Client Questions Vol 1: Collecting Debts from Bankrupt Companies

We were going to call this segment, Ask Dean Anything, but for legal reasons we couldn’t move forward. 🙂

That said, we know there are those of you out there with some burning legal questions ripe for the answering by esteemed OC business legal eagle Dean Sperling.  

Question — A lot of people think that they can’t collect unpaid debts from debtors in bankruptcy — what does the law say about this? To keep everyone awake here, let’s use some if-then statements to move this along.

First, Dean says it depends on if the matter is a chapter 7, 11 or 13. Chapter 7 is liquidation. Now let’s dig in.

Your IF-THEN Guide to Collecting Debts from Companies in Bankruptcy

IF the debtor has no assets THEN there is simply nothing to collect.

IF there are assets, THEN a proof of claim must be filed in a timely manner. (are we having fun yet?)

IF there is fraud or other dishonest behavior THEN the law allows a creditor to file an adversary proceeding to except the creditor’s debt from a bankruptcy discharge or to block the entire discharge.

IF it’s a chapter 13 wage earners payment plan for individuals, THEN A proof of claim must timely be filed here as well and for fraud or other dishonest behavior, an adversary proceeding can also be filed to except the creditor’s debt from being modified in the plan.

Note: The actual plan proposed by the chapter 13 debtor also can be challenged. A chapter 11 is a business reorganization. Again, a proof of claim must be filed as well as a notice of appearance so that the creditor can be kept aware of and challenge the plan proposed by the chapter 11 debtor if the amount of the debt and the facts warrant it.  

BOTTOM LINE: the filing of a bankruptcy is not necessarily and automatically the end of the line for the creditor. The facts underlying the debt and the facts regarding the bankruptcy should be reviewed.  And hey, Dean Sperling reviews this stuff all the time on his way to resolving legal matters with your best interests in mind. Just call or e-mail to arrange your consultation.