SavyLawyer : Hello, and thank you for contacting Just Answer. My name is Adam, I am a bankruptcy professional, and I look forward to answering your question this afternoon.
SavyLawyer : Just to clarify, what, exactly, is the company not aware of?
Customer : sorry Adam. BANK is unaware of potential Chapter 11. Company is aware of the situation 100%, we hope!
SavyLawyer : Not a problem at all, I just want to make sure that I understand that situation. That makes more sense (it would be hard for a company to file for chapter 11 without knowing it). So what, exactly, is your question? You are concerned that the bank is not aware of the potential for chapter 11?
Customer : Yes. Bank wants us to agree to a lockbox. They aren't aware we are contemplating Chapter 11. Seems that we don't want to do the lockbox, but the bank may twist our arm. We want to decline. What are the risks?
Customer : Thank you!
Customer : waiting for a response. Is it clear that the ball is in your court? Thank you!
Customer : any comment, Mr. Savy?
SavyLawyer : My apologies, I was off line for a few days. The risk here, where the debtor is considering or preparing for filing for chapter 11 reorganization is that, prior to filing, the debtor continues to be exposed to risk of collection efforts by a creditor. Once the petition for chapter 11 is filed, an automatic stay on collection activities goes in to effect, essentially preventing a bank/creditor from taking collection action, including seizing property.
SavyLawyer : However, prior to the chapter 11, a creditor could decide to be aggressive and attempt to collect if you are not willing to work with them. Declining to take action that the bank insists on could encourage the creditor to take more aggressive action. If this is a secured loan, and the bank has a security interest in either real estate or property of the company, and the company is behind on loan payments, the bank could seek to seize the property, and if this action is taken quick enough (ie before the company can get it's chapter 11 petition in), then the company could end up losing property that would then not be recoverable in the chapter 11, because it happened prior to the chapter 11.
SavyLawyer : A creditor has the right to aggressively pursue it's interests up to the moment of the petition being filed. The main risk from not working with a creditor prior to filing the bankruptcy petition is that they can aggressively pursue property or assets, and anything the creditor can gain prior to the bankruptcy would not be protected from seizure in the bankruptcy,
SavyLawyer : So, in short, the risk in not working with a creditor such as a bank prior to bankruptcy is that if they take aggressive action (such as seeking a judgment in court, foreclosing on real property, seeking to seize property secured by a loan, etc) and gain company property, that property is lost to the company, it cannot be regained in bankruptcy.
SavyLawyer : Now, when you are talking about a personal or consumer bankruptcy, generally there is less for the creditors to go after, and as such people tend to be unwilling to work with creditors where they are confident that they will be filing for bankruptcy relief at some point in the near future. For a chapter 11, however, particularly if a company has significant assets tied up in a secured loan and the estimated date for filing for bankruptcy is still a ways off, there may be risk to that property or company assets if the creditor acts quickly and aggressively.
SavyLawyer : Let me know if you require any additional information or I can be of any further assistance to you.