How Bankruptcy Can Affect Your Debt Collection Efforts

Tiles spelling out the word bankrupt to represent debt collection and bankruptcy.Do you ask your client if they’ve previously filed for bankruptcy? If not, you might want to.

We are encouraged not to discriminate and to do business with individuals and companies who once filed for bankruptcy. After all, bankruptcy affords many companies relief, allowing them time to become better payors.

But did you know that if your client previously filed for bankruptcy, it may affect your debt collection abilites?

How Bankruptcy Can Prevent Debt Collection

Although you can enforce your right to get paid against someone who previously filed for bankruptcy through demand, litigation, arbitration, and mediation, you may not be able to execute on any judgment obtained against them — thereby leaving the judgment unsatisfied and unpaid. It’s black letter law.

The law bars execution on estate property, regardless of when the claim arose. The Bankruptcy Code, Title 11 § 362(a)(3) specifically provides that if someone has filed for bankruptcy, the enforcement of a judgment against the property of the estate — the assets in the bankruptcy — is stayed. It’s irrelevant that the claim is “post-petition,” as in the time after the bankruptcy petition was filed with the court.

11 U.S. Code § 362.Automatic Stay
Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of

(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.

What this means is that you may pursue your customer for payment — assuming the transaction was conducted after the filing — but you can’t enforce the judgment to attach any assets that are part of the bankruptcy estate. (Because attachment or execution of a judgment obtained as a result of a post-petition claim would fall within the stay provision of subsections 362(a)(3) and (4), a creditor must obtain relief from the stay to satisfy a judgment against the property of the bankruptcy estate.)

How to Collect From Your Client

If you have a judgment and want to restrain the debtor’s bank account, but the bank account is part of the bankruptcy estate and/or being used to pay creditors, you can not restrain the account.

If your transaction with a client results in obtaining a judgment and you wish to execute and/or attach assets that are part of the debtor’s estate, you must make an application to the court for relief from the stay to satisfy a judgment against the property of the bankruptcy estate.

To learn more about how to collect from your non-paying client, contact Frank, Frank, Goldstein and Nager.