Facts about Business Bankruptcies

The more information you have about bankruptcies, the better you will be able to protect your company's interests when a debtor files for bankruptcy protection.  Here are some interesting facts about business bankruptcies:

• Contrary to popular misconception, a bankruptcy filing by a customer is not an indication that the credit department has made a mistake in extending credit to that customer.
• Bankruptcies and bad debt losses are inevitable for any company offering customers open account terms.  In fact, there is an element of risk every time open account terms are extended to a customer.
• The Automatic Stay is an injunction that goes into effect automatically the moment a bankruptcy petition is filed. The automatic stay provides a period of time in which all judgments, collection activities, foreclosures, and repossessions of property are suspended on any debt or claim that arose before the filing of the bankruptcy petition. The automatic stay stops any lawsuits filed against the debtor, as well as most collection actions against the debtor by a creditor, or a collection agency.
• Prohibited activities by creditors under the Automatic Stay include:  contacting the debtor by phone, mail or in person to demand repayment; taking actions to collect money or obtain property from the debtor; repossessing property of the debtor; filing a lawsuit;  continuing a lawsuit or foreclosure action. 
• Violation of the automatic stay protection provided to bankrupt customers may result in fines or other sanctions by the ankruptcy Court.
• There is no guarantee that a creditor selling on open account termto a debtor after a Chapter 11 bankruptcy will be paid in full. To some extent, the "administrative priority" that post petition creditors receive as an inducement to extend credit to the DIP is illusory.
• Following a bankruptcy filing, trade creditors can lawfully: Reclamation involves the right of a creditor to recover possession of goods delivered to an insolvent buyer during a specific period prior to the bankruptcy filing.
  • Place the account on credit hold.
  • Stop all shipments in transit.
  • Arrange for the return of their merchandise in transit.
  • File a reclamation claim for any shipments made to the bankrupt debtor within a specific time frame prior to the date of the bankruptcy filing.
  • Refuse to extend credit to the bankrupt debtor.
  • Demand immediate payment against a personal guarantee or an inter-corporate guarantee.
  • If necessary, sue the guarantor to enforce the creditor's rights under the signed guarantee.
• Any payment received within 90 days prior to the bankruptcy filing date may be subject to a preference action.
• Preference avoidance power is granted under the U.S. Bankruptcy Code to ensure an equitable distribution of the debtor's assets.
• There are numerous defenses that can be raised by a creditor to a demand received for the creditor to return payments it has received that are subsequently identified by parties representing the debtor as involving a preference payment [or preferential transfer].
• The creditor often needs an attorney to represent them to assert one or more of these defenses in response to a demand that a preferential transfer be returned to the estate of the bankrupt debtor.
• A recent change to the bankuptcy code effectively bars most preference claims of less than $5,000.

Less than half of the companies that go into bankruptcy successfully emerge from it. This statistic should be kept in mind any time the credit department is asked to consider a request from a debtor in possession to re-establish open account terms.

Copyrighy 2009 by Michael C. Dennis.  All Rights Reserved