Protecting Secured Creditor’s Rights in Bankruptcy

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There are several protections under Bankruptcy Code for individuals or groups that have supplied services or goods to a debtor on credit before a debtor’s bankruptcy filing date.  When done properly, a trade creditor can increase the chances of receiving a distribution from the bankruptcy estate by invoking these protections.  If the trade creditor does not take action, the debt might be defined as an unsecured claim.  There are several different ways in which a creditor can be protected during a bankruptcy case.

What is a Request for Administrative Expense?

The first protection is offered under Section 503(b)(9) and it is known as a Request for Administrative Expense.  If you have sold goods to a debtor within the 20 day period before the bankruptcy case is filed, you can apply for your claims to be considered an administrative expense priority.  This is only eligible for goods and not services.

What is a Reclamation Demand?

You may also consider the potential for a Section 546(c) Reclamation Demand.  This section is broader than the first example since it is expanded the goods sold in the 45 day period prior to the filing of the petition.  In this scenario, however, the rights of sellers to reclaim goods are often subject to prior interests of secured parties.  A reclaiming seller will have to file on time for the reclamation demand but he or she might also need to file an adversary proceeding to prevent the debtor from using the purchased goods or from commingling the goods with other supplies.

What is Post-Petition Assertion of Mechanics’ Lines?

Finally, another option for a secured creditor is the Post-Petition Assertion of Mechanics’ Lines.  States have all adopted laws regarding the protection of creditors whose labor, services, equipment or materials were used to improve the land of the debtor.

Even when a secured creditor takes all these steps, it is important that no other action is taking during the bankruptcy case to impair these rights.  For example, a debtor might take action to sell property free and clear of liens, and this sale would include mechanic’s liens.

From the perspective of secured creditors, there have been actions taken to protect their interests when a debtor files for bankruptcy.  When used properly by an experienced attorney, the provisions listed above can be extremely helpful in moving a case forward and having the interests and rights of the creditor at the forefront of a bankruptcy case.  A creditor must take action by speaking with a qualified attorney from the outset.