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Know the Law: What to do when a customer files for bankruptcy

March 30. 2014 4:09PM

We received written notice from the bankruptcy court that one of our customers with a large outstanding balance just filed bankruptcy. What does this mean and should we file a proof of claim?

If you received written notice from the bankruptcy court, this means the debtor listed you as a creditor. Among other things, when a creditor gets notice that a debtor has filed for bankruptcy, it is important for the creditor to determine whether it needs to file a proof of claim in the debtor's case to preserve its rights to receive payment from the debtor's estate.

A proof of claim is a written statement describing the reason for and amount of the debt allegedly owed by the debtor to the creditor. A proof of claim must be submitted on the bankruptcy court's official form and should also include any documentation supporting the claim. In a Chapter 7 or 13 bankruptcy case, the creditor will not share in any distribution of funds from the bankruptcy estate unless the creditor has correctly and timely filed a proof of claim. In a Chapter 11 case, a creditor must file a proof of claim if its claim is not listed in the debtor's schedules, if it is listed reflecting an incorrect amount, or if it is listed and identified as disputed, contingent or unliquidated.

By filing a proof of claim in a bankruptcy case, a creditor asserts its rights to receive a distribution from the bankruptcy estate, if any. Filing a proof of claim does not guarantee a distribution to the creditor. A proof of claim may be objected to and disallowed in whole or in part. No distributions to creditors will be made if there are no assets in the bankruptcy estate.

Filing a proof of claim form, however, is not without some potential unintended consequences, including, but not limited to, submitting the creditor to the bankruptcy court's jurisdiction, subjecting the creditor to discovery regarding its claim, and waiving the right to a jury trial.

For example, the debtor may object to the proof of claim and seek information by discovery. While unrelated to filing a proof of claim, another important consideration for a creditor when a customer files bankruptcy is the potential for the bankruptcy estate to seek recovery of amounts paid during the 90 days prior to the bankruptcy filing, even if the creditor still has unpaid invoices.

Creditors should give careful consideration to the impacts of a customer's bankruptcy filing and seek advice of counsel.

Steven Dutton can be reached at

Know the Law is a bi-weekly column sponsored by The McLane Law Firm.

We invite your questions of business law. Questions and ideas for future columns should be addressed to: Know the Law, The McLane Law Firm, P.O. Box 326, Manchester, NH 03101 or emailed to Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.

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