Insolvency presents special challenges to collecting commercial debts. When a business is insolvent, its debts are greater than its assets, and the entity becomes unable to pay off its debts as they come due. Some businesses respond to insolvency by filing for Chapter 11 bankruptcy, which may reorganize the business, while others, such as insurers, may follow other statutory mandates. Both restructuring through Chapter 11 and insurance insolvency can eventually lead to property liquidation. The commercial collections attorneys at Klapper & Fass represent creditors in New York and nationwide, and can help them pursue the debts they are owed through litigation and other methods.The Process of Property Liquidation
Different debt collection strategies can be used depending on the nature of the debtor's business. In some cases, it may be appropriate to request that the court convert a Chapter 11 restructuring into property liquidation under Chapter 7. However, the amount a creditor may receive is highly variable in a Chapter 7 case, particularly if the creditor has no security interest in the debtor's property.
In other cases, the debtor may liquidate through Chapter 11 bankruptcy, which allows the management to get a higher price for assets. Usually when property is liquidated, administrative expenses to preserve the bankruptcy estate are paid first. The next priority is secured creditors, who have a security interest in the debtor's property. Generally, supplier and employee claims are paid before unsecured creditors' claims. Your ability to receive repayment on a debt in that case depends on your status as a creditor.
Different rules apply to insurance companies that become insolvent. The priority statute dictates that all creditors—both secured creditors and unsecured creditors—will be paid only after the insured parties (the policy holders) have been made whole. Under N.Y. Ins. Law § 7413(d), for example, a secured creditor of an insurance company for which a receiver has been appointed can surrender the security and file a claim as a general creditor. Alternatively, the claim can be discharged through the security, and the deficiency will be treated as a claim against the insurer's general assets, as are unsecured creditors' claims.
If the insurance company has had notice and an opportunity to be heard on the amount of the deficiency by a court, the amount of the deficiency determined is considered conclusive. If not, the amount is determined in a delinquency proceeding. If the secured assets are appropriately segregated, they will not be part of the general assets available to pay policy holders.
However, from a practical perspective, there is an ambiguity in the law. The first concern in an insurance company's insolvency is to ensure that policy holders are adequately compensated. Accordingly, without aggressive representation, some secured creditors may find that they are prioritized below policy holders.Consult a New York Attorney Experienced in Commercial Collections
The commercial collections lawyers at Klapper & Fass can enforce the creditors' rights of clients in New York and beyond that are faced with a debtor's property liquidation through bankruptcy or insolvency. We craft strong strategies to collect debts even when a business has gone under or elected to file Chapter 11 bankruptcy to reorganize. We have handled numerous cases of first impression that involve novel issues of law, and we aggressively advocate for our clients' rights. Klapper & Fass maintains offices in White Plains and Manhattan. We serve the five boroughs of New York City as well as the surrounding counties of Rockland, Suffolk, Nassau, and Westchester. We also provide legal services in New Jersey, Texas, and other states. Contact us at 914.287.6466 or via our online form.