What steps will creditors need to take during this process to help ensure success?
Aside from filing a proof of claim, the most likely involvement that a creditor is going to have in a business bankruptcy case is if they are asked to repay a preferential payment. The bankruptcy code allows the trustee to recover certain kinds of payments made within 90 days before the bankruptcy is filed.
Creditors should think defensively and gather up all the records of the business dealings they’ve had with the debtor over at least the last year before the bankruptcy was filed. They should look for any information about concealed assets or property transfers that the debtor made. For example, if the creditor learns that the principal of the company repaid a large debt to a family member within a year before the bankruptcy was filed, the creditor should bring that information to the attention of the bankruptcy trustee and the court. The trustee may be able to get that money back.
If the debtor has committed some sort of wrongdoing, the creditor could take action to get a court order barring the debtor from getting a discharge. If there’s no discharge, then the creditor could still try to collect the debt.
What expectations should creditors have of the outcome?
Be realistic about the likelihood of a small dividend or no dividend. Take a look at the business you’ve done with the debtor and be prepared to defend yourself if it looks like you’ve been paid a significant amount of money by the customer before the bankruptcy was filed, because the trustee may try to recover it.
You do need to be a little careful here because the discharge and objections to discharge are really significant if the debtor is an individual. A corporate debtor that is being liquidated in a bankruptcy proceeding and has ceased operation does not actually get a discharge by law. There are obviously a lot of proprietorships out there and you could very well have a customer who’s an individual.
Work with an experienced bankruptcy lawyer to learn whether you are in a class of creditor with special rights under the bankruptcy code that will give you some additional protection.
Larry McClatchey is director and chair of the Creditors’ Rights & Bankruptcy practice at Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5463 or [email protected].
