With the reopening of economic activity, we anticipate that problems brought on by the pandemic-induced hiatus will manifest in a fair number of businesses seeking reorganization under Chapter 11 of the United States Bankruptcy Code. Chapter 11 provides businesses that find themselves victims of temporary or even systemic pressures with an opportunity to reorganize and re-negotiate obligations they are unable to meet without shutting their doors. However, it also presents serious problems and obstacles for the businesses with whom they worked and to whom they owe obligations, including claims to recover monies paid in the months leading up to the bankruptcy filing.

In addition to an anticipated increase in Chapter 11 filings, we expect that personal bankruptcy filings under Chapter 13 (personal reorganization) and Chapter 7 (dissolution) will similarly increase. While in most cases you can expect little or no recovery in these types of cases, any business dealing with consumer or personal debt should be aware of the automatic stay imposed on creditors when a person or entity files a case in Bankruptcy Court.

Very simply, in any bankruptcy case (including Chapter 11 cases), creditors are required to stop all collection efforts immediately upon receiving notification of the filing. The notice usually takes the form of a notice of the first meeting of creditors, commonly referred to as the “341 Meeting.” It is important that you make your accounting personnel and/or any collection agencies providing collection services on your behalf aware that they should stop all efforts immediately. Prosecuting violators of the automatic stay has become almost a cottage industry for some bankruptcy attorneys, and simply responding to such a proceeding will only add insult to injury as it is likely to cost more than what you were seeking to collect.

The lawyers in our Creditors’ Rights Practice have the experience to help you navigate the labyrinth that the Bankruptcy Code poses for any business to whom money or obligations are due.

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Please visit our Bankruptcy & Creditors’ Rights Practice Area to learn more about the legal services we can provide in this area. If you have any questions or would like more information on the issues discussed in this communication, please contact any of our Bankruptcy & Creditors’ Rights attorneys.