Why Businesses Need To Comply With Debt Collection Rules
U.S. retailers still feeling the pinch – and so are their lenders
The Wall Street Journal recently reported that retail sales fell by .03 percent in September. While overall sales are still up for the year, the recent slowdown has made retailers wary that Americans are not as willing to spend for the upcoming holiday season.
The story is not new to retail suppliers, who have experienced adverse retail conditions since the Great Recession. Suppliers are generally aware of the state of the business to which they supply goods. There is still a question of whether, and when, the retailer will file for bankruptcy protection, however.
This question is extremely important to retail suppliers. It is difficult for a retailer to remain in business after filing for Chapter 11. That means the trade suppliers’ interests are at risk if a retailer does seek bankruptcy protection.
For trade suppliers in business with struggling retailers, there are several options. One is to forego business with the retailer. However, that can be a last resort option, especially if the retailer is still willing to pay for goods even if struggling financially.
Instead, a supplier might seek to obtain collateral or security interests to protect credit. Often, a trade supplier is one of the largest unsecured creditors in a Chapter 11 bankruptcy filing by a retailer. Converting unsecured debt to a secured interest can greatly protect a supplier if the retailer continues to perform poorly.
Trade creditor rights in bankruptcy
If a retailer does file for Chapter 11 bankruptcy protection, trade creditors with unsecured credit do still have rights. The bankruptcy code allows for suppliers to reclaim goods from an insolvent debtor, provided the good are identifiable. Trade suppliers should attempt reclamation as soon after the Chapter 11 is filed as possible.
In addition to reclamation, a trade supplier might consider serving on the creditors’ committee. By working on this committee, suppliers gain access to confidential business information. However, as a member of the committee, the serving supplier is a fiduciary to all creditors, meaning that a committee member must make recommendations that benefit all creditors, not just individual interests.
A trade supplier might also receive “critical vendor” status, meaning that the debtor will pay critical vendors the amount owed pre-bankruptcy. In exchange, the critical vendor usually must agree to certain terms in order to receive the pre-bankruptcy amount owed. This could take the form of agreeing to keep supplying the retailer, for example, if the retailer seeks to remain in business.
Creditors and vendors have options but must act quickly
Asserting creditor rights in a retail Chapter 11 bankruptcy case requires quick and thoughtful action. Asserting prepetition claims, obtaining critical vendor status, and understanding if the retailer has any clawback rights for previous payments can be the difference between full payment and getting pennies on the dollar.
Suppliers seeking to protect their rights in a bankruptcy case should speak to an experienced creditors’ rights attorney, such as those at Delev & Associates, LLC, to discuss their options.