What you don’t know will hurt you

Bankruptcy is a topic with a long history. The ancient Greeks, among others, wrestled with the subject and with balancing the desire to ensure repayment of injured parties while also making sure that deterrence was part of the equation. American law has developed a wide range of tools and procedures for dealing with both. In fact, the matter was considered sufficiently important to the Founding Fathers that it is mentioned in the US Constitution Article 1, Section 8, Clause 4, which empowers Congress to enact uniform laws on the subject throughout the nation. Indeed, much of that law is now embedded in the Bankruptcy Code, located at Title 11 of the United States Code (though state law still has a role in some issues).

For someone dealing with a bankrupt entity—a customer, a supplier, a partner—the topic can quickly begin to seem overwhelming. The complex matter of unsorting a financial train wreck and delivering some kind of orderly and “fair” solution is a challenge for practitioners.

There are a few things to keep in mind. The first is that bankruptcy doesn’t have to terminate a business relationship. Under Chapter 11, an entity can control assets and continue to conduct business – but with certain oversight. For instance, selling a major asset or taking on a further debt would require approval. Getting money from an entity in Chapter 11 can be confusing and frustrating. The status of debts for example, differs whether incurred before or after the filing.

Similar rules govern reclaiming goods from a debtor in bankruptcy. Perhaps most frustratingly, a contract is still a contract. So, bankruptcy may not excuse you from holding up your part of the bargain.

In short, bankruptcy is definitely a topic where knowing the law can pay off.

Comments are closed.