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How to Collect Business Debt
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Article 7: Bankruptcy: Everything Stops
Filing for bankruptcy may be relatively rare, but, of course, it does happen. And when it does, collection efforts must stop—whether by you, a collection agency or an attorney.
In fact, should you continue trying to collect what’s owed, you will violate the court’s automatic stay on debt collection.
“If you persist, you may be hauled into court to explain why,” warns Kimberley Tyson, a bankruptcy attorney with Denver’s Sherman & Howard law firm.
That doesn’t mean there is nothing you can do. You just need to work within the rules of the court.
To have any hope of obtaining a settlement, you must enter the case as either a secured or unsecured creditor by filing an inexpensive Proof of Claim.
Secured creditors typically have property at stake, such as equipment backed by a security agreement. Others might have large installment-payment contracts.
Secured credit is rarely used by companies that sell services rather than tangible goods, or by companies whose typical individual business deal is small.
Secured creditors come first in bankruptcy payouts. The court assesses the depreciated value of equipment, for example, at that time and awards the amount to the creditor, Tyson says. The remainder of the original unpaid purchase becomes unsecured debt.
Unsecured creditors are lumped together without priority, equally dividing the crumbs remaining after secured creditors are paid—frequently receiving less than a dime per dollar owed.
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