Getting Paid When the Client Goes Bankrupt: It’s Possible

by Scott Wilhelm, Esq.

Whether you are a small business owner, an entrepreneur or a valued member of a team, no matter your profession or trade, getting paid for your work is the lynchpin of your endeavors. So, when that customer/client for whom you have worked tirelessly for weeks, months or even years does not let- on that he or she is struggling financially, it can be a shock that your first indication of trouble is the notice of bankruptcy that you receive in the mail.

Rather than assume that your labor will bear no fruit, you should make an inquiry further into the particulars of the customer/client’s predicament to determine if you are able to get paid because you may be pleasantly surprised. Not everyone is eligible to file for protection from creditors under the United States Bankruptcy Code. Here are a few things you should look for if you have the unfortunate experience of being listed as a creditor in bankruptcy.

  1. The amount of the debtor’s debts: There are limits to the amount of debt that an individual can hold in order to be an eligible debtor. For instance, currently, individuals with unsecured debt in excess of $394,725.00, are generally precluded from filing bankruptcy. That is why you should examine the debtor’s entire bankruptcy petition. While you will receive only a one-page notice of bankruptcy, you should go to the United States Bankruptcy Court’s website to view the entire bankruptcy petition. If the debtor deb which exceeds the statutory limits, there are steps you can take to object to the petition.
  2. Whether the debtor filed bankruptcy previously: The availability of protection from creditors under the United States Bankruptcy Court is not unlimited. Once you receive notice that your customer/client has filed bankruptcy, you should check the records of the United States Bankruptcy Court to determine if the debtor has filed bankruptcy in the past which may render the person ineligible to be a debtor. While there are some exceptions, generally an individual can only obtain a discharge of debts once every eight years.
  3. Exemptions: The United States Bankruptcy Code provides the debtor with “a fresh start” by relieving the individual of his debts. In exchange for relief from his creditors, the debtor must surrender assets which Congress has deemed as unnecessary to “a fresh start.” Accordingly, there are limits on the kinds, and the amounts, of property which an individual can retain in a bankruptcy proceeding. For example, a debtor is permitted to obtain a limited amount of equity in a primary residence and a motor vehicle. Likewise, a debtor can retain some household goods. As a creditor in a bankruptcy proceeding, you should carefully scrutinize the petition to determine whether the debtor possesses non-exempt assets.
  4. Fraudulent Conduct: As noted above, the Congressional intent in the Bankruptcy Code is to provide “a fresh start” to an individual who has little, if any, prospect of satisfying his debts in the ordinary course of his affairs. To that end, the Bankruptcy Code mandates that the debtor file for relief from creditors in good faith. Where the individual has engaged in criminal, fraudulent, intentionally false and/or malicious conduct prior to filing bankruptcy, the individual may be denied a discharge of his debts. Assume that as a creditor you loaned money to the debtor in reliance upon the statements made, or documents produced, in a loan application which have turned out to be untrue, then you are in a position to object to the debtor obtain a discharge of the debt upon which the false information is based.
  5. Fraudulent Transfers: A person who transfers money or assets, or who makes purchases of certain goods, in the months leading up to the filing of bankruptcy may not be a good faith debtor. In these circumstances, with the assistance of the case trustee and the Bankruptcy Court, you may be able to recover the money or assets from the third-party transferee in order for a distribution to be made to creditors.

The preceding are just a few examples of protections which are built-into the United States Bankruptcy Code to protect creditors and which illustrates that upon your receipt of a notice that your customer/client has filed bankruptcy you still may get paid.

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