Bankruptcy is a court-supervised system to oversee the payment of debts and to assure that a debtor can reorganize and start fresh. As business owners, contractors often find themselves in the position of needing to collect on a debt whether it’s from an owner for work already completed, or from a judgment for deficient work by a subcontractor. In addition, because construction projects often involve long chains of contractors, subcontractors and suppliers, the many moving parts can create extra confusion and difficulty when trying to determine how to collect on those debts. When one of the entities in the chain files a bankruptcy case, it’s important to know what collection avenues are available and when collection must stop to avoid violating any federal bankruptcy rules and an accompanying sanction. This article is intended to explain some basic considerations for creditors who are unexpectedly pulled into a bankruptcy case.

Chapter 7 cases are filed when the debtor (whether it’s an individual or a business) is liquidating its assets, paying off its debts according to the priority and procedure in the bankruptcy code, and getting those debts legally discharged (forever wiped away). When a business files Chapter 7, that usually means it’s winding up and will cease to operate. A court appointed trustee takes control of the debtor’s property (known as the estate). The trustee has the power to buy, sell, lease or otherwise distribute the property in the estate and pay the debts of the debtor-company. The trustee will investigate the debtor’s finances, liquidate the estate property (if any can be found) and pay the creditors according to the priority rules. Secured liens are usually either avoided or satisfied by turnover of the secured property to the creditors. The claims of unsecured creditors (a creditor with no lien) receive a very low percentage of the original amount (10 cents on the dollar is a common estimate) and are discharged once the trustee is finished with the process.