What Happens After You File A Proof Of Claim, and When You Might Get Paid

It is frustrating, after extending credit based on a long relationship and verbal assurances, when a customer files for bankruptcy, leaving a balance that cannot be collected without court approval. Moving forward it is important to protect your rights to maximize both pre and postpetition value to your company. But after filing a proof of claim, the bankruptcy process can be a black box for suppliers trying to make the best decision going forward.

If you have not filed a proof of claim yet, you can read our articles on why you should file a proof of claim and how to file a proof of claim. If you are approaching customer negotiations for prepetition claims or postpetition orders (and credit decisions), contact us to discuss how we may be able to help  you. Assuming you have already tackled both of those, you are now waiting to hear when and how you will be paid.

Filing a Proof of Claim is Only the First Step

Several events occur in a typical bankruptcy case, and each step will impact how much you receive on account of your claim, and when you receive it. A typical timeline for a chapter 11 case is provided here. Because of the way bankruptcy law works, there is usually no way for a creditor to get paid from a debtor until months or years after a bankruptcy case starts. Even then, many creditors receive little or nothing on account of valid claims.

Bankruptcy Basics

In order to navigate a bankruptcy filing, and to understand what your claim is worth, there are a few topics to familiarize yourself with as we move forward. For a quick overview, our Bankruptcy 101 page describes some terms and concepts.

Other valuation-related topics that determine what gets paid to the various creditor classes are:

• Debt structure, absolute priority, and security – discussed in our future post, Understanding Classes of Debt
• Enterprise Value methodologies:
  • Discounted Cash Flow
  • EBITDA multiples
  • Asset-based valuation
  • Liquidation value

The bankruptcy process exists to preserve and allocate value of the debtor to its creditors. Value is allocated based on security and seniority to the classes of debt, including unsecured. To determine how much value your claim will receive, the debtor and the court will:

• validate claims in each class,
• determine value available for distribution,
• propose a plan to distribute that value and, finally,
• effectuate the plan and distribute value to creditors.

Determining the Validity of Your Claim

1. The Debtor files its Schedules. Schedules are typically filed 45 days after the commencement of a case. Though the deadline is 15 days by statute, there is almost always a motion and order to extend in larger cases. Schedule E/F is the debtor’s detailed record of what it owes to unsecured creditors. You should check that schedule to determine if the debtor initially agrees with your claim. Be aware however that, just because you agree with the scheduled claim, you should still file a proof of claim to protect your rights.  Debtors can and do amend schedules and numbers can change so you will always want to provide your own evidence of the amount. If you are not able to find the Schedules or if you have questions about the Schedules, please email us at ClaimHolder@bClaim.com and we will be happy to help.
2. The Debtor reconciles proofs of claim. The Debtor will review all proofs of claim that have been filed, compare each proof of claim to its records and files, and determine if it agrees with the amount sought in the proof of claim.
3. If the Debtor disagrees with your proof of claim: The debtor will either contact you to try to resolve this difference, or file a formal objection with the Bankruptcy Court seeking to correct or strike your proof of claim. You will receive a copy of any objection and have the opportunity to appear, be heard, and present evidence in support of your claim. Upon receiving the objection, you should contact the debtor and its claims agent or claims management firm to resolve the issue and have your claim removed from the objection.If you are unable to resolve the objection to you claim, you will need an attorney to represent your interests in court.
4. If the claim is unliquidated: If your proof of claim seeks payment of an amount that cannot be determined (for example, your proof of claim seeks to preserve a lawsuit you wish to bring against the Debtor), then the Debtor will seek to reach agreement on the amount of the claim or ask a court to determine the amount of the claim. You will receive a copy of any such proceeding and have the opportunity to appear, be  heard, and present evidence in support of your claim.
5. You may be able to amend your claim. If the amount or nature of your claim changes (for example, you found additional unpaid invoices), then you may be able to amend your claim by filing an additional proof of claim.

Determining What is Paid When to Your Creditor Class

1. Is There Value To Distribute? The Debtor and the Bankruptcy Court have to determine if the Debtor has value to distribute to creditors. In most cases and by definition of being insolvent, the Debtor will have less value (cash, stock, new debt, etc.) to distribute than it owes to its creditors. When this happens, the general unsecured creditors may receive little or no value, and it may be in the form of equity in the reorganized entity. However, even in cases that appear to have a lot of secured debt, there can be pockets of value that are recovered for the benefit of the unsecured creditors.
2. In A Chapter 11 Case, A Plan Provides Payment Details. In a chapter 11 case, a debtor generally can only pay prepetition claims after a chapter 11 plan has been approved by the Bankruptcy Court. A chapter 11 plan will categorize claims into classes and provide treatment (usually payment of cash, equity, or a note) to all claims in each class. To be approved by the Bankruptcy Court and to become effective, a chapter 11 plan must satisfy several requirements of the Bankruptcy Code. Among other things, chapter 11 plans must treat similar claims the same (i.e., the Debtor cannot pay some creditors that it wants to pay and not pay others that it does not want to pay) and the chapter 11 plan must be supported by at least one class of creditors that is not getting paid in full and on time.
3. Creditors Are Paid After A Plan Is Approved. In a chapter 11 case, the chapter 11 plan also indicates how and when payments will be made. These payments are made only after a debtor has resolved the major issues in its bankruptcy case and the Bankruptcy Court has approved a chapter 11 plan. Is it not unusual for plans to be approved many months or years after a bankruptcy has been filed. It is also not unusual for chapter 11 plans to pay creditors less than in full (i.e., 5, 10 or 30 cents on the dollar) and to stretch those payments over time (sometimes several years). Creditors also may receive stock or interests in a promissory note, or an interest in a trust that will be formed to liquidate some of the Debtor’s assets and distribute the proceeds equally to creditors.
4. Some Creditors Receive Nothing. Companies generally file for bankruptcy because they do not have enough money to pay all of their creditors. Unfortunately, this means that you may file a proof of claim, and the Debtor may agree that it owes you what you claim to be owed (and may even want to pay you), but that the Debtor will not be able to pay you because it is required to pay creditors that have greater legal right to payment. This is often the case when companies have less value than what they owe their secured creditors (usually a bank or a group of lenders that have secured their loans with blanket liens).

Suppliers typically have more leverage early on in a bankruptcy case. Categorize claims appropriately (i.e. 503(b)(9), prepetition, postpetition, etc.) and leverage the first day motions in vendor negotiations. Contact us for a free consultation and hear our take on what the debtor may be doing and what the best negotiation strategy for you may be.

Track the Case

Even under the best of circumstances, it can take more than a year for you to receive anything on account of your bankruptcy claim. And, even then, payment in full is rare. You do want to keep apprised of the latest in your customer’s bankruptcy case to understand both your prepetition claim’s value and the creditworthiness of your customer in bankruptcy. Despite the law’s intent of a transparent process that is open to all, the bankruptcy docket of a large case is anything but clear, and only reflects a small portion of the discussions taking place among the constituencies. To easily track your customer’s bankruptcy case, leverage BCE’s deep bankruptcy experience, and see actual transactions that have taken place by claim holders just like you, you can rely on our Claim Pricing and Case Tracking Report, found here.

Sell Your Claim

As an alternative to waiting for payment, you can sell your claim to an investor who specializes in distressed debt. These investors are prepared to assume the risk of time and the possibility of non-payment. There are several advantages that you may recognize from selling your bankruptcy claim, many of which are discussed here. These investors spend significant resources arming themselves with the latest information on the bankruptcy case so you too need to be prepared.

If you would like to find out more or have questions about whether selling your bankruptcy claim is a good idea, contact us here or email ClaimHolder@bClaim.com.   We do not buy claims, but we can guide you through a process to maximize the value of your claim.