With the current economy, more and more people are filing bankruptcy. If you are a bank or business owner then it is likely you have had to deal with a client or customer bankruptcy filing at least once. If you haven’t, you probably will have to in the months to come. So what should you do when a customer or client files bankruptcy? What are your rights as a creditor? Should you continue to transact business with the client?
In October 2006 congress significantly revamped the bankruptcy laws. This was supposed to help prevent people from abusing the bankruptcy process. Instead, with the state of the economy, the changes have in fact complicated the process and are hurting both debtors and creditors by costing both more time and more money. The revised bankruptcy code does give creditors some additional tools, which may be available to you depending on how you conduct business with customers and clients.
The first thing you should do is contact an attorney. Bankruptcies generally move at a faster pace than regular court actions. First and foremost, it is important that you correctly and timely file a proof of claim. You are going to be held to the information you supply in the proof of claim form. Filing a form with the incorrect claim could damage your position. Not filing a proof of claim form could prevent you from taking part in any payments to creditors. In filing a proof of claim, it is important that you know what portion of your claim is unsecured, secured, and classified as priority. This can mean the difference between getting paid nothing, something, or all of your claim. A copy of the form, known as Form B10 can be found here.
There will be a meeting of creditors (aka a 341 meeting) scheduled. It is a meeting conducted by the bankruptcy trustee to review the debtor’s assets, debts, and general financial condition. Should you attend? It depends on various factors and should be discussed with an attorney. In many cases creditors do not attend this meeting. However, in certain cases valuable information can be learned. By raising certain questions the trustee may require the debtor to produce additional information or uncover the true value of certain assets that could help you recover some of the debt owed to you.
If in certain cases the debtor may have received goods or services from you within 90 days of the bankruptcy filing, it may be possible to recover those goods or force a debtor to pay for the full value of the services and or goods provided. Each situation should be evaluated carefully.
In many cases the best way to protect your business from client or customer bankruptcy is to proactively make very small adjustments to your daily business practices and to use certain language in contracts. Many businesses are reluctant to pay for an attorney to review bankruptcy matters or daily business practices. The belief is that they will be throwing good money after bad if they hire an attorney regarding bankruptcy matters. The truth is that a business can save a significant amount of money with small proactive business practice adjustments and then working with an attorney to ensure fair treatment of their claim in any bankruptcy matters.
Feel free to contact our office to discuss your business practices and bankruptcy loss exposure.