When an unexpected bankruptcy turns you into a creditor, you need to tread carefully to maximize your potential recovery in the claims process. Here’s some key pitfalls to avoid.
In order to be repaid, you need to file a Proof of Claim. However there are important deadlines — called Bar Dates — for submitting these claims. Failure to file a proof of claim by the right deadline may “bar” your claim completely. Be aware that bankruptcy clock can move quickly. Deadlines can shift and the information can be buried in lengthy court filings which are easy to miss.
Overlooking Opportunities for Priority
Not all creditors’ debts receive the same treatment in bankruptcy claims. Priority claims are entitled to special treatment and will get paid before nonpriority claims. Bankruptcy experts can assess the facts of your case to determine whether you can qualify for priority status and how to best prove it. Sometimes the ability to get priority status is time sensitive, so acting quickly to get help in assessing your claim is essential.
In addition to filing a proof of claim form, you must also provide clear documentation. Invoices, statements, judgements, and other supportive materials should be included with your claim form. Showing that you delivered on your side of the bargain, the debtor committed to a specific amount owed to you, and you haven’t already been paid is critical. Failure to provide the right documentation makes your claim susceptible to challenge and possibly disallowance.
Improper Communications with Debtor
When a company files for bankruptcy, the court immediately institutes an “Automatic Stay.” This limits how you can interact with the debtor. One of the things this means is that ALL of your collection actions (phone calls, lawsuits) must stop. Even sending an invoice to the debtor can be deemed to violate the automatic stay! The punishment for such a violation can be severe. You may have to pay penalties and fines as well as have your claim invalidated or subordinated.
Not Filing a Claim
All too often, creditors get a bankruptcy notice and they write it off in their mind. They don’t understand that many bankruptcies represent a restructuring that can provide significant payments to creditors, either at the close of the case or over time. Many businesses in bankruptcy have more assets than you think. This can include monies they are owed by others, insurance claims, intellectual property, and brand names. These assets can all contribute to repayment of creditors. While it is impossible to determine which claims will get paid and if they’ll be paid in-full or in-part, not filing is almost always a guarantee of getting nothing.