When a major borrower files for Chapter 11 protection, secured creditors face a complex set of decisions in the first days and weeks of the case. Speed and preparation determine outcomes.
When a debtor files for Chapter 11, the automatic stay immediately halts virtually all collection activity. Secured creditors who have not already taken steps to protect their position may find themselves unable to act for weeks or months. The moment you learn a borrower has filed — or is likely to file — is the moment to call your attorney. In the first 48 hours, there are critical actions that can be taken, and critical mistakes that can be avoided.
The automatic stay does not eliminate your rights as a secured creditor — it suspends them. Your first priority should be ensuring that your collateral is adequately protected. Under Section 361 of the Bankruptcy Code, you are entitled to adequate protection of your interest in collateral. If the collateral is depreciating in value or being used by the debtor in the ordinary course of business, you can seek adequate protection payments or additional collateral as a condition of allowing that use to continue. If adequate protection is denied or unavailable, you may be able to seek stay relief to enforce your lien.
Filing a proof of claim is one of the most important and time-sensitive tasks for any secured creditor in a Chapter 11 case. The deadline — the "bar date" — is set by the court and is strictly enforced. A creditor who fails to file a timely proof of claim may forfeit the right to participate in any distribution. Your proof of claim should accurately state the amount of the debt, the nature of the obligation, and attach supporting documentation. For secured creditors, it should also clearly describe the collateral and the priority of your lien.
Chapter 11 trustees and debtors-in-possession have the power to "avoid" (unwind) certain pre-bankruptcy transfers. Payments made by the debtor to a creditor within 90 days of the bankruptcy filing — or within one year if the creditor was an insider — may be recoverable as preferences. Similarly, transfers made for less than reasonably equivalent value may be avoided as fraudulent transfers. If you received significant payments from the debtor shortly before the bankruptcy filing, you should consult with counsel about your exposure.
In a Chapter 11 case, the debtor typically proposes a plan of reorganization that determines how creditors will be paid. Secured creditors have specific rights in the plan process, including the right to vote on the plan and, if their class votes against the plan, to object to confirmation. Even if you cannot block the plan outright, sophisticated creditors can often use the threat of objection to negotiate improved treatment. Understanding the plan process — and engaging with it actively — is essential to maximizing your recovery.
Scott Shaw and Tim Mickel represent secured creditors, unsecured creditors, and committees in bankruptcy proceedings throughout Tennessee and Georgia. If you have a borrower in financial distress, contact us at 423.648.7890 before the bankruptcy filing — not after.
Attorney Advertising. This article is provided for informational purposes only and does not constitute legal advice. Reading this article does not create an attorney-client relationship. For advice specific to your situation, please contact Evans Harrison Hackett PLLC at 423.648.7890.