Subcontractors, Be Prepared to Deal with Your Contractor's Bankruptcy - Know Your Rights, but Also Your Obligations!
As a subcontractor, you should understand the challenges that come with a contractor’s bankruptcy. Authors Jay Clark and Larry Longsdon discussed the many issues to consider when a contractor files bankruptcy in The Contractor's Compass journal. Jay Clark & Larry Logsdon, Customer Bankruptcy! What’s a Subcontractor to Do?, The Contractor’s Compass, First Quarter 2009, at 12-13. Contractors that file bankruptcy are eligible for either a Chapter 7 or Chapter 11 proceeding. Unlike a Chapter 7 case, where a trustee takes possession of the debtor’s assets, Chapter 11 allows the debtor to keep possession throughout the bankruptcy process.
An automatic stay protects a debtor immediately upon filing a bankruptcy petition. The stay prevents commencement or continuance of lawsuits, as well as enforcement of judgments, against the debtor. During the stay, you must stop demanding payments from debtor in any manner. The bankruptcy court may fine you for violations.
During the stay, you may try to collect on a lien or bond. Some states may require that you file a motion with the bankruptcy court to perfect a lien. Both liens and bonds have deadlines and other requirements for filing a claim. You should also remember that the deadline to file a lawsuit, regardless of the stay, is within one year of performing or supplying materials.
File a proof of claim with the bankruptcy court within the specified deadline, if any, or else you will not receive any payment. The proof of claim shows how much the debtor owes you on the day bankruptcy was filed. In a Chapter 11 case, the debtor will show how much it plans to pay creditors. Payment in a Chapter 7 situation depends on whether there are any assets to liquidate and on your proportion of the total creditor claims.
File a motion with the bankruptcy court asking the possessor of assets to either accept or reject a contract that you have not yet completed. If the debtor or trustee chooses to continue the contract, it must first pay all dues. If the contract is rejected, you have a damages claim that is separate from a proof of claim.
Payments made by the debtor within 90 days of filing for bankruptcy may be forfeited if shown to favor the paid creditor. To protect from uncollected debt, ask that the debtor pay with checks written to you and another payee jointly. Also, assess the risk at the bidding stage by comparing the expected profit with the potential of nonpayment. Get a copy of a payment bond, if applicable, to learn how to file a claim if necessary.
So upon a filing of bankruptcy, stop demanding payment. Yet, follow the Bankruptcy Code and statutes to get a chance to receive payment, even if it is a low one.
This site and any information contained herein is intended for informational purposes only and should not be construed as legal advice. Seek a competent attorney for advice on any legal matter.
Enjoyed this article. We wrote a similar article on our blog in December 2007, which may be helpful to your readers wanting more information on this topic:
http://tinyurl.com/camb3q
This is an important subject for contractors in this economy. While many smaller outfits may have avoided learning about bankruptcy proceedings, now is the time to catch up on how to make these claims.
One thing you slightly mention in your article, is the construction lien. Subs and suppliers can avoid the messy bankruptcy claims process by just filing their construction liens. We operate a blog on construction liens here: http://www.constructionlienblog.com .
Keep up the good work with the South Carolina Construction Law blog.
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