Reactions of creditors in a Chapter 11 bankruptcy

If you own or run a business, then it is likely at some point in your career that you’ll receive notice that one of your customers has filed for bankruptcy protection. The notice you’ll receive will come in the mail from the Bankruptcy Court, and will typically come shortly after the case is filed. What next?

First and foremost, it is a violation of the automatic stay in bankruptcy for you to attempt to collect on any debt you are owed from the moment before the bankruptcy was filed. Your gut reaction to a customer’s bankruptcy filing (assuming you’ve never been through the process) will likely be panic and displeasure, since bankruptcy means that they’re getting stuck with the tab, right? Not necessarily. The most important factor is the Chapter under which the bankruptcy was filed (7, 11, and 13 are most common). While a Chapter 7 filing may mean a lesser likelihood of recovery for you (a creditor) in a case, a Chapter 11 or Chapter 13 filing often leads to creditors being paid back a large portion or in full, so long as they know the rules to play by in bankruptcy court. If you and the debtor’s other creditors refuse to do business with the debtor solely because they’re in bankruptcy, it is likely the debtor will not survive. However, if the debtor is moved to a COD policy for all future orders, thereby allowing the debtor to operate their business and hopefully reorganize, where’s the downside to you as a creditor? Not only are you earning future business and receiving cash on delivery, but you’re also helping the debtor reorganize, which will hopefully bring a better payout on your claim than a straight pro rata share in the liquidation of the debtor’s assets. If you just shipped to the debtor you may want to also consider reclamation.

An experienced commercial bankruptcy attorney can help navigate the unfamiliar waters of Bankruptcies, and help you receive the largest payout possible for your claim.

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