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When to involve an attorney in a bankruptcy case

Transcript (5:12)

Welcome to the 5 Minute Legal Master series where expert attorneys help you master important legal topics.

Today, board-certified creditors’ rights and business bankruptcy attorney, Kirk B. Burkley, discusses when to involve an attorney in a bankruptcy case.

This is a question that we often hear from clients and other people in the business which is “Hey, the company went bankrupt, so does that not mean they do not have any money, so why would I hire an attorney in this case? Is that not just throwing good money after bad?”

The answer is it depends. Let me start out with the basic notion that bankruptcy is definitely one of those places where the squeaky wheel gets the grease. Often times in a bankruptcy proceeding the debtor has for some period of time prior to the case, been fending off creditors, either creditors such as their bank trying to foreclose on property or other assets, unsecure creditors that have filed lawsuits, some sort of proceeding that has caused the debtor to say, “I need to avail myself of the automatic stay and stop all of these creditor collection activities.”

Those creditors that drove the company into bankruptcy have already taken some action that is now stayed by the bankruptcy case. Usually what happens then is some other creditors, maybe the same creditors, maybe others, show up in the bankruptcy case demanding payment. The debtor is probably tying to survive on its lasts legs or attempting to get sale done and they are going to take care of the creditor preventing them from doing that.

Creditors that sit back and do nothing in the case, even if they are not being paid in the case, or even if they have some interest that could be protected—often times the debtor is going to ignore them.  So, does that mean that if you see a bankruptcy case you automatically get an attorney involved? No. You first have to evaluate what is the interest that you are protecting and is it worth hiring an attorney to protect that interest.

One of the basic notions in bankruptcy is that creditors should not be hurt worse after the date to filing of the bankruptcy then they were prior to the filing of the bankruptcy. Post-bankruptcy, the debtor is supposed to pay everyone it does business with. Again, you are not supposed to get farther into the hole post-bankruptcy than you were on the day of filing. If the debtor is not able to pay its cost of administration, what we call administration expenses in the bankruptcy case, then the case should either be dismissed or converted and the court should not let the debtor continue to remain in bankruptcy.

If you have a secured claim and there is collateral to secure your claim, maybe you are a bank or you loan money on a secured basis to the debtor, then more often than not you should be protecting your interests and making sure the debtor is paying you, or you should move to recover your collateral so you can sell that collateral and pay off your claim.

If you are a vendor doing business with the bankrupt company after the filing of the petition, you should also be getting paid. If you are not, you should protect that interest because an administration claim is a top priority claim that has paid 100 cents of the dollar in order for the debtor to confirm a plan. In that case, so long as it is worth by terms of dollars and cents, you should be protecting that interest.

Similarly if you have an unexpired lease or an executory contract, you should be making sure that the debtor is performing under that contract and hopefully they will eventually assume that contract so that you can get paid going forward in the future.

It all takes a discussion with your attorney, an analysis of the cost and benefit of participating and protecting your interest in the bankruptcy case, and whether or not the claim is of significant value that it is worth it to you. Taking the extra step in bankruptcy just might make the difference between getting paid or not getting paid.

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