Is Bankruptcy Really Such a Bad Thing?

Is Bankruptcy Really Such a Bad Thing?

By Saalfeld Griggs PC

In today’s turbulent economy, chances are that, sooner or later, you will receive a notice that one of your customers filed bankruptcy. For most creditors, the initial reaction to bankruptcy is that all prospects of recovery are lost and there is nothing further to be done. In some cases, this may be true. However, the filing of a bankruptcy petition may actually be beneficial in certain situations. This article briefly touches upon what creditors can do before bankruptcy to protect themselves, as well as situations when you may prefer that a customer files for bankruptcy relief.


When a bankruptcy petition is filed, a creditor’s claim is categorized as a secured claim, an unsecured claim, or a combination of the two. This determination is made based upon whether or not a creditor’s claim is secured by collateral, for example commercial property or equipment. The bankruptcy code provides that a creditor has a secured claim up to the value of the collateral securing the debt, and an unsecured claim in the amount of the remaining debt after subtracting the value of the collateral. This is important because the bankruptcy code grants secured creditors a more favorable treatment than unsecured creditors. Taking the necessary steps to protect yourself before a customer runs into financial difficulties is critical to receiving some kind of repayment on the debt owing. To become a secured creditor, you could obtain security agreements in personal property, record a deed of trust upon real property, or obtain personal guaranties from the principals of a business to ensure that even if the business files for bankruptcy, the principals may remain liable on the debt.


Many creditors agree that there are few things more frustrating than dealing with a dishonest and evasive debtor. A creditor can spend significant sums, both in and out of court, attempting to locate and realize upon its collateral. However, once a debtor files for bankruptcy that debtor’s assets are fully disclosed. The debtor must detail what he or she owns, where his or her property is located, whether the property has been disposed of and if so, where the proceeds from the sale are located. The debtor must appear at a “meeting of creditors” and further answer questions, under oath, regarding his or her assets and liabilities. If the debtor continues to operate a business, the bankruptcy code requires regular financial reports detailing the debtor’s day-to-day operations.

Through these disclosures, a creditor can learn where the property securing its debt is located and evaluate its recovery options more accurately. In the event there has been wrongdoing on the part of the debtor, the creditor may avoid its debt being discharged as part of the bankruptcy proceeding. Without a discharge, the creditor is able to collect upon its debts despite the bankruptcy filing. Further, even though collection efforts are prohibited during the pendency of a bankruptcy case, the case may ultimately be dismissed. If so, the creditor will then have the necessary information to locate and realize upon its collateral, placing the creditor in a better position than he or she was prior to the bankruptcy filing.

Of course, this is not to say that bankruptcy will result in a greater recovery for a creditor in any given situation. However, in some situations a bankruptcy proceeding may be the best and most cost-effective means of dealing with an evasive debtor. The attorneys at Saalfeld Griggs are well versed in issues associated with creditor’s rights and bankruptcy proceedings and can assist you in maximizing what recovery remains available. Please contact one of the attorneys in our Creditor’s Rights Group for assistance or questions relating to this article.