Few things are more frustrating for a business owner than learning that a customer who owes you money has filed for bankruptcy. Payments stop, collection calls must cease, and the process suddenly shifts from business to law. While bankruptcy can seem like the end of the line, there are still meaningful steps you can take to protect your rights and improve your chances of recovery.
The first step is to stay calm and gather information. Carefully review the bankruptcy notice—it will tell you the type of bankruptcy, critical deadlines, and where to send any filings. Just as important, stop all collection efforts immediately. Continuing to demand payment could violate the automatic stay under 11 U.S.C. § 362, which halts all collection actions once a bankruptcy petition is filed.
Next, consider whether to file a proof of claim under 11 U.S.C. § 501 and Federal Rule of Bankruptcy Procedure 3001. This document notifies the bankruptcy court how much you are owed and why. Filing may help you recover part of your debt, but it also carries risks and legal consequences. By filing a proof of claim, you submit to the jurisdiction of the bankruptcy court. This can mean giving up your right to have disputes decided by a jury and allowing the bankruptcy court to enter final orders and judgments against you. For some creditors, especially those with smaller or unsecured claims, it may not be worth the effort and expense.
Certain creditors have special protections under bankruptcy law:
- Secured creditors—those with collateral such as equipment, inventory, or property—have rights to their collateral or its value under 11 U.S.C. § 506.
- Landlords may assert claims for unpaid rent under 11 U.S.C. § 502(b)(6) and may reclaim leased property in some situations.
- Critical vendors—suppliers essential to the debtor’s ongoing operations—may be paid sooner under court-approved “first-day motions.”
- Suppliers who delivered goods within 20 days before the bankruptcy filing may have a priority claim for the value of those goods under 11 U.S.C. § 503(b)(9).
Creditors should also be aware of potential “clawback” or preference claims under 11 U.S.C. § 547. Payments a debtor made to you within 90 days before filing bankruptcy may be challenged as “preferential transfers” and sought to be recovered by the bankruptcy trustee. However, several defenses exist—such as payments made in the ordinary course of business, contemporaneous exchanges for new value, or when you extended additional goods or services after the payment. These defenses can significantly reduce or eliminate liability, but they require timely and strategic legal action.
Because every bankruptcy case is different, it’s crucial to consult a lawyer experienced in creditor rights before filing any documents or taking action. A qualified attorney can help you weigh the benefits and risks, protect your claim, and avoid costly missteps.
Bankruptcy doesn’t have to mean a total loss—strategic, informed decisions can make all the difference.
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