What to do if someone who owes you money is on the verge of bankruptcy
What to do if someone who owes you money is on the verge of bankruptcy
In view of the current economic situation caused by the coronavirus pandemic, creditors should develop a strategy for addressing how to maximize collections, including in anticipation of a debtor’s potential bankruptcy. Action now is the key.
You are a Creditor if someone owes you money. If you have assets that secure repayment of the money owed to you, you are a secured Creditor. You are a Debtor if you owe someone money. In order to develop an effective strategy, the Creditor should first ascertain (a) whether the Debtor has any assets, (b) the approximate ratio between the Debtor’s assets and liabilities, and (c) the existence of other creditors, including any senior secured creditors. A Creditor can find some of this information through public records or by retaining a professional. A Creditor’s contract with the Debtor might even contain provisions requiring the Debtor to deliver financial information to the Creditor in certain situations. Through negotiations, a Creditor can also always ask for current/updated financial information.
If the Debtor has equity in its assets or a reliable income stream, an unsecured Creditor should weigh the pros and cons of suing the Debtor versus negotiating a workout. In addition to these options, a secured Creditor should evaluate the option of enforcing the Creditor’s rights against the debtor’s collateral.
In considering whether to file suit, the Creditor should evaluate available remedies. For instance, if the Debtor’s potential bankruptcy is imminent, suing the Debtor for money damages alone probably will not provide the Creditor with a timely remedy before the impending bankruptcy. Therefore, the Creditor should also consider prejudgment remedies, some of which might be available on an expedited basis. Here are some examples of some prejudgment remedies:
- Court order restraining the transfer of the Debtor’s property,
- Court order granting a pre-judgment attachment lien against the Debtor’s assets,
- Court order directing the Debtor to deliver the Creditor’s collateral or property to the Creditor,
- Court order appointing a Receiver to take control over the Debtor’s assets and/or business.
In considering whether to negotiate a workout, the Creditor should understand that the most common areas of compromise involve the Debtor’s payment of a reduced amount and/or payment on a payment plan. Other common areas of compromise include the Debtor putting up additional collateral and/or providing additional guarantees. In any event, the prudent Creditor will include provisions in any workout agreement that allow the Creditor to enforce the original debt if the Debtor does not comply with the workout terms.
One of the most common mistakes Creditors make when addressing a Debtor’s potential bankruptcy is failing to consider the rules against ‘preferential transfers.’ The basic rule against preferential transfers is that Debtors cannot give preferential treatment to some creditors within 90 days before filing for bankruptcy. The bankruptcy trustee has the power to set aside transfers or liens that violate this rule. Here are some general ways a creditor can reduce the risk of having prebankruptcy transfers set aside:
- Avoid debt collection methods that are so onerous that they are likely to cause the debtor’s bankruptcy,
- Avoid actions that give the appearance that the creditor has similar powers of management and control over the debtor to those of the debtor’s principals,
- Structure workouts in such a way that has additional payments or collateral come from a person or entity other than the debtor,
- Extend new value to the debtor (e.g., through extension of credit, etc.),
- Structure payment schedules in a way that is consistent with the creditor’s ordinary course of business with the debtor.
Thank you to Gabriel Courey, an attorney at Epps & Coulson, LLP who handles workouts and bankruptcy legal matters and who prepared this Memo.
There are many nuances to the matters described above. For more information feel free to contact Dawn: dcoulson@eppscoulson.com.
EPPS & COULSON, LLP
Attorneys admitted to practice in
California, New York, Colorado, Texas, Oregon and Hawaii
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