Given the quick process, it is time well spent to submit a Proof of Claim whenever you receive a notice your client or customer has filed for bankruptcy.
As a brief overview, the three most common types of bankruptcy are Chapters 7, 11 and 13. The Bankruptcy Code refers to a person or company that files for bankruptcy as a “debtor.” Chapter 7 is a liquidation, at the end of which the Bankruptcy Court discharges most unsecured debts. Chapters 13 and 11 are debt reorganizations, in which the Bankruptcy Court approves a plan for debtors to repay certain debts and for others to be discharged at the conclusion of the plan.
Most debts in Chapter 7 cases are discharged without being paid or are paid as pennies on the dollar. However, the debtor in a Chapter 13 or 11 Bankruptcy must make payments for numerous years throughout the plan, providing funds available for distribution to both secured and unsecured creditors.
When a person or business files for bankruptcy, the Automatic Stay goes into effect and all creditors must immediately stop all efforts to collect on any debts directly from the debtor. You may not send invoices, call, email or communicate in any way with the client or customer to attempt to collect the debt. You may communicate with the client or customer regarding other matters and may collect on debts the client or customer incurs to you after they file for bankruptcy, but you may not make any effort to collect directly from the client or customer on any debts prior to the bankruptcy filing. Violation of the Automatic Stay comes with hefty penalties, up to $10,000, and can expose the violator to additional punitive damages. The Bankruptcy Court takes the Automatic Stay very seriously and has little patience for creditors who violate it.
To collect on debts clients or customers owe prior to their bankruptcy filing, the Bankruptcy Court requires creditors to submit a Proof of Claim. Filing this Proof of Claim makes creditors eligible to receive payment from any money that may be in the bankruptcy estate. Many Chapter 7 cases are “no asset” cases, meaning there are no assets to distribute from the bankruptcy estate and no unsecured creditors will receive any money to pay debts. However, in many Chapter 7 cases there are assets to distribute. It is very unlikely you will receive payment on the full amount of the debt, but creditors may only collect from the bankruptcy estate if they file a Proof of Claim. If you do not submit a Proof of Claim, you are guaranteed to receive nothing when the Bankruptcy Court discharges your client or customer’s unsecured debts.
In Chapter 13 and Chapter 11 cases, it is more likely you will be able to collect some money on the debt your client or customer owes to you, since the debtor pays into the payment plan for numerous years. While you are unlikely to receive full payment on the debt in these Chapters as well, you are likely to receive some payment. The process for submitting proof of debts in these Chapters is the same as the process for collecting in Chapter 7 cases. Creditors must submit a Proof of Claim through the Bankruptcy Court’s website.
Submitting the Proof of Claim is a very simple process which a creditor does not need an attorney to file. The Bankruptcy Court provides a link to a very straightforward form on its website, which you may submit online. The process takes only a few minutes and the form and instructions are available at: azb.uscourts.gov/proof-claim-form-and-instructions.
Given the quick process, it is time well spent to submit a Proof of Claim whenever you receive a notice your client or customer has filed for bankruptcy. FBN
By Kate Mahady
Kate Mahady is a partner at Aspey, Watkins & Diesel, where she helps clients navigate bankruptcy. She also handles probate matters, immigration and real estate disputes. For additional information or to schedule an appointment with an attorney, visit AWD’s website at awdlaw.com or call 928-774-1478. Aspey, Watkins & Diesel’s Flagstaff office is located at 123 N. San Francisco Street on the third floor in the AWD Building next to Heritage Square.
