WHAT TO DO WHEN YOU RECEIVE A BANKRUPTCY NOTICE
By Attorney Randall J. Andersen
November, 2010
By Attorney Randall J. Andersen
November, 2010
Disclaimer: The information contained on this page is not legal advice. The information provided on this website is for general informational purposes and is not necessarily updated to account for changes in the law. You should consult with an attorney for legal advice regarding your individual circumstances.
Electrical contractors occasionally receive bankruptcy court notices indicating that a customer or contractor with whom they have done business has filed a petition for bankruptcy. What should you do when a bankruptcy notice is received? The answer will depend on the circumstances of your relationship with the debtor. Is the debtor a former customer who owes a relatively small balance? Or a large balance? Or is the debtor a contractor or customer with whom you have a current relationship? Do you have collateral or lien rights?
When a bankruptcy petition is filed (regardless of whether it is under Chapter 7, 11, 12 or 13), an “automatic stay” goes into effect under Section 362 of the Bankruptcy Code. The “automatic stay” is a federal law which prevents creditors from taking any further action to collect the debt. However, the creditor may still have the right to file a construction lien notwithstanding the filing of the bankruptcy petition, but be sure to consult with your attorney before filing a lien when a bankruptcy petition has been filed.
Normally the bankruptcy notice will tell you whether or not to file a proof of claim. Some bankruptcy notices indicate that you should not file a proof of claim unless you receive a subsequent notice directing you to do so. Notices indicating that creditors should not file a proof of claim are sent out in bankruptcy cases that are expected to be “no asset cases.” Creditors are directed not to file a proof of claim because it is expected, at least initially, that there will not be any distribution to creditors. This may change after the trustee assigned to the case reviews the debtor’s situation, in which case a subsequent notice will be sent out directing creditors to file a proof of claim.
When filing a proof of claim, the creditor must indicate whether the claim is secured by collateral, such as a real estate mortgage or a security agreement and UCC financing statement, or a lien against a vehicle, etc. Some claims qualify for preferred treatment in the bankruptcy. For example, if a claim is based on the delivery of goods within 20 days of the date that the bankruptcy petition was filed, and if the delivery of goods occurred within the ordinary course of the debtor’s business, then it is possible to have the claim classified as an administrative expense entitled to priority over other claims. However, the creditor will need to file a motion to have its claim receive the preferred treatment in the bankruptcy proceeding.
In the case of a debtor who is a party to an unexpired lease or outstanding contract with the creditor, there is a period of time during which the trustee or debtor has the right to assume or reject the lease or contract. The time period depends on the type of bankruptcy proceeding. If the debtor does not assume the lease or contract, the creditor will ordinarily have the right to file a claim for damages associated with the premature termination.
Creditors in certain circumstances can have their claims declared “nondischargable” by the bankruptcy court. To do so, the creditor must bring an “adversary proceeding.” The bankruptcy judge will then determine whether the debt is discharged after notice and a hearing. There are a variety of circumstances in which a debt can be declared nondischargable. Examples include claims that arise as a result of fraud or credit which was obtained by the debtor under 2 false pretenses. The bankruptcy notice will indicate the date by which the creditor must take action to have its claim declared nondischargable.
The bankruptcy notice will also let the creditor know when the “meeting of creditors” is scheduled. The phrase “meeting of creditors” is a bit of a misnomer. It is actually a meeting where the bankruptcy trustee asks the debtor questions concerning the bankruptcy schedules. If any creditors are present, they are also given an opportunity to ask questions of the debtor.
The filing of a bankruptcy petition can have significant consequences for the creditors and parties who deal with the debtor. Failure to properly prepare and file a proof of claim can result in the creditor waiving its right to receive a distribution from the bankruptcy estate. A bankruptcy filing gives rise to various rights and responsibilities of creditors, and therefore it is prudent to check with your attorney whenever a notice is received from the bankruptcy court.
When a bankruptcy petition is filed (regardless of whether it is under Chapter 7, 11, 12 or 13), an “automatic stay” goes into effect under Section 362 of the Bankruptcy Code. The “automatic stay” is a federal law which prevents creditors from taking any further action to collect the debt. However, the creditor may still have the right to file a construction lien notwithstanding the filing of the bankruptcy petition, but be sure to consult with your attorney before filing a lien when a bankruptcy petition has been filed.
Normally the bankruptcy notice will tell you whether or not to file a proof of claim. Some bankruptcy notices indicate that you should not file a proof of claim unless you receive a subsequent notice directing you to do so. Notices indicating that creditors should not file a proof of claim are sent out in bankruptcy cases that are expected to be “no asset cases.” Creditors are directed not to file a proof of claim because it is expected, at least initially, that there will not be any distribution to creditors. This may change after the trustee assigned to the case reviews the debtor’s situation, in which case a subsequent notice will be sent out directing creditors to file a proof of claim.
When filing a proof of claim, the creditor must indicate whether the claim is secured by collateral, such as a real estate mortgage or a security agreement and UCC financing statement, or a lien against a vehicle, etc. Some claims qualify for preferred treatment in the bankruptcy. For example, if a claim is based on the delivery of goods within 20 days of the date that the bankruptcy petition was filed, and if the delivery of goods occurred within the ordinary course of the debtor’s business, then it is possible to have the claim classified as an administrative expense entitled to priority over other claims. However, the creditor will need to file a motion to have its claim receive the preferred treatment in the bankruptcy proceeding.
In the case of a debtor who is a party to an unexpired lease or outstanding contract with the creditor, there is a period of time during which the trustee or debtor has the right to assume or reject the lease or contract. The time period depends on the type of bankruptcy proceeding. If the debtor does not assume the lease or contract, the creditor will ordinarily have the right to file a claim for damages associated with the premature termination.
Creditors in certain circumstances can have their claims declared “nondischargable” by the bankruptcy court. To do so, the creditor must bring an “adversary proceeding.” The bankruptcy judge will then determine whether the debt is discharged after notice and a hearing. There are a variety of circumstances in which a debt can be declared nondischargable. Examples include claims that arise as a result of fraud or credit which was obtained by the debtor under 2 false pretenses. The bankruptcy notice will indicate the date by which the creditor must take action to have its claim declared nondischargable.
The bankruptcy notice will also let the creditor know when the “meeting of creditors” is scheduled. The phrase “meeting of creditors” is a bit of a misnomer. It is actually a meeting where the bankruptcy trustee asks the debtor questions concerning the bankruptcy schedules. If any creditors are present, they are also given an opportunity to ask questions of the debtor.
The filing of a bankruptcy petition can have significant consequences for the creditors and parties who deal with the debtor. Failure to properly prepare and file a proof of claim can result in the creditor waiving its right to receive a distribution from the bankruptcy estate. A bankruptcy filing gives rise to various rights and responsibilities of creditors, and therefore it is prudent to check with your attorney whenever a notice is received from the bankruptcy court.