Business workshop: Getting paid in bankruptcy

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Business bankruptcy filings declined 16 percent from 2011 to 2012, according to U.S. court statistics.

But this dramatic fall in the number of companies entering bankruptcy protection offers little solace to the hundreds of thousands of businesses owed money by the approximately 40,000 businesses that did declare bankruptcy in 2012.

Sooner or later, most successful businesses will sell goods and services to another business that goes into bankruptcy before paying its bills.

Once a customer enters bankruptcy, creditors have to file papers with the court to collect what's owed.

The new bankruptcy code enacted in 2005 gives priority to the claims of unsecured trade creditors that have shipped to the debtor within 20 days before the bankruptcy filing date.

The law should enable businesses with recent sales to jump to the head of the line for payment, but courts have said that although recent creditors have priority, they need not be paid earlier than others.

A creditor has the right to reclaim the goods sold to a debtor that later enters bankruptcy without paying.

But it's illegal to just pick up the goods -- the creditor must first get court approval, by which time the goods may have been sold or used.

Odds are good that creditors will never get full payment, even if the bankrupt company has entered Chapter 11, which enables it to reorganize its finances and continue operating. In Chapter 11, old creditors often get a partial payment, even as those who sell the company goods and services after the bankruptcy filing receive full payment.

What that means is if a company suspects a customer is close to filing for bankruptcy, it will increase the probability of payment by delaying shipment until after the filing date.

-- Christopher Smith, Meyer, Unkovic & Scott, cps@muslaw.com

Business workshop is a weekly feature from local experts offering tidbits on matters affecting business. To contribute, contact Business Editor Brian Hyslop at bhyslop@post-gazette.com.


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