Masonry Magazine December 1992 Page. 18
How to Avoid Being A Bankruptcy Creditor
When one of your customers files for Chapter 11, this puts a moratorium on payment of bills. Fortunately, there are ways you can greatly limit your liability.
Often tell people that, as a bankruptcy attorney in these recessionary times, I am in the country's only growth industry. Unfortunately, with over one million case filings in 1992, this joke is as sad as it is true. And with bankruptcy filings so numerous and widespread, your chances as a business owner of being on someone's creditor list are greatly increased. In my over ten years as a debtor's attorney, I have found many legal and ethical ways to reduce my clients' debts so that they can reorganize and continue in business. As their advocate, it's my job to help them protect themselves from their creditors. When one of your customers files for chapter 11, this puts a moratorium on payment of bills. You, as a creditor, have very little recourse: you can't sue, harass for payment, or garnish his bank account. So what power do you have? Fortunately, there are ways you can greatly limit your liability in your customers' bankruptcy. There are only two types of creditors who are not severely injured when a company or individual files for bankruptcy: (1) the secured creditor, especially the oversecured creditor (one who takes more collateral than the amount of credit extended); and (2) the creditor who limited the amount of credit he or she agreed to extend in the first place.
If you choose (or are able) to become a secured creditor, you will retain an interest-a right-in property belonging to the debtor. We are all familiar with this phenomenon from car and house financing. In the business world, the collateral is either assets belonging to the debtor, or assets that the creditor is selling to the debtor. For instance, when a bank gives a line of credit, it's usually secured by accounts receivable, inventory and/or equipment. Documentation is executed to assure that, if the debtor fails, the creditor has recourse against any assets which may be liquidated to extinguish the debt. An astute creditor will make sure that under any scenario, liquidation of assets will bring at least the amount outstanding to that creditor. In addition, in the masonry industry, you are entitled to file a mechanic's lien if you haven't been paid for work done on real estate. However, if you choose to file a mechanic's lien, be reminded that there are strict time limits which must be met, as well as certain documentation requirements. Only after the liquidation of assets for payment to secured creditors, will other creditors be entitled to anything. Under bankruptcy rules, certain creditors-e.g. employees, pensions, taxing authorities-take the first available funds. General creditors-e.g., landlords, utilities, trade and the like-will share on an equal basis if anything is left to be distributed.
Therefore, the most effective way to minimize the impact of a customer's bankruptcy, as simple as it may seem, is to make wise credit decisions before the fact. Obtaining contracts for which you won't ever get paid is simply not good business. A financially troubled business that is headed for bankruptcy and has good counsel will plan its reorganization using as much trade credit as it can get before filing for protection. So, for Continued on Page 36
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