Collecting on debts is a critical aspect of running a successful business. Occasionally, those funds can be difficult to recover, especially when dealing with a debtor facing bankruptcy. Under such dire circumstances, the outcome greatly depends upon how your business is classified as a creditor.
The Three Types of Creditors
US bankruptcy classifies creditors in three specific ways. How likely you are to collect what the debtor owes you depends on where you fall into each of these classes:
- Preferred creditors: This type of creditor falls under the highest priority category and includes people or organizations owed wages or tort awards. From a tax standpoint, the government is also considered a preferred creditor.
- Secured creditors: These are often financial institutions that have made a collateralized loan. They retain a high priority on repayment from the funds available after the liquidation of the collateral.
- Unsecured creditors: These creditors are essentially “everyone else” involved in extending credit to individuals or businesses. This can include debt accrued from services rendered or virtually any other conceivable transaction.
Your ability to recover in the face of bankruptcy from a debtor depends on the nature of the original transaction.
How to Recover Unsecured Debt
If your debtor files for bankruptcy and their debt to you is unsecured, you may still receive some of what you are owed. Bankruptcy does not entirely invalidate a debt. It crafts a new payment plan and reduced amounts.
Depending on the chapter of bankruptcy your debtor chooses, you have a strong chance of recovering some of that money. However, you are not likely to recover the total amount you are owed by a debtor. Working with a skilled business litigation attorney will improve your chances of obtaining a favorable outcome.