Imagine you are supplying clogs to Samantha’s retail store. Her payments have been getting slower by the month and you need to hound her to collect. Usually the hounding works after enough calls. Collecting has been like basketball: always apply the full court press.
She is late again in paying. Each time it is a new excuse: Delays in the bank processing for money… Waiting for a check to come in from the big customer… Unexpected deferred maintenance on her store room…
This time she claims that it is different: she cannot pay because she filed for bankruptcy. What should you do?
- Redouble your efforts and be more persistent?
- Threaten to sue so you can get your money before a bankruptcy court sticks its nose into your business?
- None of the above.
Contrary to your instincts, the answer is (c), none of the above.
Your next step is simple: Be polite and verify that there really has been a bankruptcy case filed by Samantha. Ask Samantha for the court name and case number. Or just type Samantha’s business name into our case locator here [hyperlink to Proxifile Case Locator].
If it turns out that a bankruptcy case has really been filed by Samantha’s business, then a secret force field called the Automatic Stay has been activated.
What is the Automatic Stay?
The United States has many federal laws, grouped into a series of titles. The Bankruptcy Code is embodied in Title 11 of the United States federal laws.
Section 362 of the Bankruptcy Code describes the Automatic Stay, which is a legal provision that takes effect the instant a debtor files for bankruptcy. When the Automatic Stay is in place, you’re no longer allowed to use typical collections efforts to pursue debtors for the money they owe you. In a general scenario, an Automatic Stay will last through the duration of the bankruptcy case.
What’s the Purpose of the Automatic Stay
There are two primary purposes to the Automatic Stay. The first and more obvious purpose is that it provides protection for debtors, allowing them to workout their financial situation without the burden of creditors confronting them and picking away at their assets.
The second purpose of the Automatic Stay is in order to protect creditors as well, specifically, to protect creditors from other creditors. The Automatic Stay does this by leveling out the playing field and making sure that no single creditor can take hold of the debtor’s assets before the other creditors have the chance to stake their claim as well.
Actions Prohibited by an Automatic Stay
Once the Automatic Stay is in place, there are many actions that a typical creditor might pursue that are no longer allowed. Actions that you can’t willfully pursue after an Automatic Stay is in place include the following:
- You cannot send them phone calls asking for the money.
- You cannot send them demand letters or invoices.
- You cannot initiate or continue court proceedings against them.
- You cannot initiate or enforce a lien against their property.
- You cannot attempt to foreclose on their property.
Continuing to partake in these typical collections efforts can result in the debtor suing you for violating the Automatic Stay. The result of such a lawsuit could include penalties and sanctions from the court, as well as all or part of your own claim getting wiped out. It is not unheard of for a creditor to lose more money than his claim is worth when the Automatic Stay is violated.
So What Can You Do?
- First check whether the company is truly bankrupt. At Proxifile, we can help you look up whether they truly filed a bankruptcy case or are just pulling your leg to buy more time. [hyperlink to our case finder] Sometimes people and companies team themselves to be “bankrupt” when they have cash flow issues because they do not know that Bankruptcy is a specific legal condition, rather than the description to use for a general feeling of poverty. If you discover they didn’t really file a bankruptcy petition, you can pursue normal collection actions and Proxifile may be able to help you in that regard as well.
- Explore whether there is anyone else who is also liable for the debt. If there is someone else on the hook, such as a guarantor, who has not filed bankruptcy, you can still pursue your claim against them. There are even situations where an individual who is an officer or shareholder of a bankrupt company could be liable. [See our article here on Piercing the Corporate Veil: hyperlink]
- If there really has been a legitimate bankruptcy case that has been filed, then there is a special mechanism we can use to help you get repaid. Specifically, Proxifile can help you present your claim to the bankruptcy court to seek a recovery. This is called Filing a Proof of Claim. Depending on the facts of your relationship with the bankrupt company, we may be able to find a way to prioritize your claim in bankruptcy to increase your chances of a good recovery. A Proof of Claim will describe how much is owed to you by the bankrupt entity and include supporting documentation. We can help you gather the right information. Bankruptcies can move fast so there is a tight deadline to file these proofs of claim.
- Tell your colleagues who run the traditional collections playbook to be careful and not inadvertently violate the Automatic Stay because you forgot to remove a debtor from your automated email queue.
- In some circumstances, you can petition the court to lift the Automatic Stay and proceed in your collections, despite the bankruptcy case being ongoing. Proxifile has a diagnostic checklist here [hyperlink ] to help you figure out if you have a good argument to ask the court to lift the Automatic Stay for you.
How to Get Around the Automatic Stay
On the bright side, it’s possible as a creditor to get the Automatic Stay lifted and continue to pursue typical collections efforts against your debtor. In order to lift the Automatic Stay, creditors have the option to file what is called a Motion for Relief from the Automatic Stay. While there is no special form required to file this motion, you have to submit a formal statement in writing detailing your reasons for requesting the relief. Reasons for this request vary widely, but some of the reasons that the court will consider include:
- The lack of adequate protection of a creditor’s collateral, causing the asset in question to diminish in value throughout the duration of the Automatic Stay.
- How much value a specific asset provides the debtor regarding effective reorganization.
- If the case qualifies as a “single asset real estate case” (SARE).
This course of action in attempting to lift the Automatic Stay is most commonly sought when the debt you are owed is secured with a lien against some of the bankrupt entity’s assets. A secured creditor can pursue replevin or foreclosure.
Find out if you might qualify to get around the automatic stay and get paid sooner. Tell Proxifile about your claim: [hyperlink]
LATER LET’S ADD THIS:
Our free diagnostic tool makes it easy.
DISCLAIMER: This tool is not meant to replace a legal professional and serves merely as an indicator of success.
1. Are you a secured creditor (possess a lien) or an unsecured creditor?
a. Secured: Move to question 2, +1
b. Unsecured: End quiz, +0
2. If the debtor had no access to the property in question, would this severely decrease their chance at a successful reorganization? For example, a moving van is essential to a moving business, but a television is not.
a. Yes: Move to question 3, +0
b. No: Move to question 3, +0.5
3. Does the debtor have an equity in the property? In other words, is the value of the property in question greater than the value of all secured debt on the property?
a. Yes: Move to question 4, +0
b. No: Move to question 4, +0.5
4. If the property in question continues to remain in possession of the debtor, will it’s value diminish in a way that would, if in your possession, not diminish in value?
– Yes: Move to question 5, +1
– No: Move to question 5, +0
5. Does your case qualify as a single-asset real estate bankruptcy in which the amount of secured debt is less than $4 million?
a. Yes: End quiz, +1
b. No: End quiz, +0
0 = not likely
1-1.5 = likely
2+ = very likely