We have written in the past on what to do when a customer files for bankruptcy and how to give yourself the best shot of getting paid, but how, if at all, are your decisions affected by the type of bankruptcy your customer chooses? There are many different types of bankruptcy, but we will focus on the three that cover almost all business bankruptcies: Chapter 7, 11, and 13.
Chapter 7 Bankruptcy
Chapter 7 is what most people tend to think of when they think of bankruptcy. If a company files for Chapter 7, a trustee is appointed by the court to liquidate all of the companies assets and distributes the pay amongst the creditors. It is important to note that once a business completes Chapter 7 bankruptcy it will receive a debt discharge that prevents anyone from attempting to collect on the debt further. This makes sense, as Chapter 7 requires the business to shut down and relinquish all assets. You may still attempt to collect on debt, however, if the owner or another member of the company signed a personal guarantee. The trustee may also attempt to claw back any payments made right before bankruptcy was filed. These may be considered preferential debt payments, an attempt by a company to give some creditors preference over others.
Chapter 11 Bankruptcy
A business will file for Chapter 11 bankruptcy if they feel like there is still hope that the enterprise will succeed. With Chapter 11, a business is allowed to continue operating, but the company must undergo a comprehensive reorganization plan under a court-appointed trustee. Once a plan for how to pay creditors has been made, the creditors will vote on it and if the courts find it fair and equitable it will be approved. An important thing to note is that these plans can take over a year to fully work out and typically spread out payment over many years. So you may end up getting paid, unlike Chapter 7, but it could take a substantial amount of time. Preferential debt payments may also occur with this type of bankruptcy.
Chapter 13 Bankruptcy
Chapter 11 and 13 are very similar, but chapter 13 is typically associated with personal bankruptcy. It may, however, be used if the business in question is a sole proprietorship. In this case, the individual would file a repayment plan with the court. This plan would be based on their income, assets, and debt. From a creditors point of view, the result is similar, except for the fact that you have less control over the payment plan created.
Overall, most business will file either Chapter 7 or Chapter 11. They will file for Chapter 7 if they believe the business is dead and there is no hope of continuing and they will file for Chapter 11 if they believe the business can be salvaged. From a creditors point of view, they both have their positives and drawbacks. Chapter 7 allows you to get paid quicker and easier, albeit a lesser amount. Chapter 11 typically means a larger payment, but the headaches and time involved can be a pain. The most important thing is to stay on top of things and to make sure you are following all of the steps you need to get paid.