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Myths and Misconceptions about Business Bankruptcies
There are a number of widely held myths and misconceptions about the bankruptcy process, including these:
- Myth: There is no risk associated with selling to a debtor in Chapter 11 bankruptcy. In reality, no one is guaranteed payment. Both pre-petition and post petition balances owed are at risk when a customer is in bankruptcy.
- Myth: All payment received within 90 days of the bankruptcy filing date are preferential transfer that must be returned [disgorged] on demand. Fact: Not all payments received during the look-back period are preferential transfers. Therefore, creditors should not return such payments on demand. Instead, they should discuss their options with their attorney if such a demand is received.
- Myth: Creditors are required to extend credit post-petition to a Debtor in Possession. This is false. Creditors are under no obligation to extend credit to a DIP. Any decision to do so is made at the creditor company’s discretion.
- Myth: When filing a Proof of Claim in a Chapter 11 case, creditors are not required to list [a] open credits or [b] on-account payments. The fact is that creditors must submit a claim for the net amount due on the bankruptcy filing date. To accomplish this, creditors must report invoices, debits, credits and on account cash.
- Myth: Trade creditors can ignore all notices from the Bankruptcy Court except for the Proof of Claim form. The truth is that every document from the Court may be important. Missing a deadline, failing to perform a required task, or failing to respond in a timely manner to correspondence received may result in the dismissal of all or part a creditor’s claim against the debtor.
Copyright 2010 by Michael C. Dennis. All Rights Reserved.