Someone Who Owes You Money Files For Bankruptcy – What Do You Do Now?
Your company may not be near bankruptcy, or even thinking about bankruptcy. But then it happens—a company or person you are suing files for bankruptcy. What do you do now?
If a company or person doesn’t pay you, or you have a contractual dispute with a company that you are suing, it’s not unusual to find yourself on the opposite (non-filing) end of a bankruptcy. Companies and people have financial troubles, and if they haven’t paid you or for your services, there’s a chance that they haven’t paid a number of people, and bankruptcy will be coming.
No matter where you are in the collections process—pre-suit and just sending collection letters, in the middle of a lawsuit, or perhaps you are collecting on a judgment you have already obtained—you will eventually get notice of the other side’s bankruptcy.
The Automatic Stay
When a bankruptcy is filed, an automatic stay goes into place. This applies to you, as someone who is trying to collect on a debt. All collection activities, (or any lawsuits of any kind) must stop against the other side, immediately. Even non-monetary collections must stop (for example, refusing to provide a document to someone unless they pay a debt, would be a violation of the automatic stay).
Your company should have a procedure or protocol for dealing with others who go bankrupt, if you are in an industry that sues often.
Accidents, like computer systems that automatically spit out and generate collections letters, or accidental failures to stop in-place wage garnishments, are not excuses for violating the bankruptcy automatic stay. Your business can and will get in trouble, often with costly sanctions penalties, for any collections activities that take place after the automatic stay.
You can request that the court lift the automatic stay, allowing you to continue collections, but you’ll need to have a good reason or excuse.
What Happens to the Debt?
The bankruptcy will, in most cases, wipe out whatever the other side owes to you. Some exceptions are debts that are secured by property, and debts that aren’t dischargeable. Your business law attorney can tell you if your claims or lawsuits fall into these categories. If so, you can put in a proof of claim with the bankruptcy court, to preserve your right to make a claim on any excess assets that the debtor may have.
Don’t Take Pre-Bankruptcy Payments
You also should be wary about taking payments from others who owe you money when you know they will be filing for bankruptcy shortly.
Often, a debtor may say “I’m filing for bankruptcy, but want to make sure I take care of my debt with you first,” or something like that. Maybe the debtor is a friend or colleague that wants to make sure you’re “taken care of” so your debt isn’t wiped out in the upcoming bankruptcy.
Don’t do this—it is a preferential transfer, and the bankruptcy trustee can sue you for the money paid to you.
Call the West Palm Beach commercial litigation lawyers at Pike & Lustig to help you deal with collections, lawsuits, and other commercial litigation and business law related matters.