Law Offices of Bret R. Rossi

Articles by Bret Rossi

Bankruptcy and Your Receivables

Your business is going great! The customers are pouring in, the orders are stacking up and you just haven't had as much time as you'd like to devote to collecting a few of those slow paying account receivables. As a result, your account receivables balance has grown significantly in the pass 90 days and a few large accounts have shown no activity. Suddenly out of the blue, the mailman delivers you a notice from the US Bankruptcy Court for the Eastern District of California notifying you that your largest account receivable has just commenced a case under the Bankruptcy Code! What do you do now? The first thing not to do is panic. It won't help at all.

Carefully read the notice to find out which Chapter of the Bankruptcy Code has been invoked. The most common bankruptcy filings are now filed under Chapter 7. Businesses that want to reorganization and remain in business typically utilize the procedures under Chapter 11.

Individuals and small businesses with unsecured debts of less than $250,000.00 and secured debts of less than $750,000.00 which wish to remain in business will typically utilize Chapter 13. Individuals and businesses that do not wish to remain in business and typically have little or no assets typically utilize Chapter 7. That's the bad news. In all likelihood you can kiss that account receivable goodbye.

Since the vast majority of debtors file under Chapter 7, the chances are that the notice you have received is a notification that your account receivable is in Chapter 7. The next thing not to do is to make an effort to collect your account receivable from the debtor. Once a bankruptcy has been filed, the law places very strict restrictions on a creditor's further efforts to collect against an individual or business in bankruptcy. In fact, if the Debtor is represented by an attorney, you are prohibited from directly contacting the Debtor about the debt and can only communicate with the Debtor's attorney. If the Debtor has filed their own bankruptcy and are in "pro per" you may contact the debtor for information about the bankruptcy but you are not allowed to make any direct efforts to collect your account receivable.

The most important thing that you can do to protect your right to receive payment should there be any assets available for distribution to creditors, is to timely file a proof of claim with the bankruptcy court. Timely means within 60 days of the date set for the meeting of creditors. That date should be listed on the notice you received from the Bankruptcy Court. If it's not, don't panic - you can call the trustee listed on the notice and ask them for the date. But, before you do that, check the notice carefully to see if it states that this is a "no asset case." If it is, there is no need to file a Proof of Claim unless the trustee later discovers assets and notifies you to file one. However, if you are overly paranoid or just want to play it safe, there is nothing to prohibit you from filing a Proof of Claim. So where do you get a Proof of Claim? Turn over the notice that was sent from the Bankruptcy Court and "whala" there is your Proof of Claim. If is not there, that means it was a no asset case and the Court is attempting to discourage you from filing a Proof of Claim. However, Proofs of Claim are readily available for free from the Bankruptcy Court which is located at 650 Capitol Mall on the 8th Floor of the Federal Courthouse. You don't even have to stand in line as they are available in boxes attached to the wall outside the clerk's office.

If you file a Proof of Claim, fill it out completely, keep a copy for your file and you should include documentation that verifies the status and amount of your Claim. Since most account receivables are unsecured, attaching a copy of your most recent billing statement should suffice.

If you had enough foresight to obtain security for your claim, you must attach documents establishing your status as a secured creditor. These can include security agreements, UCC filings, notes and deeds of trust, abstracts of judgments and copies of pink slips on record with the DMV.

After you have filed your Proof of Claim, the next step in the process is to wait. And wait. And Wait. And if you are lucky, in 12 to 18 months you may receive a distribution from the trustee. Sometimes it takes longer.