In the economic fallout caused by the COVID-19 pandemic, bankruptcy filings are destined to rise as more debtors seek the broad protections provided by bankruptcy. As a result, many businesses and individuals will receive notices from bankruptcy courts. A bankruptcy notice is legal notice that you or your company may be owed money by a debtor who has filed for bankruptcy. Upon receiving a bankruptcy notice, you are now expected to comply with each deadline and restriction imposed by the bankruptcy court. Consequently, businesses must understand the impacts of bankruptcy and take appropriate actions to protect their interests upon receiving notice. Although the nature of a given bankruptcy and the protections available will vary in each case, several common questions should be considered by any business receiving a notice of bankruptcy.
First, a business should carefully read the notice to determine who the debtor is and review their relationship with the debtor to determine if they are owed money or may be required to perform a service or provide goods to the debtor. Understanding the amount owed by the debtor, and how the debtor is related to your business, will assist you in determining the best course of action to protect yourself and to maximize your ability to seek payment. In situations where the debtor and creditor maintain an existing business relationship, a creditor should question whether he or she will be paid for the provision of services or goods to a debtor. In some cases, such as a debtor-in-possession, a creditor may receive payment for goods and services despite the bankruptcy. However, in other situations, a creditor’s right to payment may be extinguished. Importantly, a creditor is not left without legal protection. For example, a creditor may file documents with the bankruptcy court compelling a debtor to assume or reject a given contract or seek “adequate protections” from the debtor. Before engaging in business with a debtor, a creditor should consult with legal counsel to determine whether a contract must be performed, and what bankruptcy protections can be obtained to maximize payment.
In addition to the practical considerations of whether a business will be paid by a debtor, businesses must also be mindful of their efforts to collect debts after receiving a notice of bankruptcy. Once a debtor has filed for bankruptcy, an “automatic stay” is put in place by the bankruptcy court that prevents creditors from attempting to collect any debts owed to them by the debtor. This stay may affect your rights to stop performance, foreclose on real estate, or initiate legal proceedings against the debtor. Not only is the application of the automatic stay complex, but violation of the stay may result in significant penalties, which can include fines and contempt.
If you receive a notice from a bankruptcy court, it is essential to consider whether you are owed money by the debtor, your relationship to the debtor, and your ability to obtain payment or protection through bankruptcy proceedings. The attorneys at Rose & deJong have experience with all aspects of bankruptcy, and can help your business navigate complex bankruptcy considerations while maximizing payment.