A commercial litigation lawyer often must deal with clients who may need to collect a debt from one of their own clients who have filed bankruptcy. In many cases, a company may simply decide to write off the loss and not take legal measures to collect on the debt. However, most commercial litigation lawyers will advise clients that they should not simply write off the debt, but may find that collection is not only possible, but a profitable option as well.
Complying with Bankruptcy Order
The first important factor when it comes to dealing with a client who is in bankruptcy is to stop all collection efforts once you have received notice from the bankruptcy court. When someone files bankruptcy, the court issues an automatic stay that requires all creditors to cease any and all debt collection efforts. The first step is to note that the account is in bankruptcy court and stop issuing any demands for payment. If you use a collection agency, inform them as well and require that they also stop attempting to collect the debt in any way. This includes phone calls, letters or any other type of contact with the client.
Review the Court Paperwork
Once court documents have been received, review them carefully. The documents will provide information on:
- Property owned by the debtor that is part of the bankruptcy proceeding
- Property the debtor believes is exempt from seizure in bankruptcy
- List of creditors with notations on whether the debt is secured by collateral or unsecured
Knowing the property that may be available to pay off the client’s debts is helpful as it allows you to make an informed decision on whether you will be successful in receiving payment on the debt. Because many creditors do not pursue collection of debts that are in bankruptcy, don’t be concerned with the number of creditors listed.
Attend the Creditor Meeting
The court will require the debtor to attend a creditor meeting. It is at this meeting that anyone who is owed a debt can question the debtor regarding their claim. This is your opportunity to ask about any property available to resolve the debt and provide information about your claim to the court. Very few creditors attend these types of hearings, so it is normally a fairly quick process.
File Proof of Claim
If, after reviewing the property available, you and your commercial litigation lawyer feel that there is the possibility of successfully collecting on the debt, you will need to file a proof of claim. This is normally a short, one-page form that proves your claim is valid to the court. It is possible the debtor will oppose your claim, which means you and the debtor will be required to attend a hearing. Failing to file a claim may eliminate your right to collect during the bankruptcy proceedings.
Attend the Bankruptcy Hearing
Another bankruptcy hearing may be scheduled, depending on the type of bankruptcy that was filed. Under Chapter 11, debtors may be asked to create a reorganization and repayment plan that must be approved by the courts. Under Chapter 13, the court may hold a hearing to approve, deny or modify a proposed repayment plan. It is at this hearing that you can object to the debtor’s plan if you feel it is inadequate. Chapter 7 bankruptcy may be more difficult as the debtor may have limited property that can be sold to repay the debts owed. This could mean you will only receive a portion of the debt, if any at all.
After the hearing, the entire matter falls into the court’s hands. A trustee will administer the bankruptcy and determine the distribution of assets. Do not contact the debtor if you have questions, but direct any you have to your commercial litigation lawyer or the trustee. If you contact the debtor in any way, it could forfeit your claim to any payment. In most cases, you will not receive the full amount you are owed, but only a portion of the debt. This process can take several months and, if you learn that the debtor has obtained additional assets while the matter is in bankruptcy court, such as winning the lottery or getting a substantial raise, you can contact the trustee to inform them of the change in the debtor’s circumstances.
Hire a Commercial Litigation Lawyer
If you have a client who owes you money and learn that they have filed bankruptcy, it is critical to hire a commercial litigation lawyer who will represent your interests in court. A commercial litigation lawyer will protect your interests and not the interests of your debtor, which is why it is crucial to discuss the case with them as soon as you learn your client has filed for bankruptcy. Contact Snellings Law LLC today to learn how they can help you collect on a debt even if the person who owes you has filed bankruptcy. Call them at 973-265-6100.