Practical Tips When Facing a Chapter 11 Bankruptcy Case

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2020 Issue Two

Practical Tips When Facing a Chapter 11 Bankruptcy Case

By: Jason M. Katz

The COVID pandemic is going to increase bankruptcy filings in 2020 and 2021. Therefore, it is important to know some bankruptcy basics in order to maximize recovery. It is also important to retain bankruptcy counsel, but only after ensuring the likelihood of recovery and if the case/claims necessitate engagement of a bankruptcy specialist.

What kind of bankruptcy has been filed?

The most common types of bankruptcies are Chapter 7, Chapter 11, and Chapter 13. Chapter 7 and Chapter 13 cases typically deal with smaller dollar amounts, but a lot of the same issues addressed in Chapter 11 cases must be addressed in the smaller cases. This article is focused on tips for creditors facing a Chapter 11 case.

PACER account/claims agents?

There are some free resources available to creditors in many complex Chapter 11 cases. Many debtors in complex Chapter 11 cases hire claims agents that keep important information on their websites and creditors have free on-line access to the docket and other details about the case. For example, prime clerk acts as the claims agent in various cases ( and this information can be viewed by creditors without charge. In cases that do not have claims agents, creditors may view case information on Pacer Creditors have to pay to view filings on pacer, but the creditor can review the status of the case and obtain valuable information prior to contacting bankruptcy counsel.

What kind of claim do you have?

It is important to understand what type of claim each creditor has as the protections and remedies for each creditor may be different – even in the same case. Creditors can have secured claims, unsecured claims, administrative claims, or priority claims. Therefore, it is important to describe your relationship with the debtor when speaking to your bankruptcy counsel so he/she can make an accurate assessment.

What does the automatic stay mean?

Creditors may not continue to pursue collection of any pre-petition debt (debt existing on the date of the bankruptcy filing) during the pendency of the automatic stay. In addition, creditors may not be allowed to take action against assets that are being used by a debtor in its operations. The most cautious approach if there is a question about whether a creditor may pursue a debt without violating the automatic stay is to contact bankruptcy counsel to help analyze and have that lawyer recommend how to proceed. Bankruptcy Courts take the automatic stay seriously and may sanction creditors who violate it. Evaluating whether a claim can be pursued without asking the Bankruptcy Court for relief from the automatic stay is a situation where bankruptcy lawyers can provide significant value.

Are there any existing contracts or leases?

If you have existing contracts or leases at the petition date, those contracts and/or leases will be reviewed and assumed or rejected in the bankruptcy. Sometimes, debtors try and take advantage of the bankruptcy filing and continue to improperly not pay for post-petition services/goods. It is important to make sure that the debtor is paying the creditor for anything that occurs post-petition under the contracts and/or leases. Creditors often have the ability to reject leases and/or contracts if the debtor is not paying the creditor. In addition, creditors may seek payment from the debtor for any post-petition amounts owed if those are considered administrative claims. Bankruptcy Courts will typically provide creditors with relief if a Debtor is not paying administrative claims.

How much are you owed as of the petition date? Did you sell goods to the debtor 20 days before the petition date?

Creditors should have the bankruptcy schedules and statement of financial affairs reviewed for any reference to the creditor by the debtor. How the debtor has chosen to treat the creditor in the schedules and statement of financial affairs is an important piece of information for the creditor to consider in its decision making. Creditors will have a deadline to file a proof of claim for all monies owed as of the date of the bankruptcy petition.
In addition, if the creditor sold goods to the debtor twenty (20) days prior to the petition date, the creditor can seek to treat those invoices as an administrative claim (503(b)(9) claim). While this type of claim does not go all the way in making creditors whole, it does provide an avenue toward recovery for those twenty (20) days if the Creditor knows to ask for it.

How much did you receive in the 90 days before the petition date?

Often creditors are hit with an unexpected surprise when it receives a demand letter to return monies received in the ninety (90) prior to the petition date. Most creditors scream: “How can I be out the prepetition invoices and have to return more money?!?” I understand, and it may not seem fair, but preference laws are in place to protect all creditors (i.e. by not allowing certain creditors to get paid during the 90 days prior to the bankruptcy petition date while not providing any payments to other creditors during the same term). The challenge for creditors is that they are now fighting on two fronts. The good news is that creditors have defenses to preference claims. The debtor is required to identify all preference payments made to creditors during the 90 day period before the preference period. If the preference exposure is large enough, creditors should start reviewing the potential preference claims for defenses with bankruptcy counsel before receiving the demand letter or lawsuit.

I just got a 100-page Disclosure Statement and Plan of Reorganization- what does is it mean for me?

Chapter 11 bankruptcy plans can be very intimidating based solely on the size of the document and the bankruptcy-specific language they use. Bankruptcy counsel should be able to pin point the important sections quickly and analyze what the debtor proposes to pay your type of claim. In addition, the disclosure statement contains details about the proposed plan that assist the creditor with analyzing the plan of reorganization.

Bankruptcy counsel on speed dial

Having bankruptcy counsel on speed dial may be a stretch, but being pulled into a bankruptcy situation is inevitable. Often, the timeline between notice and the deadline for a creditor to make a decision on how to proceed is very short. Potential creditors should form a relationship with a bankruptcy lawyer as one of their vendors, tenants, or customers will likely file bankruptcy in 2020 and 2021. Having confidence that your bankruptcy counsel is critical. Your counsel should not add to the business challenges a creditor is facing, and instead, bring value to the creditor in the case. Not all bankruptcy cases justify retaining counsel. Reputable bankruptcy counsel will evaluate the potential situation and provide practical advice to the creditor. Ask your proposed bankruptcy counsel about the topics in this article to help you retain the right bankruptcy counsel and create value.