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Administrative Expense Claims: Understanding the Risk of Doing Business with Bankrupt Customers

chapter 11.jpgSometimes, when you do business with multiple companies, chances are that a few of them will file for bankruptcy because not all businesses are successful. When you find out that a company you have been doing business with has filed for bankruptcy, the first question you may ask yourself is whether you want to keep doing business with them or terminate the relationship.

If the company that went bankrupt was small and has little to no impact on your business, it may be wise to terminate all relationships with that business. However, if the bankrupt business is large, and you sell or provide many services through that business, you may want to continue to do business with them because you have much more to lose. In this case, you would have an administrative claim for expenses.

Administrative Claims for Expenses

The United States Bankruptcy Code permits businesses to file claims for administrative expenses when they are doing business with businesses that have filed for chapter 11 bankruptcy. After a bankrupt business files a petition for bankruptcy, specifically chapter 11, you will be entitled priority of payments for goods and services that your business provided to the bankrupt business. You will receive priority over other general unsecured creditors. It is important to note that, although there is no guarantee that your claim will get paid in full, priority claims almost always get paid in full.

In order to determine if you have an administrative claim or expenses that can be paid by the bankruptcy estate, you need to prove the value of goods and their necessity. Commonly, if you have a contract with the bankrupt business, the contract will control the value of the goods or services. But, in order to prove the goods or services or necessary, you need to show that the chapter 11 trustee purchased them in the ordinary course of business to preserve (or benefit) the bankrupt estate.

What Qualifies as An Administrative Expense?

Administrative expenses are paid first and in full because they are intended to support the reorganization of the bankrupt business' debt and encourage prospective businesses to continue to do business with the bankrupt business, to preserve the bankrupt estate. Examples of these expenses, among others, include: fees for professional services (accounting or legal services); certain nonresidential real property lease expenses; value of goods received by the debtor within 20 days prior to the bankruptcy petition being filed; and wages, salaries, or commissions for services rendered to the bankrupt business.

Consult an Attorney

If you are doing business with a company, large or small, that recently filed for bankruptcy, you should contact an experienced San Jose bankruptcy attorney who will be able to preserve your rights, advise you of any contract issues, and get you the compensation you deserve.

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