The Other Side to Your Contract Has Filed for Bankruptcy: What Now?

Bankruptcy can, in some instances, be a help to people or businesses in debt. But for many on the opposite end of the contract-the end of the contract that is potentially being discharged if the bankruptcy goes through—bankruptcy can be a financial nightmare.

What Does Bankruptcy Mean to the Creditor?

Bankruptcy means that in most cases, the other side to your agreement does not have to perform under your contract, and/or does not owe you any money, if there is money owed. And because you cannot contract away the right of a party to file for bankruptcy, you cannot insulate yourself from this risk, by having a party promise in their contracts they won’t file for bankruptcy.

Notice of Filing

You will know if a party filed for bankruptcy, because you will get notice of the bankruptcy from the bankruptcy court. This comes from the debtor listing you as a creditor in the bankruptcy schedules.

Getting this notice is confusing for most parties—unlike the debtor who has probably consulted with a lawyer, and thus, may have an understanding of what will happen and what to expect in bankruptcy, you didn’t have that same opportunity, and are now facing a loss of an expected financial opportunity through the possible bankruptcy discharge.

What to Do Next?

The first thing you should do when you get a notice of bankruptcy, is really something you should not do: don’t try to continue to collect the debt, in any way, shape or form; don’t even suggest payment, or work out a solution to the debt, or do anything that could in any way be construed as an attempt to collect the debt.

When the bankruptcy is filed an automatic stay will go into effect; this stay prohibits all creditors from making any attempt to collect a debt, and bankruptcy courts will sanction creditors that try to evade this bar, even if the attempt to collect is innocent.

What Kind of Bankruptcy?

What will happen to your debt largely depends on the type of bankruptcy being filed. Businesses that file for Chapter 7 do not get a discharge, but individuals do. In Chapter 13, you may be paid some on your claim, but only over time, and possibly, not 100% of your claim.

Larger businesses tend to file Chapter 11 claims, where most debts will be discharged, although some with priority will be paid. Because Chapter 11 cases can be long, with multiple creditors all wanting to get paid, the cost of fighting to get paid in bankruptcy court is something to consider.

Any debt that is secured by a lien is in a better situation, as liened property can be taken even after a bankruptcy, even if the debt related to or secured by the lien, is discharged.

Trying to collect on a contract? We can help. Call our Fort Lauderdale business lawyers at Sweeney Law P.A. at 954-440-3993 today.

Sources:

levelset.com/blog/does-a-mechanics-lien-secure-debt-in-bankruptcy/

jdsupra.com/legalnews/how-bankruptcy-affects-mechanic-s-lien-64430/