How Do I Handle Outstanding Bills During Bankruptcy Proceedings?

 Filing for bankruptcy can be an overwhelming experience for any business owner. One of the most pressing concerns during this process is how to manage the outstanding bills and debts that have piled up. Whether your business is filing for Chapter 7 or Chapter 11 bankruptcy, understanding how to handle these bills during the bankruptcy proceedings is crucial to ensuring that the process goes as smoothly as possible.

In this blog, we’ll break down how outstanding bills are handled during bankruptcy proceedings, the role of creditors, the protections available to businesses, and what steps you can take to manage your business finances during this time.

1. Understand the Automatic Stay

One of the most significant advantages of filing for bankruptcy is the automatic stay. The moment you file your bankruptcy petition, an automatic stay goes into effect. This means that creditors are prohibited from taking any collection actions against you, including:

• Calling to collect payments
• Filing lawsuits or judgments
• Wage garnishment
• Seizing assets or property

This stay provides much-needed relief, allowing you to focus on the bankruptcy proceedings without the constant pressure of creditors trying to collect on your outstanding bills. The automatic stay helps businesses reorganize or liquidate without the threat of further collection actions from creditors.

Temporary Relief

The automatic stay is temporary and lasts throughout the bankruptcy proceedings, which can vary depending on the type of bankruptcy filed (Chapter 7 or Chapter 11). However, certain actions, such as criminal cases or family support obligations, may not be protected under the automatic stay. In some cases, creditors can also request relief from the stay if they can prove it is causing them harm.

2. Identifying Secured vs. Unsecured Debt

Not all outstanding bills are treated the same during bankruptcy. Understanding the difference between secured and unsecured debt is essential to determining how your creditors will be paid.

Secured Debt

Secured debt is backed by collateral. For example, if your business has a loan for equipment or real estate, and the loan is backed by the equipment or property itself, it is considered secured debt. If the business defaults, the creditor has the legal right to seize the collateral to satisfy the debt.

In bankruptcy proceedings, secured creditors have a higher priority than unsecured creditors. During Chapter 7, these creditors may seize the collateral unless you can either:

• Redeem the collateral by paying the fair market value of the secured asset, or
• Reaffirm the debt to continue paying for the asset under the terms of the loan.

In Chapter 11, secured creditors are typically negotiated with as part of the reorganization process. You may be able to restructure your debts, extend payment timelines, or reduce the amount owed to secure creditors.

Unsecured Debt

Unsecured debt, on the other hand, does not have collateral backing it. Examples include credit card bills, vendor bills, and medical bills. These creditors are lower on the priority list and are paid only after secured debts have been settled. In Chapter 7 bankruptcy, unsecured creditors may receive little or no repayment, depending on the assets available for liquidation.

In Chapter 11, unsecured creditors are typically included in the reorganization plan. You may be able to negotiate with them to reduce the debt or extend repayment terms over time.

3. Working with Creditors

During bankruptcy proceedings, you’ll need to communicate and work with your creditors. While the automatic stay protects you from creditor actions, it doesn’t mean that you won’t eventually need to deal with these outstanding bills.

In Chapter 7 Bankruptcy:

• Liquidation Process: If your business is filing for Chapter 7, a trustee will be appointed to liquidate your assets and pay off creditors. Creditors will file claims with the bankruptcy court to try and recover the money you owe them.
• Discharge of Unsecured Debt: Once your assets are liquidated, any remaining unpaid unsecured debt will typically be discharged (eliminated), meaning you won’t have to repay it.
• Secured Debt Resolution: Secured debts may be resolved through the sale of collateral or through reaffirmation if you want to keep the asset.

In Chapter 11 Bankruptcy:

• Reorganization Plan: In Chapter 11 bankruptcy, your business will create a reorganization plan to restructure debt payments over time. This will involve negotiating with both secured and unsecured creditors to agree on a payment plan.
• Creditor Committees: A creditors' committee may be formed in larger bankruptcy cases to help negotiate with the debtor. This committee will work with the business to ensure that the debt repayment is reasonable and in line with the best interests of all parties involved.

4. Treatment of Priority Claims

Some outstanding bills will receive special treatment due to their status as "priority claims." Priority debts are considered more urgent and must be paid before general unsecured debts. These can include:

• Employee wages and benefits: Wages, salaries, and commissions earned within the 180 days before the bankruptcy filing may be classified as priority debts.
• Taxes: Certain tax liabilities, including payroll taxes and income taxes, are also given priority in bankruptcy.
• Alimony or child support: Any outstanding family support obligations will generally be prioritized in bankruptcy proceedings.

Priority claims are generally paid first from any available assets, and only after they are satisfied will remaining funds be allocated to other creditors.

5. Impact on Vendor Relationships

Outstanding bills owed to suppliers and vendors can become a major concern during bankruptcy proceedings. While the automatic stay prevents them from taking immediate action, vendors will likely be seeking assurance that their debts will be paid or resolved.

• Vendor Negotiations: In Chapter 11 bankruptcy, your business will likely need to negotiate with vendors for terms of continued supply. Some vendors may require upfront payment, while others might be willing to extend credit as part of the reorganization plan.
• Reaffirmation of Debt: If you want to continue working with certain vendors, you may negotiate to reaffirm specific debts to maintain a good relationship with them. This is especially important if you want to ensure that the supply of goods or services continues during the bankruptcy process.
• Vendors' Rights: In Chapter 7 bankruptcy, vendors are typically considered unsecured creditors. If you owe significant amounts to your vendors, there’s a chance they may not receive full repayment after the liquidation of assets.

6. Dealing with Non-Payment of Bills

While bankruptcy provides protection from creditors, it’s important to note that not all debts are dischargeable. Certain bills, such as child support, student loans, and some tax obligations, are not typically dischargeable in bankruptcy. For these debts, you will need to negotiate or come up with a plan for repayment, even if you’re in bankruptcy proceedings.

If your business cannot repay all of its debts during the bankruptcy process, some creditors may not receive any payment, particularly unsecured creditors. However, for debts that are dischargeable, you may be able to have them eliminated entirely, freeing you from the obligation to pay.

7. Post-Bankruptcy: Managing Outstanding Bills

Once the bankruptcy process is complete, you’ll need to focus on rebuilding your business and credit. If you successfully reorganize your business through Chapter 11 or liquidate under Chapter 7, your outstanding debts (subject to the discharge process) should be resolved. However, moving forward, it’s essential to stay current on new bills and obligations as you continue operating your business.

Some steps to consider include:

• Create a new business plan to help prioritize debt repayment and budgeting.
• Monitor your credit score and work to rebuild it over time.
• Maintain clear communication with any remaining creditors to ensure that future payments are met on time.

Conclusion

Handling outstanding bills during bankruptcy proceedings can be challenging, but understanding how bankruptcy works will help you navigate the process. The automatic stay provides immediate relief from creditors, while secured debts and priority claims will be given higher priority during liquidation or reorganization. In Chapter 11, you have the chance to restructure debts and continue operations, while Chapter 7 typically involves asset liquidation and discharge of unsecured debts.

By understanding the various aspects of handling bills and working with creditors, you can ensure that you’re taking the necessary steps to resolve outstanding debts and move forward with your business after bankruptcy. Be sure to work with an experienced bankruptcy attorney to guide you through this complex process.