against the debtor must cease. The debtor’s assets are now
subject to the oversight of a bankruptcy judge whose goal is
to balance the rights of the involved parties.
Put another way: After bankruptcy is filed, a creditor cannot
pursue collection activities, except and unless it is within the
confines of the bankruptcy court.
Bankruptcy Alert: The stay suspends any lawsuit currently
underway, and precludes the enforcement of any previously
obtained judgment. Failure to abide by the rules of the stay can
result in severe sanctions and penalties. By all means, when
served with notice of a bankruptcy, stop all collection efforts!
When bankruptcy is filed, a debtor must list all possible creditors so that they will receive notice of the debtor’s bankruptcy
filing. Normally, a creditor will receive written notice from the
court, in addition to a timetable that lists the dates certain
actions must be taken (e.g., filing proofs of claims, attending
creditor meetings, etc.).
If a creditor did not receive notice of bankruptcy for a party
that owes it money, then the creditor should contact the federal bankruptcy court in its jurisdiction to be properly directed to the debtor’s legal counsel.
Proof of Claim
A proof of claim is an official form filed with the bankruptcy
court that details what is owed to the creditor by the bankrupt
debtor on the date the bankruptcy proceeding was filed. When
a creditor receives a notice of bankruptcy, a blank proof of
claim form is included that provides deadlines for filing that
In Chapter 11 cases, the court always establishes a deadline
for filing proofs of claim. A creditor must file a timely proof
of claim to be considered for disbursement of funds, if any, to
be paid out by the debtor. If a creditor fails to do so, its rights
will be severely prejudiced.
Even when a proof of claim is filed, such filing does not guarantee that a creditor will recover some or any of the amounts
due. In Chapter 11 cases, the sums to be paid out to creditors
are detailed in the debtor’s “Plan of Reorganization.”
In Chapter 7 cases, the court can decide not to provide an
opportunity to file proofs of claim if the debtor clearly has no
assets that can be used to pay out to creditors.
However, if there are assets to be liquidated so funds can be
paid to creditors, then the size of the payments will depend on
the amount available to distribute, the amount of creditor
claims, and the priority given to certain “secured” creditors.
Must You Continue to Work for a Bankrupt Party
Pursuant to a Contract?
Within the context of a construction contract, work usually
halts until court-sponsored meetings occur. If a construction
company still has work to perform under its contract with a
bankrupt party, it should ask the bankruptcy trustee or the
debtor in possession to either formally assume or reject the
If the remaining work is critical for project completion or is
near the end of the project, it is likely the debtor will agree
to continue with the contract. To do so, the debtor must
“cure” all past defaults or provide assurance that the defaults
will be promptly cured and agree to perform and pay under
the contract in a timely manner. These details are usually
included in the court order issued by a bankruptcy judge to
provide further protection to the creditor.
If the trustee or debtor in possession rejects the contract,
1) it is terminated,
2) the party is no longer obligated to
perform the balance of work, and
3) the party is entitled to file
a claim for damages resulting from the rejected contract.
This claim would be separate from the proof of claim for
amounts owed at the time of bankruptcy filing. Once again,
all this is done in writing by a court order under the auspices
of a bankruptcy court.
Can You Pursue Others Involved in a Contract
Outside the Bankruptcy Proceeding?
As previously mentioned, a bankruptcy stay halts collection
efforts against the bankrupt party. It does not stop collection
efforts against a third party that was not in bankruptcy, such
as a lien claim against a project owner or a bond claim against
a bankrupt party’s surety.
The steps to perfect a lien vary from state to state. Some
states allow for the filing of a proof of claim to act as perfection of a lien claim. However, in states that require a lawsuit
to perfect the lien, a creditor must seek bankruptcy court
approval before filing a complaint against a bankrupt debtor.
Bankruptcy Alert: It is always advisable to seek the bankruptcy court’s permission (in the form of a relief from the stay)
to proceed against a debtor.
Parties pursuing bond claims should ensure that they pay
attention to and meet the statutory bond claim deadlines. It’s
important to know the deadlines for filing both a notice of a
bond claim and a lawsuit to perfect the bond claim. For private projects, the bond’s terms (or for public projects, the
terms in the applicable statutes) describe the rules for filing