A Guide to Bankruptcy Types and Their Implications for Lien Holders

In this blog, we will explore the main types of bankruptcy, the considerations for lien holders and give you tips on how to get paid for your work.

What are the Different Types of Bankruptcy?

In the construction industry, companies facing financial distress or insolvency may consider filing for bankruptcy to restructure their debts and potentially continue operations or liquidate assets. The most common types of bankruptcy applicable to businesses, including those in the construction industry, are Chapter 7, Chapter 11, and Chapter 13. Here's a brief overview of each:

1. Chapter 11 - Reorganization for Businesses

Overview: Chapter 11 bankruptcy is commonly encountered, especially in the construction industry. It allows businesses, including real estate developers and general contractors, to reorganize and continue operations despite significant debts and cash flow challenges.

Key Points:

• Immediate Attention: Lien holders must assess the situation promptly and consider legal representation to ensure they can continue work and secure payments during the Chapter 11 proceedings.
• ‍Lien Stripping: Lien holders need to be cautious as Chapter 11 proceedings can involve stripping off liens, affecting their rights. Vigilance and proactive measures are essential to protect lien rights.

2. Chapter 7 - Business Liquidation

Overview: Chapter 7 bankruptcy involves the cessation of business operations. A trustee is appointed to oversee the distribution of the business's assets to creditors.

Key Points:

• Urgency but Not Emergency: While immediate attention is necessary, the urgency level is lower compared to Chapter 11. Lien holders will deal with a Chapter 7 trustee for potential claims and payments.
• Applicability: Chapter 7 can apply to both businesses and individuals, impacting creditors owed money by either entities or individuals.

3. Chapter 13 - Individual Bankruptcy

Overview: Chapter 13 bankruptcy is typically filed by individuals and does not significantly affect most construction industry stakeholders, except in specific cases related to property liens.

Key Points:

• Lien Stripping in Chapter 13: Property owners filing Chapter 13 may attempt to strip off certain liens on their property. Lien holders need to be aware and take legal action to protect their rights.

Understanding the Automatic Stay

The Automatic Stay is a potent aspect of bankruptcy, halting all collection efforts instantly upon filing. Lien holders need to grasp its implications and follow specific guidelines:

• Automatic Activation: The Automatic Stay activates immediately upon bankruptcy filing, freezing all collection activities.
• Severe Penalties for Violation: Attempting to collect money in violation of the Automatic Stay can lead to severe sanctions and penalties.
• Communications and Actions: Lien holders need to exercise caution in all communications and actions related to debt collection during bankruptcy proceedings, seeking court permission for certain actions.

How do you ensure you get paid for the work you've done?

In the face of bankruptcy, one pressing question stands: How do you ensure you get paid for the work you've done or the services you've provided? The key lies in following a structured approach, which involves essential steps to secure your rightful compensation even amidst financial turbulence.

1. File a Proof of Claim

The initial step is to file Proof of Claim. This straightforward procedure entails completing a claim form, specifying the amount owed to you and the basis for the claim. This document is then submitted to the court.

• Understanding Claim Categories: Depending on your position and relationship to the bankrupt entity, such as being an employee, you may have a priority claim, entitling you to receive payment before others. Carefully fill out the form, ensuring you tick the correct boxes.
• ‍Adhere to Filing Deadlines: Recognize and adhere to the designated deadline for filing a Proof of Claim. Missing this deadline could jeopardize your claim, even if others receive partial payments.
• ‍Legal Assistance: While you can handle the filing yourself, consulting an attorney is advisable for accuracy and to optimize your claim.

2. Avoid Working Unpaid

It's crucial not to work for free. You've rightfully earned your compensation, and filing a Proof of Claim is your way to ensure you're not left uncompensated.

• Ongoing Work in Chapter 11: If the bankruptcy case involves ongoing work, ensure you negotiate and establish terms to be paid concurrently with your work, securing what's known as an executive contract.

3. Protect Your Interests Through Liens and Bonds

One of the most vital steps is to safeguard your interests by filing a lien or sending bond claims. This protects your position as a secure creditor.

• Timely Lien Filings: Promptly file your lien as soon as legally possible. This places you in a stronger position, offering a level of security that unsecured creditors don't possess.
• SunRay Construction Solutions: Consider leveraging services like those provided by SunRay Construction Solutions to streamline and simplify the lien filing or bond claim process.

Key Takeaway

• Emphasize diligence, timeliness, and strategic actions during bankruptcy to optimize compensation for work or services in the construction industry.
• Stress the importance of following recommended steps and seeking appropriate guidance for effective navigation of bankruptcy complexities and securing rightful payments.
• Highlight proactive measures and a well-informed approach as critical tools in handling challenging bankruptcy scenarios.
• Underline the significance of being informed about various types of bankruptcy and their impact on lien rights for construction industry payment management.
• Encourage seeking legal guidance and understanding bankruptcy laws' nuances to protect lien holders and ensure fair treatment during financial distress situations.

You can always contact SunRay for further assistance and exploring solutions to enhance construction payment efficiency and to streamline payment processes.