Collecting Debts or Payments from Bankrupt Customers

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 How to Collect from Bankrupt Customers

It can be extremely frustrating when a customer or client does not pay you back for what they owe you for your business services. Unfortunately, this might be due to the fact that they are having financial troubles. For instance, in some cases a customer may have filed for bankruptcy. Thus, it is important that you understand the rules surrounding a bankruptcy case. 

Once you know the bankruptcy rules, then you can attempt to recover any money that is still owed to you. At the same time, you can avoid running afoul of the rules that protect customers who have filed for bankruptcy.

Additionally, it is possible to sue customers to collect the money that you are owed, but business owners often do not attempt to do this since it can hurt their business reputations. They also might not be able to recover the money at all. This is partly because business owners usually assume that the costs, challenges, and resources associated with attempting to get their money back from a customer who is having financial trouble would not be worth it.

Finally, there may be a different path you can take to collect the money you are owed when a customer files for bankruptcy. The remainder of this article will discuss the steps that a business owner can take if they are trying to recover money from a bankrupt customer.  

What are the Steps for Pursuing a Bankrupt Customer?

It is crucial that a business owner abide by the rules for bankruptcy and the protections that are in place to protect debtors as they work through the bankruptcy process. The following are some steps that a business owner can take as they attempt to recover payments that they are owed from a customer who has filed for bankruptcy. 

  • Comply with an automatic stay: When a customer files for bankruptcy, they must notify their creditors. This triggers an “automatic stay” on some of their possessions and also helps to prevent creditors from trying to collect debt from the customer during the bankruptcy process. In other words, an automatic stay will stop any collection agencies that a business owner might send to collect debts from a customer. 
  • Review the customer’s bankruptcy notice and paperwork: The information that a customer files with the court when declaring bankruptcy should give a business owner a clear idea of whether they should attempt to collect debts and how much of that debt they will be able to collect. 
    • This includes what property will be protected by the bankruptcy process and how much money will be available to pay back any creditors. It will also include a list of all the customer’s creditors and where the business owner ranks among the creditors in that list. 
      • For example, secured creditors like mortgagees will typically hold one of the highest spots on the list of creditors. It should be noted that creditors collect in the order of their status until there are no remaining funds left to pay them off.
  • Meet with the customer at the meeting of the creditors: The meeting of the creditors, also known as a “341 meeting”, is held to allow creditors to question a debtor about their assets and various debts. Although creditors do not usually show up at 341 meetings, they can be used as a mechanism to get a clear idea of a customer’s actual ability to pay a business owner back for what they are owed.
  • Determine whether it is worth continuing to pursue the matter: After reviewing a customer’s bankruptcy information and attending the meeting of the creditors, a business owner should know whether they should continue pursuing the matter and what their chances are of recovering that money.
  • File a proof of claim: If a business owner continues to pursue the matter, they should file a proof of claim with the bankruptcy court, so that they can become a part of the bankruptcy proceedings. In order to file a proof of claim, a business owner will need to provide proof as to how much the customer is still indebted to them.
  • Attend the customer’s bankruptcy hearing: The business owner should follow-up on their claim by attending the customer’s bankruptcy hearing to find out the outcome. 

In addition, a business owner should make sure to follow through with any extra court proceedings or procedures that are relevant to the collection of debts. After a business owner has followed the above steps, it is necessary that they allow the bankruptcy case to proceed and to leave the customer alone for the time being.

What are the Penalties for Failing to Comply with Bankruptcy Rules?

A creditor who attempts to harass a customer and violates an automatic stay can face serious penalties. The customer may report their attempt to collect debt in violation of the automatic stay to the bankruptcy court. The bankruptcy court may then hold the creditor in contempt and consider whether to issue a financial penalty against them for their actions.

Additionally, the customer may also sue the creditor for violation of the automatic stay, which can result in further severe penalties. Depending on the circumstances surrounding the case, a violation of an automatic stay can occur by placing harassing phone calls, repossessing items against a court order, and sending demand letters to the customer’s home.

Does the Type of Bankruptcy Filed Matter?

The type of bankruptcy filed matters when creditors are trying to collect debt. In general, the majority of individuals file for Chapter 7 or Chapter 13 bankruptcy, whereas corporations mostly file for Chapter 11 bankruptcy

When a customer files for Chapter 11 or 13 bankruptcy, they will need to create a repayment plan to make payments to their creditors that will eventually pay off all of their remaining debts. In this instance, a business owner can request to be included as one of the creditors in their repayment plan.

On the other hand, when a customer files for Chapter 7 bankruptcy, their goal is to get rid of as much debt as possible. Thus, creditors who hold a lower spot in the rankings on the list of creditors will be less likely to recover any of their money.

How Likely Will a Creditor Be Able to Collect from a Bankrupt Customer?

Whether a creditor will actually be able to collect debts owed from a bankrupt customer will depend on both what chapter of bankruptcy was filed, as well as how involved a creditor is in the bankruptcy process. 

A business owner who follows the steps discussed in the above sections is much more likely to recover some of the money that they are owed, as opposed to a creditor who skips the 341 meeting, does not attend the bankruptcy hearing, and is not aware of what occurred during the bankruptcy proceedings. 

Should I Consult an Attorney If I Need to Collect a Debt from Bankrupt Customers?

If you are a business owner who is attempting to collect debt from a customer who has filed for bankruptcy, it may be in your best interest to consult a local collection lawyer for further guidance. 

An experienced bankruptcy lawyer can help you navigate the bankruptcy process as a creditor, can conduct a risk assessment of whether it is worth continuing to pursue the customer, and can answer any questions you may have about debt collections in general.

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