Creditor Protection in Chapter 11 Bankruptcy

 Posted on November 14, 2024 in Bankruptcy

Businesses and individuals with significant financial difficulties may file for Chapter 11 bankruptcy protection. A creditor faced with a debtor company that has filed for Chapter 11 bankruptcy should consider consulting with an attorney who represents creditors to ensure that they are able to recover their assets and to familiarize themselves with the process.

Chapter 11 Bankruptcy Explained

Chapter 11 bankruptcy allows a debtor to reorganize with no debt limits. For this reason, and because the business owner remains in control of operations even following bankruptcy, many businesses utilize Chapter 11.

However, Chapter 11 reorganization is complex and unpredictable, especially for creditors, who must ensure that they monitor debtor filings so that their claims are not negatively impacted. Unsecured creditors, who are paid last following reorganization, should be particularly vigilant to ensure their rights are not negatively impacted.

Chapter 11 Bankruptcy Process

Although each Chapter 11 case will vary, the process and timeline for these cases follow a general pattern:

• The debtor petitions for Chapter 11 Bankruptcy

• Within 14-16 days: Schedule of Liabilities is filed

• Within 120 days: Deadline for debtors to file a repayment plan

• Within 4-18 months: Reorganization plan is filed. Up to this point, the creditor negotiates the plan with the debtor

• Within 6-24 months: Plan is approved

Chapter 11 Preference Claims  

Creditors doing business with a company that has filed for Chapter 11 protection or is about to do so should pay particular attention to the potential for "preference claims" or "preference demands." 

A bankruptcy trustee may file a lawsuit against a creditor seeking to "claw back" or recover on payments the debtor made to that creditor in the period just before the debtor’s bankruptcy filing. This is called a preference claim.

The purpose of preference claims is to prevent unequal treatment between creditors. Preference claims force the "preferred" creditor to return the payment to the bankruptcy estate for the benefit of all the creditors.

This can be problematic for creditors who continue to do business (and receive payments) from a company in the time period before it files for Chapter 11 protection. Receiving a bankruptcy claim can also be frustrating for a creditor who either was not aware that the debtor company was facing financial difficulties at the time or may have wanted to wait it out in hopes the debtor would not face bankruptcy. Additionally, a creditor facing a "preference claim" may still be owed debts from that Chapter 11 debtor, making it all the more frustrating to face a claim on a paid debt.

Creditors can protect themselves from preference claims so that they are less likely to occur by training employers to be aware of changes in customer payments and to flag those for management review.

A creditor facing a preference lawsuit can also assert defenses specifically set out in bankruptcy law, including that the payment was made in the ordinary course of business rather than as an attempt to give a creditor preferential treatment.

Key Terms to Know

• Automatic stay: This injunction forbids creditors from collecting on debt after the debtor files for Chapter 11 protection.

• Schedule of Liabilities: This is filed by the debtor early on in the bankruptcy and will help determine the creditor’s recovery of assets as well as the status of debts.

• Proof of claim: The creditor must file a proof of claims owed by the debtor.

• Executory contracts: A contract between the debtor and creditor in which both parties still have to fulfill their rights and responsibilities. A bankruptcy court must approve the contract. If the contract is "assumed" by the court, the debtor must continue to perform under the contract while paying back their claim or a payment plan.

• Plan of reorganization: This plan governs how the debtor will restructure their business to pay back creditors.

Contact a Chicago, IL Bankruptcy Attorney

At Teller, Levit & Silvertrust, P.C., we focus our practice on protecting the rights of creditors. If you are a creditor facing a debtor’s Chapter 11 filing, contact our office to speak to a Cook County, IL bankruptcy attorney who can guide you through this complex proceeding and protect your assets. Call our offices at 312-922-3030 today for a detailed consultation.