As we have all noticed going through our daily lives, the economy is rapidly changing from where it was a year ago. The current rate of inflation in the United States is sitting at 8.2%. Gas is more expensive. Groceries seem to cost more every time you walk into a store. Bottom line – people’s money does not go anywhere near as far as it used to. As a result, people are falling farther and farther into debt.
Home foreclosures are up anywhere from 180 to over 200% depending on location. More and more small businesses seem to have closed permanently. As a result, more and more people and businesses fall farther and farther into debt, thus more bankruptcies will be filed.
What is Bankruptcy?
Bankruptcy is a legal proceeding in federal court that is filed when an individual or business is unable to pay its outstanding debts. This process typically begins with a petition filed by the debtor (either an individual or business). In this petition, the debtor lists all their assets and all of their outstanding debts and obligations. Notices are then sent out to all of the people that debts are owed to (creditors). This notice details the type of bankruptcy filed, and the various deadlines set out in the case. The debtor’s property, assets, and income will be assessed, and depending on the type of bankruptcy, steps will be set out to possibly pay all or some of the debtor’s outstanding debt. If the debtor successfully makes it to the end of his/her bankruptcy matter, the debtor can be relieved of all remaining debts that occurred prior to the filing of the bankruptcy petition (discharge).
As a business in Knoxville, Tennessee, how do you protect yourself when your clients begin defaulting on their debts and filing for bankruptcy?
The best protection begins long before the client falls into debt. This protection involves prior planning. First, take out the contracts that you have been using over a long period of time and give them a new look. Make sure they are up to date and include the protection and collection measures you desire for your business. Second, make sure if you are taking a lien against any of your client’s property that your documents are filled out properly and filed correctly in order to preserve your place in line if/when a bankruptcy is filed. Things as simple as a misspelling of your client’s name can cause you to lose your place in line as a creditor when a bankruptcy is filed, and that can be the difference between receiving all/some of the debt owed to you and receiving nothing at all.
What Do I Do If My Customer or Client Files for Bankruptcy?
So, the next question is, what do you do if your customer/client who has fallen behind files for bankruptcy? The first and most important thing to do is STOP. Once a notice of bankruptcy is filed all collection efforts must cease. There are very serious penalties for creditors who attempt to continue collection after a bankruptcy is filed. This is known as violating the automatic stay. These types of violations are taken extremely seriously by the bankruptcy court.
Next, it is important to understand the type of bankruptcy that has been filed. Depending on the type of bankruptcy, you may be entitled to more or less \Further, depending on the type of debt, the debtor may not be entitled to have his debts discharged by the bankruptcy court. It is important to consult with legal counsel to determine what type of bankruptcy has been filed, and what your rights are as a creditor in the bankruptcy.
The next step, if there are assets in the bankruptcy, is to get in line. In order to be considered for payment of the debts owed to you by the debtor, a document known as a claim must be filed with the court. The claim puts the bankruptcy court and the debtor on notice of the amount you believe you are owed. That claim will be reviewed by the court, the debtor, and the person managing the assets used for payment in the bankruptcy (the trustee). These individuals will determine whether the claim is valid, where the claim fits in with the other claims that have been filed, and how much of the claim can/will be paid off in the bankruptcy. It is important for the claims process to be done correctly to secure your place in line as a creditor.
The most important thing when there is a pending bankruptcy case involving one of your customers or clients is to educate yourself. Make sure that you understand what is going on in the case, understand your rights as a debtor, and understand the steps that you need to take to protect your claim. It is also important to know when you need to seek the advice and representation of counsel in order to protect your rights. Preparation and knowledge are the keys to understanding and protecting yourself and your business from potential bankruptcy threats.
