Practical Insights

Posted: July 13, 2015 / Categories Bankruptcy, Client Q & A

Client Q & A: One of my customers just went bankrupt. Does that mean it does not have to pay off its account?

One of my customers just went bankrupt. Does that mean it does not have to pay off its account?

By Bennette Deacy Kramer

Your customer does not have to pay off its account now, but depending on the amount of assets in the bankruptcy estate, you might receive payment up to 100% of the amount of the account during the bankruptcy case.

The Automatic Stay and Creation of the Bankruptcy Estate

Your customer does not have to pay off its account right away because, when a person files a bankruptcy petition, an "automatic stay" comes into effect immediately. Once the automatic stay is in effect, a creditor may not take any action to collect any debts that existed before the bankruptcy filing. Also, once a bankruptcy petition has been filed, all the debtor's assets become part of a "bankruptcy estate" and no longer belong to, or are under the control of, the debtor – your customer. However, a bankruptcy filing does not mean that you will never receive all or part of the amount you are owed.


As a creditor, you should receive notice of the bankruptcy filing within a month or so. The notice will let you know about two events. First and most important, the notice will announce the bar date for submission of claims. This is the date that claims (i.e., your claim for any amount owed to you by this debtor) are due. This is a very important date. Unless you submit a claim prior to the bar date, you likely will lose all chance of collecting from the bankruptcy estate. The notice should include a Claim Form that has been filled in with the information pertinent to the bankruptcy case and information relating to the creditor.

It should be noted that certain kinds of claims against individual debtors are not dischargeable in bankruptcy, which means that the right to collect survives the end of the bankruptcy case. Some of the claims that fit into this category are tax claims, fraud claims, unscheduled claims where the creditor did not get notice of the bankruptcy, domestic support claims, fines and other payments owed to the government, most student loan claims, claims for death or personal injuries if the debtor was intoxicated, claims for payment of an order of restitution to the United States, post-petition coop or condominium fees, amounts owed to a pension plan and similar claims.

Second, the notice will tell you when the Creditors' Meeting will take place. This meeting is the opportunity for creditors to question the debtor or its representative about its assets.

No Assets

In cases where the debtor has no assets, the notice will have a notation that it is a "No Asset Case" and no claim bar date. Because there are no assets, the likelihood of any creditor recovery is slim unless the bankruptcy trustee later finds assets. If that happens, another notice will be sent requesting submission of claim forms.

Getting Paid from the Bankruptcy Estate

The amount a creditor may expect to recover from a bankruptcy estate ranges from 0 to 100%, depending on the value of the assets compared to the amount of liabilities. Usually, the trustee appointed to oversee the case by the United States Trustee will have a good idea of the percentage of the payout per dollar about six to twelve months after the commencement of the bankruptcy case. In large business cases a trustee will not be appointed, instead the debtor's employees will be in charge as Debtor in Possession or DIP.

There are also different classes of creditors with different priorities set forth in the Bankruptcy Code. Often, the first creditors paid are those who lend money to the debtor at the beginning of the case; these creditors receive a superpriority claim. Next, claimants with secured claims receive payment to the extent of their security. Unsecured claims are then paid in the order of priority set forth in the Bankruptcy Code as follows: domestic support obligations, allowed administrative expenses, wages up to a certain limit, contributions to an employee benefit plan, claims related to raising grain or fishermen, deposits for housing, tax claims, capital requirements for insured depository institutions, claims for death or personal injuries if the debtor was intoxicated, and allowed unsecured claims.


The bankruptcy process may seem confusing, but we have considerable experience representing creditors in bankruptcy proceedings. If you have a question or need advice, we would be happy to discuss your situation.