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Even if your small business is filing for bankruptcy, there may still be some debts you'll need to repay. And who you'll need to repay -- and who you'll need to repay first -- will depend on how your creditors are classified. By the same token, if a client or customer is declaring bankruptcy, there's still a chance you'll get paid. And whether -- and when -- you'll get repaid will also depend on how your small business is classified as a creditor.
Therefore it's important to understand some bankruptcy terms from both sides of the coin. For instance, do you know which of your creditors are secured creditors in a bankruptcy? Do you know if you are one? Here's what you need to know.
Small Business Filing
If your small business is filing for bankruptcy, and your filing includes a repayment plan, your creditors will fall into one of three categories:
Under any bankruptcy repayment plan, secured creditors are entitled to at least as much as the value of the collateral pledged for the debt, i.e., the value of the property. Under some bankruptcy filings, payments to secured creditors can continue longer than the scheduled period of the repayment plan, usually if your underlying debt obligation was scheduled to be paid over more than the length of the plan. You may be able to pay the loan off over whatever timeframe existed for the original loan repayment schedule as long as you make up for any missed payments or interest during the plan.
Customer or Client Filing
As you can probably glean from the description above, if you want a spot in the front of the repayment line, you'll want the money owed to you to be backed by some real property. If you loaned a client money or turned over real property or equipment to a customer in advance of payment, that might make you a secured creditor. On the other hand, if you just did some work for a client or provided a customer with a service, you may have to wait a bit longer for repayment.
Whether as a debtor or a creditor, bankruptcy filings can be complicated. Talk to an experienced bankruptcy attorney to find out about your rights and responsibilities in bankruptcy.