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What are your rights when a client files bankruptcy?

If you own a business in Texas, you likely rely on customers' timely payments to pay expenses and fund growth. When a customer not only fails to pay you but also files bankruptcy to prevent any sort of debt collection action, you may be torn between pursuing the debt into bankruptcy or giving up the claim altogether. If you are like many business owners, you may assume that pursuing the debt is not worth your time or money.  But this might not be the case at all.

Though pursuing the debt into bankruptcy will require you to expend some resources, it is not as difficult as many creditors think. If, after weighing the pros and cons of pursuing the debt, you decide to proceed with collection efforts, there are routine steps you should take. The first is to comply with the Bankruptcy Code and cease all collection actions immediately. The "automatic stay" comes into effect instantaneously upon the debtor's filing of a bankruptcy petition and makes it illegal for creditors to continue with debt collection efforts without seeking approval of the bankruptcy court.  Record the account as bankrupt, and if you hired a third-party agency to collect the money on your behalf, inform it of the client's new status.

Next, you or your counsel may review the debtor's bankruptcy papers to ascertain what property he or she has listed as a part of the bankruptcy and what assets have protected status. The initial bankruptcy notice usually advises creditors whether the debtor has filed a "no asset" case, or if there are apparent assets that might result in a distribution to creditors.  Also, make note of the creditors to whom the person owes money. Knowing how much property is available and how many creditors the debtor needs to repay can give you a realistic assessment of the magnitude of your eventual recovery. 

The chapter of the debtor's filing is also important. A chapter 7 signals liquidation of the debtor's assets and closure of its business; whereas, chapters 11 and 13 ordinarily anticipate an ongoing business that the debtor intends to restructure and repay its creditors to some extent.  Some bankruptcy plans propose a 100% repayment of their legitimate debts, particularly small amounts owed.

Before you make a decision to pursue the debt, meet with the debtor during the public examination at the "meeting of creditors." Ask the debtor about your claim and property relevant to satisfying it. If there is some prospect of repayment, file a proof of claim. Attach any contracts, communications and records you have that show that the debtor does, in fact, owe you money.

To ensure that the bankruptcy court includes you in the proposed repayment plan, it's important that you engage competent bankruptcy counsel and press your company's claim at the debtor's bankruptcy hearing.  If the debtor proposes a plan, you will have a right to object to it on a variety of grounds and the bankruptcy judge may require the debtor to do more for creditors. Ultimately, the bankruptcy case will proceed either via a repayment plan or asset distribution.  Bur remember: do not contact or harass the debtor. 

Palmer & Manuel has experienced bankruptcy attorneys available to assist you.

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Palmer Lehman Sandberg, PLLC
8350 N. Central Expressway Suite 1111
Dallas, TX 75206

Phone: 214-242-6444
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