Trade creditors often find themselves categorized as “general unsecured creditors” when a customer files for bankruptcy. However, some creditors benefit from liens that have been contractually negotiated or statutorily granted, potentially elevating the priority of their claims. To secure this priority, the lien must be properly granted and perfected under applicable law before the customer files for bankruptcy, and in a manner that does not expose the lien to avoidance as a “preferential transfer.”

When a company files for bankruptcy, creditors often wonder about the likelihood of getting paid. The answer largely depends on the priority and treatment of each creditor’s claim in the bankruptcy process. The doctrines of recharacterization and equitable subordination can significantly impact the priority of a claim, potentially postponing or eliminating payment.

When a creditor files a proof of claim, it can often take months or even years before they hear anything about it. Then, suddenly, they may face an objection to their claim, potentially on multiple grounds, with a limited window to respond. This situation can prompt several important strategic considerations for crafting the most effective response.

An assignment for the benefit of creditors (ABC) is a state law-based process where a financially distressed company (assignor) transfers its assets to a third-party fiduciary (assignee) for liquidation and distribution to creditors. This process differs significantly from a bankruptcy case, with key distinctions including the lack of court supervision in certain jurisdictions, enforceability of ipso facto clauses and anti-assignment contract provisions, absence of an automatic stay, and potential nonexistence of preference claims.

A fraudulent transfer is a wrongful attempt to avoid a debt by improperly transferring assets to a third party or transferring assets for less than fair value while insolvent or leading to insolvency. Each state has its own statute regarding fraudulent transfers, often similar to the Uniform Voidable Transactions Act (UVTA) or the Uniform Fraudulent Transfer Act (UFTA). Section 548 of the Bankruptcy Code governs fraudulent transfers in bankruptcy, providing a trustee with authority to avoid or unwind such transfers. This framework prevents debtors from thwarting creditors’ collection efforts. Outside of bankruptcy, creditors may seek to avoid fraudulent transfers under state law. In bankruptcy, only a trustee or debtor-in-possession can pursue these claims for the benefit of all creditors.

Involuntary bankruptcy is a legal process where creditors compel a company into bankruptcy, as opposed to the company itself filing for relief. This is considered an extreme remedy, with strict requirements and standards for filing such petitions. Involuntary cases are initiated by filing a petition with the Bankruptcy Court under Section 303(a) of the Bankruptcy Code. Creditors can commence an involuntary bankruptcy case against any entity eligible for a voluntary case under Chapter 7 or Chapter 11 of the Bankruptcy Code, with certain exceptions. The court will grant involuntary relief against the debtor for reasons such as the debtor’s failure to timely contest the petition, not paying its undisputed debts as they become due, or if a custodian was appointed to take possession of substantially all of the debtor’s property within 120 days before the petition was filed.

When borrowers struggle to meet their debt obligations, they may negotiate with creditors to modify the terms of their debt instrument. This could involve changes to the interest rate, repayment period, collateral, or other aspects of the debt. However, these modifications could potentially result in a taxable exchange of the original note for a modified one, a fact that may not be immediately apparent to the involved parties.