Trade Creditor’s Risk-Mitigation Tools and Remedies Manual

Trade creditors dealing with financially troubled customers often have difficulty collecting their claims. Unpaid sellers and service providers must refrain from collection efforts against a buyer that files for bankruptcy unless specifically authorized to take action by the bankruptcy court or the Bankruptcy Code. Instead, they frequently have a general unsecured claim against the buyer in bankruptcy with the right to file a proof of claim with the bankruptcy court. Trade creditors usually obtain little or no recovery on their unsecured claims because the value of the debtor’s assets is frequently significantly reduced when they are liquidated in bankruptcy. In addition, the Bankruptcy Code’s priority rules require the full payment of more senior secured and administrative priority claims before any distribution can be made to holders of general unsecured claims. Further, due to the inherent delays in administering a typical bankruptcy case, any dividend will likely only be received long after a bankruptcy case is filed.