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The COVID-19 pandemic is creating financial hardship for so many; likely among them your customers, clients, service providers and suppliers. Depending on the length of the crisis, and the level of aid provided, some businesses will inevitably seek the protection of the bankruptcy courts as an option of last resort. Accordingly, this Alert is intended to provide a high-level overview of the central rights, protections and procedures associated with bankruptcy, from the perspective of a creditor.

Treatment and Payment of Debts for Completed Deliveries or Services Rendered

If you are a vendor or service provider and a customer owes you money for completed deliveries or services rendered, the debt is not secured, and the customer files bankruptcy, your remedies are usually limited to filing a general unsecured claim in the bankruptcy action.

The claim procedure is straightforward, and not expensive to complete, but the payoff is generally limited to a deeply discounted percentage of the debt, paid as part of a plan of reorganization or dissolution months after the filing.

One bright spot for some creditors is the power of reclamation. Under reclamation, a creditor may, after the debtor’s bankruptcy, demand return of any goods delivered to the debtor up to 45 days before the bankruptcy date. The goods are often not actually returned to the creditor, but rather the creditor gets priority payment for the goods, often 100% of their value. However, the creditor must act fast and look to filing a written notice of demand as soon as the bankruptcy is filed.

Treatment of Ongoing Contracts

If you have a continuing contractual relationship with the debtor at the time of bankruptcy, the debtor may have the option of assuming or rejecting your contract.

If the contract is assumed, the debtor must cure any default, provide reasonable assurance of future performance, and perform under existing contract terms going forward.

If the contract is rejected, the debtor is excused from performance, and the remedy of the other contracting party is filing a general unsecured claim for pre-petition amounts due, plus contract rejection damages.

Debtor Protection

It is important to understand and respect the automatic stay imposed by the bankruptcy filing. The stay protects the debtor from any efforts by creditor to collect the debt owed, or force contract compliance.

The courts take this protection very seriously, and can and will impose substantial monetary sanctions for even unintentional violations (for instance, automatically generated collection letters or invoices).


A company bankruptcy often ends quickly with the sale of some or all of the debtor’s assets. This can create opportunities to purchase the assets at a bargain price. In addition, an existing creditor that wishes to purchase assets out of bankruptcy may get to credit the debt owed towards the purchase.

What’s more, a bankruptcy will ensure clear title to assets in ways that a regular market sale cannot, in that the federal court judge’s order approving the sale will wipe out known and unknown liens and encumbrances.

If you are – or fear you may become – a creditor in a bankruptcy proceeding, it is critical that you understand your rights, opportunities and obligations – and act quickly. At Manning Fulton, we stand ready to assist you in that analysis and would be honored to help you through these uncertain times. Should you have any questions about how any of the foregoing issues might impact you or your company, please contact William Smith or your Manning Fulton relationship attorney.

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