When Consumers Get Notices About A Business’s Bankruptcy — When You Are Suddenly A Creditor.
My community was recently rocked by two businesses who were suddenly in Chapter 7 bankruptcy with unhappy clients and customers. Chapter 7 bankruptcy for business is a very different process than when people file for Chapter 7 bankruptcy. A business in Chapter 7 no longer is able to conduct business and any assets are subject to liquidation by the appointed Chapter 7 trustee.
Questions and letters to the editor followed regarding the bankruptcies as community members wondered what could be done. One business was a car sales lot and the other was a funeral home. In each case, allegations of misconduct flew as those who were owed money (who were now creditors) felt that the bankruptcy filings were unfair to the “creditors”. In the funeral home case, there have been press releases from the Department of Justice advising that any creditors should file a claim with the bankruptcy court. Surprisingly, there were only a few claims filed before the deadline (and no claims were filed in the car sales case).
What should you do if you receive a Notice of Bankruptcy Filing and you have suddenly become a creditor?
First, look at why you were listed as a creditor. In the funeral home case, customers of the funeral home who had prepaid for funeral services or who had prepaid for internments were not going to get those services/goods that they had paid for in advance. In the car sales lot case, customers who had paid for clear titles to vehicles did not receive what they had purchased. Each of those people was now a creditor of the failed business.
How should you file a claim?
The bankruptcy court has made it very easy to file a claim, also known as a “proof of claim”. It can be done via mail using the Bankruptcy Court’s official form or via the internet on each court’s website (the link for Oregon, for example, is here). A link to each Bankruptcy Court’s website is found here.
There are rules about the documents to be submitted with the claim (which prove that the debtor owes money to the creditor). Those documents cannot disclosure account numbers, social security numbers, or minor children’s names. The documents cannot violate the medical privacy laws. Whoever files the documents must make sure that this kind of information is hidden or “redacted” from the documents.
When do claims get paid by the trustee?
The bankruptcy trustee has a period of time to review claims to make sure that the claims are accurate and valid. The trustee also liquidates assets, if any, of the business, to change those assets into funds to pay claims. After the trustee reviews, the trustee submits a report to the Court. Just because a claim is accepted does not mean it will be completely paid. There may not be enough funds. The trustee pays debts in a certain order, with domestic support, taxes, and administrative priority claims being paid first. Then, other claims are paid, such as secured taxes, before any unsecured claims are paid. Often, only a percentage of a claim is paid.
Why should you file a claim?
If a debt is owed, a creditor should file a proof of claim in order to be paid. If no claim is filed, no payment will be made. The payment may not be 100% but at least you attempted to be paid what you were owed.
What should a consumer/creditor avoid doing?
The automatic stay protects ALL debtors in bankruptcy. It is important that a consumer who suddenly finds that they are a creditor not violate the bankruptcy rules about attempt to collect a debt during the bankruptcy or after the bankruptcy is completed. Sanctions can be awarded against any creditor who violates the rules, even the unwary consumer creditor.