Protecting Creditors in Chapter 11 Bankruptcy: Top 3 Takeaways

If you’re a creditor faced with customers who have filed for chapter 11 bankruptcy relief, you may be wondering how you can protect your company’s interests and ensure you see repayment for amounts that you’re owed by the customer. 

 

Fortunately, there are legal remedies at your disposal. In our recent webinar, Protecting the Creditor’s Interest in Chapter 11, shareholder and chair of the Bankruptcy Practice Group, Scott Fink, and shareholder Geoff Peters discuss the proper steps and precautions to take when your customer files a chapter 11. They also answer attendees' top questions with their combined 52 years of experience in bankruptcy!

 

 

With bankruptcies anticipated to be on the rise in the coming months, this is one session you don’t want to skip! Key topics include: 

Available to both individuals and businesses, a chapter 11 filing is a reorganization with no debt limits. Unlike chapter 7, which liquidates assets not protected by exemptions, the debtor doesn’t have to sell off all of their assets in a chapter 11 bankruptcy. If the debtor is a business owner, he or she can remain in control of business operations throughout the duration of the bankruptcy and afterward, if successful.

 

Also, it’s important to keep in mind that a chapter 11 filing is a much more complex process because of the large and varied number of creditors and debts involved. The high volume of complex pleadings filed and the need to monitor those filings to determine if they impact your claims in the case. The proposal of a bankruptcy plan often involves extensive negotiations with the secured debt holders and creditors involved in the proceedings. 

 

In chapter 11, an individual debtor or corporation has 120 days to file the bankruptcy plan. This is called the “exclusivity period,” and only the debtor can file a plan within those first 120 days. Afterward, a creditor can propose their own plan. 

 

In a corporate filing, the business also includes a disclosure statement, which includes background on the case, why the enterprise is in bankruptcy, and projections going forward. A creditor can review this statement to understand the state of the business and determine whether or not it wishes to vote in favor of  the plan or oppose it. 

 

There are some exceptions to the bankruptcy code for small businesses. As part of the Small Business Reorganization Act (SBRA), bankruptcy was made into a faster, more affordable process for small businesses. As a result, there is no exclusivity period because only the business files a plan. No disclosure statement is necessary either. 

 

When debtors file for bankruptcy, certain payments made in the days before the filing are subject to demands that the payments be turned over to the bankruptcy trustee or, in some cases, returned to the debtor. These payments are referred to as “preferences.” 

 

Most often, preference demand targets are creditors. The primary purpose of a preference demand (also called a “preference claim”) is to promote and attempt to uphold the equality of the distribution of a debtor’s assets among its creditors. However, it often has the effect of unfairly penalizing creditors who continued to do business with a financially distressed debtor. The preference period is 90 days prior to the bankruptcy filing for typical creditors.

 

While it may seem like any creditor doing business with a troubled debtor will be forced to return funds received within 90 days of the bankruptcy, there are several available defenses under the Bankruptcy Code. However, the most important thing you can do when receiving a preference demand is to contact your attorney. An experienced attorney can help to reduce the amount owed or eliminate any liability entirely. A thorough knowledge of preference law, defenses, and procedures provide the foundation for preference defense. Moreover, failure to pay attention to any lawsuit could result in a default judgment.

 

If you have additional questions on this topic, please reach out to our shareholders, Scott Fink or Geoff Peters at any time.