There is no question that businesses and the economy have had a rough 2020. Things have been especially challenging for small businesses whose revenue has dried up while others still hold on. Those that survive can credit strategy, hard work and a certain amount of luck. However, not everyone is so lucky, which means that businesses may start to see other businesses they work with file for bankruptcy.
This is terrible news for the owners and employees at that company, but it can also be a blow to still operating businesses if they are owed money. Once the other business files bankruptcy, the businesses owed become creditors.
Important terms and actions
Here is a brief list of essential terms and actions for creditors to be aware of:
- Automatic stay: This means that a business filing bankruptcy is automatically protected from creditors trying to collect money owed. This gives them time to figure out their next move.
- First day motions: This paperwork enables the company to continue functioning (pay workers, pay post-filing bills, etc.). If there is word that a company filed bankruptcy, it is also smart to have an attorney check to see if there is paperwork. This enables the creditor to request it become a critical vendor who gets paid money owed.
- Cash collateral: If a company borrows money before filing bankruptcy, that money can only be used with the lender or the court’s permission. One first day motion is the use of cash collateral to pay bills and will include a budget. Creditors will want to see the budget to find out if the debtor plans to pay.
- Request for Notices: The creditor’s attorney files a request to receive everything filed in the case via email.
- Schedules: The debtor creates a list of creditors and how much it believes it owes to each one. Creditors will want to examine this.
- Proof of claim: This is documentation sent to the debtor for the amount the creditor believes they are owed.
- Reclamation: This enables the creditor who sold goods to the debtor to reclaim those goods. A specific process must be followed to do this.
- Executory contracts: While specific expenses must still be paid, the debtor decides which of its contracts it wants to keep and pay (assume) during bankruptcy and which ones it does not (reject).
Legal guidance often useful
Bankruptcy involves a long list of what can and cannot be done. This also applies to those who find themselves to be creditors. If they are in this position, creditors often find it useful to discuss creditors’ rights with an attorney experienced on these and other bankruptcy matters.