What Are Some Rights as a Creditor to a Business in Bankruptcy?

When a business initially files a bankruptcy petition, it triggers the automatic stay, which generally halts a creditor’s ability to enforce collections. A creditor may, however, have rights to continue pursuing money owed after a business debtor has filed for bankruptcy. 

As reported by Forbes magazine, creditors may not pursue collections, such as by initiating a legal action, without obtaining the court’s approval. If you extended credit secured by the debtor’s assets or have proof of your status as a critical vendor, the court may grant you relief from the automatic stay. 

Filing a proof of claim and debtor bankruptcy type 

A business has two options for filing bankruptcy. If the owners plan to liquidate and cease operations, they may file a petition for Chapter 7. This generally means selling all the debtor’s assets and using the proceeds to pay its creditors before the business shuts its doors. 

You may not receive the full amount owed when unpaid employees or outstanding taxes take priority during a Chapter 7 bankruptcy. If a debtor files for a Chapter 11, however, the business expects to remain in operation but does so through a restructuring process. You may assert your right to collect on the money owed by filing a proof of claim with the court before the deadline. 

Reclaiming goods sold or assuming a lease agreement

If you have a contract with the debtor and shipped goods or raw materials, you may reclaim them to avoid the possibility of not receiving payment. Property owners who have entered into a rental agreement may work with a tenant in bankruptcy to assume or reject the lease for its remaining duration. As a creditor, your debtors’ restructuring strategies may provide you with workable options when they file a bankruptcy petition.