set up under federal law. Secured debts such as loans are paid before unsecured claims like debts for goods or services. Typically, if you do get paid back, it will be around 10 percent of what you were originally owed.
  • Attend the Creditors Meeting. Find out when the 341 meeting is scheduled and be there. This is a meeting with the debtor, the trustee and creditors. At this meeting, the debtor explains why the bankruptcy occurred and how debts will be settled. Now is your chance to ask the debtor some questions. If you think that the debtor is committing any sort of fraud, you can address it at this meeting. Also you can make an objection to the repayment plan if you think it is not fair and correct.
  • Protect Your Business Upfront. You can get a deposit, third-part guarantee or collateral from your clients. You can use a Uniform Commercial Code 1 form with your state or county to insure your money. The form will create a security interest in the personal property that is tied to the debt, and this places you at a higher priority than unsecured creditors.
  • Conduct Credit Checks. Before you go into business with a company do a background check or a credit check if it’s a consumer.
  • Take a look at the Public Access Court Electronic Records. You can see for yourself what is going on with the specific bankruptcy case and see how the process is going.

Even with these guides in mind you should always have an experienced bankruptcy lawyers by your side to take you through this process and recover what is still there for recovering. Don’t hesitate to contact an attorney or to schedule a consultation.

About Marc Aaron Goldbach

Marc Aaron Goldbach has worked tirelessly to develop a successful bankruptcy and civil law practice for clients located throughout Los Angeles County. Mr. Goldbach at GoldBach Law Group have represented a wide array of small businesses and individuals with 100% client success rate. Mr. Goldbach is always available to answer questions and willing to guide you through the entire legal process.
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