When Businesses File for Bankruptcy
Filing for business bankruptcy provides business owners with a debt relief option and allows them to restructure their business. Among the bankruptcy options available to business owners are Chapter 7 and Chapter 11.
Chapter 7 vs. Chapter 11
Chapter 7 bankruptcy allows business owners going through financial distress to eliminate most of their general unsecured debts and achieve a financial clean slate. The court will appoint a trustee to oversee the bankruptcy case. The trustee will collect and sell the business’s nonexempt assets and use the proceeds from the sale to pay off its creditors. Creditors do, however, have the right to be heard regarding the liquidation of the nonexempt assets of the business.
Conversely, Chapter 11 bankruptcy or "reorganization bankruptcy" helps businesses reorganize their affairs, assets, liabilities, and debts. By filing for Chapter 11, the business proposes a structured repayment plan to the creditors. The business owner will be able to pay back their debts using future revenue while keeping the business afloat. Both the court and creditors must approve the proposed repayment plan.
What Creditors Must Do
When a business files for bankruptcy, creditors must:
- Cease any collection effort, including phone calls, text, demand letter, email, billing, and any pending lawsuit against the debtor.
- File a proof of claim with the bankruptcy court before the specified deadline.
- Reach out to the court-appointed trustee and provide the necessary information.
- Determine whether your claims are nondischargeable and secured by the debtor's assets
- Continue monitoring the progress of the debtor's bankruptcy case.
Filing a Claim with the Bankruptcy Court
As mentioned earlier, you are required to file a proof of claim with the court upon receiving a bankruptcy notice from the court clerk. You must ensure that you file your claims before the deadline because deadlines are stringently enforced in every Texas bankruptcy case.
Right to Secured Claims
As a creditor, if your debts are secured by the debtor's assets, you will have rights depending on a mortgage, deed of trust, a security agreement on personal property (such as a car), or a judgment lien. As such, you are entitled to receive a value equal to the collateral or the debt, whichever is less. You can also seek to recover attorney fees and interests on such property.
Right to Unsecured Claims
In contrast, unsecured creditors do not have similar rights to secured creditors. Generally, unsecured debts (such as credit card debts and medical debts) are given the lowest priority. Unsecured creditors can:
- File a proof of claim
- Attend the first meeting of creditors
- File objections to the bankruptcy discharge
- Review the bankruptcy papers that were filed
Unfortunately, most unsecured debts will eventually be discharged under Chapter 7 bankruptcy.
Reclamation can be described as the right of a seller to take back any goods sold on credit to an insolvent buyer. Under 11 U.S. Bankruptcy Code Section 546(c)(1), a vendor is within their rights to "reclaim" goods delivered to the insolvent buyer (the debtor) if the debtor received such goods while insolvent and within 45 days of the petition date. A seller who intends to reclaim such goods must make a written demand for reclamation.
Work with an Experienced Attorney
Business bankruptcy or insolvency can threaten your interests as a creditor, but you don't necessarily have to quit after getting a notice that your debtor has filed for bankruptcy. Hiring an experienced business bankruptcy creditor rights attorney is crucial to help protect your rights and seek to recover the debt you’re owed.
At Uloth, P.C., I have devoted my career to providing knowledgeable guidance to individuals in the legal matters of creditors' rights and debt collection in bankruptcy. As your legal counsel, I will review all of the details of your case and explore your available options to recover the debt. I will also investigate whether your claims are nondischargeable, help you file an adversary proceeding, and continue to monitor the progress of your case. I will dedicate every available resource at my disposal to help you pursue a judgment in your favor and take further action to help you recover your money.