Step-by-Step Support for Unsecured Creditors

As a well-known creditor rights firm, we speak with creditors coping with Chapter 11 bankruptcies every day, providing support for businesses and individuals across the United States and the world. Based on our 20+ years of experience, we have created the following Step-by-Step list to help unsecured creditors respond rapidly when their businesses and incomes are placed at risk by a Chapter 11 filing. Having worked with hundreds of creditors in cases all over the United States, we know one thing is clear – how you respond can and does have an enormous effect on how a bankruptcy affects you and your firm.

Note: In addition to these general steps for all unsecured creditors, we highly recommend contacting us for a no-cost review of your specific circumstances. Your call may greatly enhance your chances of being repaid for products and services you have provided the debtor.

======================================================

Are you a victim of a Chapter 11 bankruptcy? Rapidly respond by taking the following steps:

Step 1 - Conduct an Immediate Status Review

Ideally you should be aware of potential problems in the debtor's finances before a bankruptcy filing occurs, but this is not always possible. As soon as you become aware of the bankruptcy, immediately review the status of your business with the debtor. This review should include an assessment of outstanding invoices or other obligations from business conducted prior to the date of the bankruptcy filing, and critically, your review should consider the risks of conducting present and future business with the debtor. Depending on the circumstances, you may decide to stop further deliveries of products and services, or you may make arrangements to proceed on a cash-only basis.

Remember that Debtors frequently attempt to assure their creditors they will be paid in full for past and future business following their bankruptcy filing. Vendors are often told they will be given priority or placed on a "Critical Vendor" list, or otherwise will be benefactors of the Debtors' present or future plans. Unfortunately, what Debtors say and what actually occurs following bankruptcy are often very different, even if their intentions are good. Contact Brinkman Law Group, PC at (818) 597-2992 for a free consultation to help protect your company from potential risks of future business with the Debtor.

Step 2 - Claim Administrative Status for 20-Day Goods

Since 2005, bankruptcy law has granted higher priority administrative status to repayment of goods sold to the Debtor within the 20-day period immediately prior to the bankruptcy filing. These goods must have been sold to the Debtor in the ordinary course of business. Since administrative status may make the difference between receiving full payment and no payment at all, it is critical that you confirm what portion of your claim may qualify.

The 20-day administrative provision only applies to goods, not services. Therefore, if your organization provided a mix of products and services to the Debtor during the 20-day period, you will need to separate the portion of your claim that will qualify as goods only. Some Debtors will prioritize 20-day goods claims without any effort by creditors, but in most cases creditors must officially inform the Debtor in some manner. This can be done by writing "administrative" on your proof of claim form, but such an action will not guarantee the Debtor will notice and/or acknowledge your claim accordingly. The best way to ensure your claim is officially recognized as an administrative claim is to file a motion with the bankruptcy court requesting priority status. Contact Brinkman Law Group, PC at (818) 597-2992 to receive no-cost advice on your specific situation.

Step 3 - File a Reclamation Demand Letter Before the 20-Day Deadline

In addition to filing a claim for 20-day goods (described in Step 2), you may be able to receive administrative priority status for goods (not services) shipped to the Debtor up to 45 days immediately prior to the bankruptcy filing. For goods shipped to the Debtor within this 20-45 day window previous to the bankruptcy, administrative priority status may be established by filing a Reclamation Demand Letter within 20 days after the bankruptcy.

Be aware, however, that a Reclamation Demand only applies to goods which the Debtor has not yet used, and therefore delays in sending your letter may result in losing the administrative status of your claim. And importantly, once the 20-Day post-bankruptcy deadline has passed, your demand letter is likely to have no effect on the status of your claim. Very specific procedures must be followed in the preparation and submission of Reclamation Demand letters, so we recommend contacting us at (818) 597-2992 for no cost assistance in meeting these legal requirements.

Step 4 - File a Proof of Claim

Soon after a Debtor files bankruptcy, unsecured creditors whom the Debtor lists as having the largest claims (usually the Top 20, at least) are sent a Proof of Claim form in the mail along with other documents regarding the case. Filling out and submitting this form (before the required deadline, referred to as the Bar Date) along with invoices and/or supporting documentation serves to validate the exact amount and veracity of each unsecured creditor's claim, which at times is widely discrepant from the amount recorded by the Debtor. Note that although this step is important, the Proof of Claim process merely validates the fact that the creditor has a legitimate claim, not that the claim will ever be repaid in any way. To improve the likelihood of being repaid, unsecured creditors should follow the other steps recorded here, notably those that follow.

Step 5 - Be an Active Learner

Many creditors adopt a skeptical attitude following a bankruptcy filing, thinking that nothing they do will make any difference or improve their chances of being repaid, and will only be a waste of time. Others naïvely believe that merely submitting the Proof of Claim form will get them repaid the amount they are owed.

The reality is that creditors can do a great deal to improve their situation by actively learning as much as they can about how the Chapter 11 process works, the circumstances of the debtor's bankruptcy and subsequent events, and numerous resources available to assist them in influencing the outcome of events which affect their present and future business. This website has a Publications section with links to several online resources for unsecured creditors, and of course myriad other resources are available both on the Internet and by contacting your local bankruptcy court district. What you learn can and does affect the potential impact of a bankruptcy filing on the functioning of your business.

Step 6 - Get Professional Support

Debtors hire highly paid, sophisticated attorneys who understand exactly how to manipulate the outcome of bankruptcy proceedings to their client's benefit. Even if a Debtor has good intentions, a wide gap often exists between what they and their attorneys say in the early stages of bankruptcy and what actually occurs by the end. Unsecured creditors, on the other hand, often have no such legal support, and if they have an attorney at all, their attorney is not usually an expert in creditor rights or the highly specialized world of Chapter 11 bankruptcies. As a result, unsecured creditors (who are already low on the priority list for repayment) often get taken advantage of during Chapter 11 proceedings.

Unsecured creditors are often understandably reluctant to incur the expense of hiring legal professionals to represent them, but there are ways for them to obtain legal support without cost. One way is to take advantage of free consultations offered by many law firms. A great amount of applicable information can be obtained in one no cost phone call about your specific situation, even if you decide not to hire counsel at that point in time. Another method for acquiring counsel with no direct cost is to work with other creditors to organize a committee (see step 7 below).

Keep in mind that coping with a Chapter 11 bankruptcy filing often comes with numerous risks beyond repayment for prepetition debt. These risks include the possibility of litigation against your firm, ongoing transactions with the debtor, and potential future changes in business relationships and climate. Given these risks, it is wise to seek prompt legal advice from an expert in Chapter 11 creditor rights, even if you do not hire an attorney directly.

Step 7 – Save Time, Money By Working Together

By far one of the best ways of getting help while saving time and money is to collaborate with other unsecured creditors and organize a committee to represent you in the Chapter 11 case. The phrase "strength in numbers" holds true when it comes to creditors coping with a Chapter 11 bankruptcy.

Creditors who work together can share critical information and support each other in numerous ways, and most importantly, if they get a committee organized, the committee can hire expert bankruptcy counsel at no direct cost to unsecured creditors. By law, funding for professionals hired by the committee on behalf of all unsecured creditors comes from the Debtor's estate, not from creditors themselves.

Bankruptcy law requires at least 3 creditors submit forms agreeing to be part of a committee, following which a committee is appointed by the U.S. Trustee's office with jurisdiction in the bankruptcy district where the case was filed.