When a debtor files for protection under the U.S. Bankruptcy Code, an automatic

Question

When a debtor files for protection under the U.S. Bankruptcy Code, an automatic stay goes into effect prohibiting further collection efforts against the debtor or similar actions. This automatic stay also "reaches" provisions in contracts that supposedly permit the non-debtor party to terminate a contract if the other business (party) files for protection under Chapter 11 of the U.S. Bankruptcy Code. What can the other party do to minimize his/her risk of doing business with a debtor-in-possession? Is there a fair, ethical side to this question?

Explanation / Answer

The other party who is involved in business with a debtor in possession can do the following in order to minimize the risk.

1. First they should file an administrative claim for all post bankruptcy sales as it is legal for the debtor to pay for the purchase of all goods and services in the ordinary course of business. The amounts that are used for purchase of goods post petition are accorded as administrative claims that are given priority over the unsecured claims for which the debtor will have to pay the charges instantly. If the purchases are unually large that are not on normal terms then the other party that is doing business will have to reach the bankruptcy court and get approval to make sure to make an approved transaction to make sure that the rights are protected.

2. The other party doing business will have to be careful wit the twists involved in the executory contracts:

The contract might have terms that are applicable to pre-petition, but the creditors or parties that are involved in business will have to make sure that they forecast all the possible alternatives with respect to the risks involved in business so that they also have the post petition terms mentioned in the contract. The enforcement of a contract might sometimes need intervention of a third part like an attorney who will be approached to file a motion which can compel the debtor to either assume or reject the contract.

3. To see if the debtor is creditworthy:

This is the most important aspect since people who are involved in business should have the capacity to analyse the creditworthiness of the debtors. There will be scenarios where two friends are involved in business wherein they will be knowing of each other's assets which will given them confidence that even if any one files for bankruptcy the other person will be able to recover the costs, but there are situations where in people from two different backgounds involve in business and a situation of bankruptcy arises. Then in this condition they will have to make sure that the tems are clearly mentioned in the contract and they should also be able to analyse the creditworthiness of the debtor and contract.

In the case of bankruptcy, the case of being fair and ethical is not possible. Filing a bankruptcy might help the debtor but what about the creditor, they cannot act ethical at all times, since they will be interested in only recovering the money that they have invested or else they inturn will be forced to file bankruptcy.

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