What Happens to a Debt When Your Client Files for Bankruptcy

11 Dec

bankruptcyYou have gone through the in-house debt collection processes set into place, and maybe even involved a third party collection agency. Then, you receive that letter informing you that your client has filed for bankruptcy. What happens next? Unfortunately, with the economic state of the country, bankruptcy filings are becoming increasingly more common. While you can no longer collect on the debt and all collection activity must stop, you can file a proof of claim and hope that you will be able to recover some portion of the debt.


Type of Bankruptcy Filings:

Chapter 7
For small business owners struggling with debt, Chapter 7 bankruptcy filings are normally the route they take. The bankruptcy results in a total liquidation of the debtor’s funds. Luckily for you, the purpose of a Chapter 7 bankruptcy is to create a fair distribution to creditors of the debtor’s available non-exempt property. Whatever is liquidated gets distributed among the creditors.

Chapter 11
This form of bankruptcy is used for corporations to get creditors off their backs. Filing for Chapter 11 bankruptcy allows the businesses to reorganize and restructure debts in hopes of creating a more viable business operation going forward. Unfortunately this comes at the expense of creditors usually having to significantly compromise on what is owed to them.


What to do:

Proof of Claim

Always file a proof of claim. If you don’t, you have no chance of getting paid. When you receive the bankruptcy filing notice in the mail, check the deadline and the detail of what is owed. The proof of claim form can be found on the US Courts website: http://www.uscourts.gov/FormsAndFees/Forms/BankruptcyForms.aspx.

Know your Chances

Unfortunately, if you have sold the bankrupt client goods or services, you are the low man on the totem pole. Secured claims, such as mortgage holders, take precedence over unsecured claims, such as the goods that you sold to them. Understand that you have less of a chance of getting your money back, but still go through the process. If you don’t file a proof of claim, you have no chance; and some chance is better than none.

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