Rights of Pre-Petition Creditors in a Chapter 11 Bankruptcy
This essay is published for informational purposes only. It is not legal advice, nor is it intended as a substitute for the advice of your attorney.
There are a number of myths and misconceptions about creditors' rights when customers file for protection under Chapter 11 of the U.S Bankruptcy Code. Often, creditors receive notice of a bankruptcy and incorrectly believe they have no rights and no options to consider. Credit profesionals should know the facts in order to protect their employer's interests. For example, creditors can:
- Become one of the petitioning creditors that forces an insolvent or illiquid customer into bankruptcy.
- Place the account on credit and shipment hold once a bankruptcy has been filed.
- Stop all shipments in transit to the debtor once a bankruptcy has been filed, and demand that common carriers return to the seller shipments in transit.
- File a reclamation claim for any shipments received by the bankrupt debtor within the time frame specified in the U.S. Bankruptcy Code.
- Extend open account terms or refuse to extend credit to a bankrupt debtor.
- Refuse to sell on C.O.D. company check terms.
- Demand immediate payment against a personal guarantee, or an inter-corporate guarantee given to the creditor on behalf of the bankrupt debtor, and sue the guarantor[s] if necessary to collect the entire balance due.
- Attend the first meeting of creditors and question the debtor in person.
- Bring to the attention of the trustee or the Bankruptcy Court information demonstating that the debtor has hidden assets or committed some other type of fraud such as a fraudulent transfer [conveyance] of assets.
- Ask the Court to appoint a trustee to run and manage the business if the debtor's management is incompetent, or is involved in some form of theft or fraud.
- Ask the court for approval to seize collateralized assets.
- Ask the debtor to reaffirm the pre-petition debt.
- Ask to become a member of the Official unsecured creditor's committee.
- Refuse to join the creditor's committee.
- Refuse to disgorge payment[s] in response to an assertion that the creditor in question received a preferential transfer payment.
- Negotiate with the trustee or litigate over the validity of a preferential transfer claim.
- Vote on the Plan of Reorganization.
- Review the Disclosure Statement. A Disclosure Statement is a written document prepared by a Chapter 11 debtor or other plan
proponent designed to provide “adequate information” to creditors to enable them to evaluate the proposed Plan of Reorganization.
Copyright 2012. Michael C. Dennis. All Rights Reserved.