Imagine that you have a customer which has unpaid bills piling up. After trying to collect for six months, you have a veritable collection of bounced e-mails to go along with those bills. No one picks up the phone, and you are reminded of a scene from a movie where the phone is ringing somewhere in an empty room.
Your best efforts at recon show that the State of Texas has even suspended the corporate status of the company for failure to pay taxes, and online reviews, news, and general scuttle point towards the company being no more.
If a Company Goes Bankrupt and Owes Me Money, Can I Collect?
With the help of Houston judgment collection lawyer, Seth Kretzer, your next move should be to check the federal bankruptcy docket to see if your absentee business debtor has not just gone AWOL, but filed for formal protections in United States Bankruptcy Court. If the business has, there are careful and specific steps you can follow to attempt to collect on your debt, which we walk you through below.
What If a Company Goes Bankrupt and Owes Me Money?
While all bankruptcies are factually a little different from each other, the procedural steps creditors need to take are largely the same. If someone filed bankruptcy and owes you money, you would file a proof of claim to assert your right against them. The same is true for the business filer. If your attorney informs you that the business debtor has filed successfully for formal bankruptcy, you want to:
1. Stop Collection Efforts
If bankruptcy is granted, the bankruptcy court will issue something called an “automatic stay,” which takes precedence over collections efforts and even Texas State Court collections lawsuits. In order to comply with this order, both you and your collections agents, if any, should cease efforts to collect judgments in Texas and proceed through the bankruptcy process.
2. Review Bankruptcy Documents
Review documents filed with the bankruptcy court. A bankruptcy debtor is required to reveal a plethora of important information about the state of affairs of its business which, until now, has likely been shrouded in secrecy. No more.
To get the court’s protection, the debtor is required to provide the court such information as its current financial status and list of creditors with believed outstanding claims. Make sure your business’ name is on that list. The resulting information is all public. Review it thoroughly.
3. Attend Debtor’s Initial Examination
Attend the initial meeting before the bankruptcy court. Creditors are permitted to attend the initial examination of the debtor before the bankruptcy “trustee.” This is worth doing to get a sense of how the bankruptcy proceeding will proceed, learn who will be representing the in-debt business, and calendar important upcoming dates.
4. File a Proof of Claim
If you’ve decided that you have a reasonable chance of success in recovering on the debt, you should file a “proof of claim” in the bankruptcy proceeding. This document states your desire to be a part of the bankruptcy proceedings and attaches any documentation that proves the validity of your claim against the debtor, such as contracts, invoices, records, and communications.
The debtor may object to your claim; if that happens, you will need to attend a court hearing. It is recommended to do this with a seasoned attorney who can help you make your strongest case. If you fail to file a proof of claim, then you will likely lose your right to be a part of the bankruptcy proceedings and forfeit your right to be paid from the proceeds of the bankruptcy.
5. Attend Debtor’s Bankruptcy Hearing
A debtor may file under either Chapter 11 or Chapter 13, which affects how a debtor’s reorganization plan is reviewed. In either case, the reorganization plan will include proposed repayment terms for you and any other creditors. You will be provided an opportunity to object to the plan if you object to these terms.
6. Let the Bankruptcy Proceed
After the court hearing, you should be on record with the court and in line to recover on the debt. The debt collection by way of bankruptcy will be administered by a trustee who will oversee the repayment plan and ensure the distribution of the remaining assets of the debtor.
Can I Collect Debts Owed by a Business that Has Closed?
Yes. The appearance of a business closing its doors or shutting down its website does not mean that the legal entity is “gone for good,” or off the hook for debts. In addition to the likelihood that the legal business debtor entity can be sued in a collection action or that claims be addressed through bankruptcy, there may additionally be responsible parties under an “alter ego theory” or a “piercing of the corporate veil” due to fraudulent transfers in Texas.
In some cases, there may be a unity of interest or common ownership between your debtor business and other businesses, or your debtor business and its individual owner or owners. The litmus test for whether these entities can be pursued for unpaid debts is the intermingling of assets.
Factors to consider include:
- payments made by the business but drawn from personal accounts;
- direct deposits of profits into personal accounts without first being in a business entity’s account;
- shared personnel, board or executive leadership between multiple businesses;
- money transferred from corporate accounts with no proper clearance procedures;
- poor or suspect corporate recordkeeping;
- frequent and unjustifiable draws on corporate accounts or bonuses.
Collecting Debt from a Closed Business
Another option outside of the bankruptcy process, which is guided by the federal government, is a “winding up” under the guidance of a private trustee selecting by the closing business. When a corporation dissolves, all its assets are typically liquidated, or turned into cash, and used to deal with current debts owed by the business. These assets are often distributed to the business’ creditors, in hopes of avoiding lawsuits that may pierce the corporate veil and render owners and executives liable.
Even if there is no formal bankruptcy, these private procedures may involve the assignment of a trustee to manage the winding up of the business’ affairs. The trustee of the dissolved corporation will begin by collecting information on all the business’s current creditors. The trustee then sends each creditor a notice of the dissolution and what effect it may have on their debt.
Creditors respond to the notice by submitting claims to the dissolved corporation for the money that they are owed. Holders of senior debt and other types of debts that are secured by specific assets like inventory will likely be given priority, followed by unsecured creditors.
Attorney Seth Kretzer Can Help with Post-Closure Collection from Businesses
If you have a claim against a business that you know is closing or fear will soon be closing, you will need a lawyer with specific experience on collections in Texas and who has the right knowledge and resources to help you. Contact the Law Offices of Seth Kretzer today to discuss your case.