Despite the COVID economy, bankruptcy filings have decreased over the past year. This is likely due to the government aid packages. However, it is possible that the number of bankruptcies will increase substantially when the government programs expire. In the event a customer files bankruptcy, there are several things a creditor needs to know.

There are several types of bankruptcies, and they offer different protections for debtors and different outcomes for creditors. Understanding which type of bankruptcy has been filed and whether there are assets and possible payments to creditors can help a creditor determine the amount of resources to expend on monitoring and participating in the bankruptcy. For example, it might not make sense to spend any significant time and money on an individual’s no asset Chapter 7 case, but a creditor may want to be very active and involved in a Chapter 11 reorganization where the creditor could recover some or all of the debt.

A creditor should pay attention to all bankruptcy deadlines, including the proof of claim deadline, the deadline to object to discharge, and the deadline to object to the reorganization plan. Missing deadlines will cause the creditor to miss out on its opportunity to have input into what happens in the bankruptcy and to lose its chance to recover any funds through the bankruptcy.

There are aspects of bankruptcy that can cause problems for creditors. Two common issues involve the bankruptcy stay and preferential payments. A creditor who continues collection efforts after a bankruptcy has been filed is in violation of the stay and can be sanctioned, so it is important not to ignore a bankruptcy notice. Additionally, the court can recover preferential payments, which are payments made by the debtor within the 90 days prior to the date the bankruptcy petition was filed. Note that there are defenses that can protect the creditor from having to pay back all of the money.

Navigating a bankruptcy as a creditor can be challenging. If you have questions or would like to discuss the details of a customer’s bankruptcy, please do not hesitate to give us a call.