Dear Clients and Friends,
We are going into the new year with economic uncertainty.
Neil Peretz (a bankruptcy expert that I’ve worked with on multiple occasions) shares his insights on how to deal with customers that owe you money.
We hope that everyone does well, but, some of you may have to deal with troubled companies, hopefully this will help you in those dealings.
President & Founder
Staying Afloat When the Bankruptcy Tsunami Hits
– Neil Peretz
Record unemployment, dramatic changes in consumer behavior due to public health concerns, and the impending exhaustion of government aid means that we are likely headed into the largest wave of bankruptcies that we have seen in our lifetime. While your company might be in excellent financial health and growing at a rapid clip, it is likely that some of your clients or suppliers will face solvency challenges that impact your ability to get money owed to you.
In Part 1 of our two-part series, we explore the first steps individual companies can (and should) take in the bankruptcy claims process and offer some tips on how to improve your recovery outcome. In Part 2 we will explore ways to reclaim money owed outside of the bankruptcy process and how to weigh your fiduciary responsibilities against the time and expense of recovery.
- Watch out for Landmines
When a company or individual that owes you money lets you know, even informally, that they are bankrupt, it’s time to watch your step. As soon as a bankruptcy petition is filed, a condition known as the Automatic Stay is triggered by the court. The word “Automatic” means that there is no delay between the filing of the bankruptcy petition and this condition occurring.
Essentially, the automatic stay is like the referee blowing a timeout whistle in the midst of a team sporting event. When the whistle is blown, it is expected that all the players stop playing immediately. If a player wishes to keep playing, the referee will likely throw him or her out of the game. Think of the bankruptcy court like a referee, blowing the whistle and stepping in and saying that it alone will decide how to reconcile the debts of the entity that has filed for bankruptcy. Anyone who wishes to collect on their debt needs to do so by following the court’s rules.
Most businesses already have a playbook for collecting on delinquent accounts, ranging from sending strongly worded letters that accompany bills to knocking on your customer’s door or calling them on the phone. None of those approaches are acceptable if the entity that owes you money has filed for bankruptcy.
In fact, if you try to collect against a bankrupt company using your normal process, even something as simple as sending a bill, you will be violating the automatic stay of the bankruptcy court. The result can be fines and sanctions by the court against you, and even a possible invalidation or subordination of your claim. Recently a telephone company learned this the hard way when it was sanctioned by the bankruptcy court and ordered to pay $24,931 in fines for improperly trying to collect on a bill worth $201.54. Avoid these simple but costly mistakes.
- Make Your Best Case
Just because you cannot send out bills and hector delinquent payers over the phone does not mean that you will not, eventually, be able to receive a recovery on your claim. A UCLA study found that unsecured creditors received, on average, $0.45 on the dollar in large bankruptcies, with some recovering a far higher percentage. In a hot merger and acquisition environment, there could be even a greater financial recovery due to gains from industry consolidation.
The way to recover what you are owed is to file a claim in the bankruptcy. On its face, the bankruptcy claims form to be filed looks relatively simple. You’re asked what you are owed and to provide your contact details. If you want to increase your odds of a maximum recovery, however, you need to go beyond simply preparing your claim.
The Bankruptcy Code and cases decided under it present a wealth of opportunities to improve the odds and size of your financial recovery as a claimant. Unfortunately, the bankruptcy code is difficult to read and many of the nuances that could greatly increase your standing have to be learned by reviewing prior cases in your jurisdiction. For example, did you know that if you sold fresh produce to a bankrupt company within a certain number of days of the bankruptcy, you can increase the standing of your claim? Because bankruptcy law is highly complex, only attorneys who specialize in this field tend to know all the angles on how you might increase your recovery. If your attorney doesn’t have this expertise, it could greatly reduce your chances of a successful claim. Luckily, there are other ways to access the expertise you need, don’t overlook them.
- Organize Those Ducks
Successful claims require appropriate documentation to substantiate your claim in case another creditor objects to it. For example, if your claim is based on a debtor’s failure to pay for goods purchased, you would want to document both the contract evidencing the price to be paid, as well as evidence of your actual timely delivery and the debtor’s acceptance of the goods.
Bankruptcy cases often move a lot faster than other types of litigation, thus you want to have your evidentiary ducks in a row. Gather emails, invoices, and other correspondence that document what the debtor owed you prior to the bankruptcy filing. If you have evidence, perhaps in the form of emails or other correspondence, where the debtor (before the bankruptcy) affirmed what it owes, gather those as well. You might not need to submit them with your initial proof of claim as evidence, however you will want to be able to access them quickly in the event that there is a later dispute about how much is owed to you.
Courts often rush to dispose of bankruptcy issues quickly, before they trigger serious disruption to customers and business partners. Likewise, some debtors push the court to go at warp speed because the debtor already has a reorganization plan in mind. In these types of cases, nicknamed pre-packs, the debtor might propose a plan of reorganization on the same day that it files for bankruptcy, with the affirmative vote of many large creditors already in its pocket. For example, a recent energy company bankruptcy involving $5 billion in assets went from filing bankruptcy to emerging out of bankruptcy with a plan of reorganization in a mere three months. This should not stop you from pursuing your claim. Keep track of bankruptcy proceedings and be ready to make submissions and other maneuvers on short notice.
- Beat the Clock
It is critical to stay abreast of the timing of particular events in bankruptcy, because failing to meet established deadlines could make a dramatic difference in your recovery. For example, as soon you learn about a case, you will want to look up the Claims Bar Date because this serves as the deadline for you to file your claim in the bankruptcy. Any claims filed after that date might be disallowed, or, at best, given a shot to pick at the leftovers after all the other creditors have been paid.
Also, if you are delivering goods to an entity that has filed bankruptcy, you will want to keep track of the date the goods were delivered relative to the bankruptcy petition date. If you act quickly, you might be able to exercise a right of reclamation under section 546(c) of the Bankruptcy Code and recover the goods completely. A bankruptcy expert can help walk you through how to seek such a reclamation, however you need to act as soon as you become aware of the bankruptcy in order to meet the relevant deadlines to qualify.
Don’t leave your money on someone else’s table. As bankruptcy is complex and often a fast-moving process creditors should take action to improve their chances of successful claim recovery. Follow the rules, organize information supporting your claim, keep track of all deadlines and access expert help so you don’t miss opportunities that could prioritize your claim.
As a former general counsel and practicing bankruptcy attorney, I have been working with a new company called Proxifile.com that has finally addressed the hurdles faced by creditors in the bankruptcy process. For very little money upfront, an expert bankruptcy attorney helps position your claims to maximize recovery and meet beat deadlines with very little work on your part. We would be happy to tell you more.
Neil Peretz has served as general counsel of multiple companies, as well as a corporate CEO, CFO, and COO. Outside of the corporate sphere, he co-founded the Office of Enforcement of the Consumer Financial Protection Bureau and practiced law with the US Department of Justice and the Securities and Exchange Commission. Peretz holds a JD from the University of California, Los Angeles (UCLA) School of Law, an LLM (master of laws) from Katholieke Universiteit Leuven (where he was a Fulbright Scholar), bachelor’s and master’s degrees from Tufts University, and has been ABD at the George Mason University School of Public Policy. Peretz’s most recent technology endeavors are serving as general counsel to Contract Wrangler, which applies attorney-trained artificial intelligence to identify the key business terms in a wide variety of contracts, and co-founder of Proxifile.com a new,
hassle-free method for creditors to stake their claim in bankruptcies. Follow him online at linkedin.com/in/neilperetz.