December 9, 2009
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With the economy stumbling along, both business and personal bankruptcies are on the rise, and small businesses can be among the most vulnerable when a company goes bust. In most cases, unsecured creditors will at best receive only a portion of the money they are owed, but how you handle it can go along way in determining if and how much you get paid. Here’s a brief guide to the bankruptcy process and how you can stay ahead of it.
- The best way to avoid getting caught out in a bankruptcy is to avoid running up a large bill in the first place. If you have any reason to believe that a company is on the ropes, either because of their performance or simply the industry they are in, don’t do too much work or provide too much product without getting paid. If a customer is struggling you don’t want to cut them off necessarily, but be prudent and recognize the risk of loss upfront.
- If you are in construction or any real estate-related business, file construction liens early and often if you don’t get paid on time. It’s a simple process, and construction liens, sometimes referred to as mechanics liens, get priority ahead of other claims. In many cases a contractor with a construction lien will get paid in full, though it can take quite a while. Be patient.
- No matter what the circumstances of the bankruptcy, make sure to pay attention to the mail and file a proof of claim in a timely fashion. It’s a simple form and doesn’t require a lawyer. This will at least get you in the line for any payout, though it does not guarantee any payout.
- If you are approached by an outside company who wants to buy your bankruptcy claim, you can take this as a sure sign that some kind of payout is likely. The claims buyers count on either ignorance of the process, or peoples’ need to get their money quickly. If you absolutely need the cash, do what you have to do. But if not, don’t sell your claim. You may have to wait a year or even two, but in all likelihood you’ll get two to three times what the claim buyer offered.
- On the other hand, remember that bankruptcy cases – unlike other legal proceedings – are not really about capital J justice, but rather about facilitating a fair distribution of whatever assets remain in a bankrupt entity. That often means cutting deals. So if you’re offered a settlement of your claim by the bankrupt entity, you should negotiate hard and consider it carefully. Sometimes the best deals come early in the legal proceedings.
The bankruptcy process can be quite complex, and you’ll only want to get deeply involved if you have a lot of money at stake. In general, most federal bankruptcy filings are either Chapter 11 cases, in which the company proposes to re-organize and either sell itself or raise more money to stay in business, or Chapter 7 cases, which are liquidations of assets.
In both cases, there is a hierarchy of claims payments established, partly by law and partly by the court proceeding itself. Employee wage claims are at the front of the line in almost any case, followed by secured lenders, which might be banks or construction lien-holders. Unsecured creditors –and if you’re not sure that you’re a secured creditor, you are almost certainly an unsecured creditor – get paid last. Creditors are usually represented by a Creditors Committee, and if you have a large claim you might want to ask to be on the committee. That can help you defend your interests.
Above all, be aware that bankruptcy cases can take a very long time to get resolved – as much as several years. Partly for this reason, you should be cautious about hiring a lawyer unless it’s a very large claim. You can easily eat up any potential recovery in legal fees, and in fact the bankrupt entity might use this fact as leverage in forcing you to settle. If your claim is challenged for whatever reason, and the legal fees to fight for it are going to be $20,000 or $30,000, and your potential payout is $40,000 two years from now, you might want to swallow your pride and take $5,000 or $10,000 now and be done with it.
Check your balance, review recent transactions and pay your bill on the go.
