Receiving information that your customer or tenant has just filed for bankruptcy under Chapter 11 isn’t good news. It can leave you wondering what that means for you and the money you are owed. Questions pop up like: Will you get paid? What if other creditors make claims before you? How do you assert your claim of a debt owed?

All of these questions about what to do when a debtor files for Chapter 11 are understandable and normal. Speaking with a bankruptcy attorney can help you understand your legal rights, role in the bankruptcy process, and possible outcomes.

Key Takeaways

• Once a debtor files for Chapter 11 bankruptcy, an automatic stay is imposed on creditor collection actions.
• Secured creditors can file for exception relief with a qualifying collateral interest.
• Creditors should file a proof of claim before the court’s stated deadline to secure their inclusion.
• Creditors should consider whether to join the committee.
• Review the debtor’s schedule and organization plan for accuracy and feasibility.

The Automatic Stay: What You Can and Cannot Do

One of the most important legal points to understand as a creditor is the automatic stay under 11 U.S.C. § 362(a). Once someone files a bankruptcy petition, they are protected from continued collection efforts. Generally, it prevents creditors from taking collection actions, including:

• Filing their own lawsuit
• Continuing to pursue pending collection litigation
• Enforcing a judgment for collection
• Foreclosure action
• Repossession

The automatic stay can be frustrating for creditors, as it halts the ability to pursue collection when they are still owed money. That doesn’t mean that creditors are powerless or have no legal options of their own. What to do when a debtor files for Chapter 11 is seek relief from the automatic stay. The court may grant relief if certain conditions are met. For example, the court may grant approval to continue certain collection efforts on collateral. The important distinction is seeking court approval before taking an action that would otherwise be unauthorized.

Filing a Proof of Claim

Once the creditor is on notice of the bankruptcy petition, they need to file a proof of claim per 11 U.S.C. § 501(a) with the bankruptcy court. By filing a proof of claim, the creditor is making the court aware of the debt. It needs to include the relevant information, such as the creditor's name, amount owed, reason for the debt, and the debt’s status. It’s also important to review the debtor’s schedule to ensure claim accuracy. If the schedule has inaccuracies, the creditor’s proof of claim can correct any error in amount or status.

When it’s a Chapter 11 bankruptcy case, creditors whose debt isn’t included in the schedule must file their own proof of claim to be included in distributions and voting. Think of it as protecting your legal rights. This can be especially important if you sent the debtor goods within 20 days of the debtor’s filing. Under 11 U.S.C. § 503(b)(9), you may be able to make a claim for administrative expenses for the value of the qualifying goods received by the debtor.

One crucial date to pay attention to is the filing deadline when a debtor files for Chapter 11. This isn’t a set number of days or dates. Instead, the bankruptcy court sets the date, and it’s case-specific. Creditors can check the court docket and notices for the date applicable to their debtor’s filing. Missing the applicable deadline can jeopardize the creditor's ability to participate in the case.

Secured vs. Unsecured Creditors in Chapter 11

One of the first things to do when a debtor files for Chapter 11 is to determine whether you are a secured creditor or an unsecured creditor. If you are a secured creditor, then you have an established legal interest in an asset owned by the debtor. For example, a mortgage lender has a secured interest in the debtor’s house. A vehicle lender has a secured interest in the vehicle the borrower bought with the loan. These lenders take priority when collecting the proceeds from the sale of these assets.

Unsecured debtors generally don’t have this priority treatment because they don’t have an established interest in a named collateral asset. Being able to recover in bankruptcy will depend on the total amount of the debtor’s assets and liabilities. It also depends on where they rank in the list of unsecured creditors. Bankruptcy courts give some creditors priority over others depending on their classification under bankruptcy law.

What Is a Creditors' Committee and Should You Join?

A creditors' committee is a group of the debtor’s unsecured creditors. The U.S. trustee appoints an official committee creditors in a traditional Chapter 11 case. With court approval, the committee may employ attorneys, accountants, and other professionals. The creditors that are willing to participate can perform several functions:

• consult with the debtor regarding case administration
• investigate the debtor's business and financial affairs
• participate in developing the reorganization plan
• advocate for the interests of unsecured creditors as a group.

Creditors should consider the potential benefits and burdens when deciding if they should join a committee. Joining will give a creditor greater access to information and a voice during negotiations when a debtor files Chapter 11. They will have a voice in discussions about the debtor’s schedule. The collective representation gives the group of creditors greater negotiating power than attempting to do so individually.

There are potential burdens to agreeing to participate in the committee. There is a time commitment and potential confidentiality obligations. You will also have a fiduciary duty to the unsecured creditor group instead of only having a duty to yourself. This can result in potential conflict between your own interests and the committee’s interests.

Reviewing and Objecting to the Plan of Reorganization

Don’t treat the schedule or reorganization plan as a formality. Look at the plan as a whole and evaluate whether it seems reasonable and feasible. Read it carefully and pay attention to how the different classes of creditors are treated. These differences will directly impact how much the creditors will receive, when they’ll receive payments, and what form the payment takes.

Each creditor should determine where their claim is classified and their assigned percentage of recovery. Look for payment timing and the treatment of the collateral they have an interest in. Compare this information with how similar creditors are treated. Check for release and discharge provisions.

Any party with an interest in the plan may file an objection. The bankruptcy court must determine whether the statutory requirements for confirmation have been met. Generally, an impaired creditor cannot receive less under the plan than it would receive in a hypothetical Chapter 7 liquidation, subject to the Bankruptcy Code's specific rules.

Speak With an Experienced Bankruptcy Attorney

If you are a creditor wondering, “what to do when a debtor files Chapter 11,” it’s important to be aware that you need to stop certain collection actions and take other legal action. Don’t wait to assert your right to collect by filing a proof of claim with the court. Speaking with a bankruptcy attorney can help you understand your legal rights and potential treatment during the debtor’s bankruptcy case. At Wernick Law, PLLC, we work with creditors to advocate for their financial interests. Schedule a consultation online or call 561-961-0922 to speak with a lawyer about your debtor’s bankruptcy filing.