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THE CONSEQUENCES OF A DEBTOR GOING INTO BANKRUPTCY

 

All businesses are afraid of one of their debtors going into bankruptcy, since it naturally complicates the collection of unpaid debt. To be officially recognized as being in bankruptcy, your debtor must meet three imperative conditions: to be in business, to have ceased paying its invoices for an extended period, and to no longer be creditworthy.
Another noteworthy point is that bankruptcy may be applied for not only by the public prosecutor or by the debtor itself, but also by a creditor. For a creditor, claiming bankruptcy for one of its debtors can be a way for a creditor to put pressure on them regarding unpaid debt.

The practical consequences of a debtor’s bankruptcy

  • The debtor is no longer in control of its assets. All invoices are managed by an official receiver, who defends creditors’ interests and is appointed by the court during the bankruptcy announcement.
  • The ways of getting this debtor to pay are then suspended. If a creditor obtains a writ of execution against the debtor and tries to conduct a seizure of assets, this seizure cannot take place if the debtor has been declared bankrupt between the date of the writ and the date of its execution.
  • The creditor can still claim the sums due or becoming due.
  • It is prohibited for the creditor to claim late penalties starting from the date of the initial bankruptcy ruling. However, the creditor may claim the interest incurred up till the ruling date, as well as compensatory damages and interest resulting from the agreement(s) or general terms and conditions of sale.
  • The receiver may determine, within two weeks, if a contract binding the creditor and the debtor must remain in effect or not.
  • Start of the “suspect” period, which covers the last six months before the bankruptcy procedure was opened. If certain actions have been completed during this period and may be considered suspect, they will be declared as non-binding on the debtor’s creditors as a whole (sale of buildings at below market price, attempts to favour one creditor by paying an invoice that has not yet become due, etc.).

The creditor’s rights and obligations

The debtor’s bankruptcy does not automatically mean that unpaid debt won’t be collected, as even if the situation is complicated, there are certain things that the creditor can do to optimize its chances of recovery.

Firstly, even though creditors who are known to the court are in principle notified of their debtor’s bankruptcy, it can still be difficult for the receiver to identify all the creditors concerned. This means it’s crucial to be proactive to have any hope of collecting the amount due. However, it’s worth noting that not all creditors are on a level playing field when it comes to collecting unpaid debt. Even though the principle states that all creditors are equal, legislators can grant preference to certain creditors, who will thus be paid before the others. These are called preferential creditors (taxes, VAT, etc.), whereas the others are known as unsecured creditors. The latter will then be reimbursed on a pro rata basis (i.e. the proportion of their debt claim in relation to the assets released by the receiver).

Furthermore, creditors are required to report their debt claims to the court clerk no later than the date stipulated in the bankruptcy ruling. It should also be noted that the right to submit a debt claim expires one year after the bankruptcy ruling.
The creditor must also submit all available proof (purchase order, invoice, general terms and conditions or formal notice, if any) to the receiver to ensure that the latter will take this declaration into account.

Once in possession of all the necessary information, the judge will then decide whether the debtor in question is or is not at fault for the bankruptcy. If the judge decides that the debtor is “excusable”, they can no longer be pursued for unpaid debt problems related to the bankruptcy. Excusability can only be granted to a natural person if the latter is recognised as being “unfortunate” and as having acted in good faith.

P.S.: The creation of the Registre Central de la Solvabilité, or Central Solvency Registry (RegSol), offers real benefits in terms of time savings and lower administrative and travel costs, since creditors can now submit their debt claim declarations online.

You wish more details on what we can do for you? Please don’t hesitate to contact TCM.  Surf our website or contact us!

Added 23 March 2018: Please read additional information on the effect of bankruptcy on the credit score. There are two examples to make it easier to understand different bankruptcy scenarios.

THE CONSEQUENCES OF A DEBTOR GOING INTO BANKRUPTCY

 

All businesses are afraid of one of their debtors going into bankruptcy, since it naturally complicates the collection of unpaid debt. To be officially recognized as being in bankruptcy, your debtor must meet three imperative conditions: to be in business, to have ceased paying its invoices for an extended period, and to no longer be creditworthy.
Another noteworthy point is that bankruptcy may be applied for not only by the public prosecutor or by the debtor itself, but also by a creditor. For a creditor, claiming bankruptcy for one of its debtors can be a way for a creditor to put pressure on them regarding unpaid debt.

The practical consequences of a debtor’s bankruptcy

  • The debtor is no longer in control of its assets. All invoices are managed by an official receiver, who defends creditors’ interests and is appointed by the court during the bankruptcy announcement.
  • The ways of getting this debtor to pay are then suspended. If a creditor obtains a writ of execution against the debtor and tries to conduct a seizure of assets, this seizure cannot take place if the debtor has been declared bankrupt between the date of the writ and the date of its execution.
  • The creditor can still claim the sums due or becoming due.
  • It is prohibited for the creditor to claim late penalties starting from the date of the initial bankruptcy ruling. However, the creditor may claim the interest incurred up till the ruling date, as well as compensatory damages and interest resulting from the agreement(s) or general terms and conditions of sale.
  • The receiver may determine, within two weeks, if a contract binding the creditor and the debtor must remain in effect or not.
  • Start of the “suspect” period, which covers the last six months before the bankruptcy procedure was opened. If certain actions have been completed during this period and may be considered suspect, they will be declared as non-binding on the debtor’s creditors as a whole (sale of buildings at below market price, attempts to favour one creditor by paying an invoice that has not yet become due, etc.).

The creditor’s rights and obligations

The debtor’s bankruptcy does not automatically mean that unpaid debt won’t be collected, as even if the situation is complicated, there are certain things that the creditor can do to optimize its chances of recovery.

Firstly, even though creditors who are known to the court are in principle notified of their debtor’s bankruptcy, it can still be difficult for the receiver to identify all the creditors concerned. This means it’s crucial to be proactive to have any hope of collecting the amount due. However, it’s worth noting that not all creditors are on a level playing field when it comes to collecting unpaid debt. Even though the principle states that all creditors are equal, legislators can grant preference to certain creditors, who will thus be paid before the others. These are called preferential creditors (taxes, VAT, etc.), whereas the others are known as unsecured creditors. The latter will then be reimbursed on a pro rata basis (i.e. the proportion of their debt claim in relation to the assets released by the receiver).

Furthermore, creditors are required to report their debt claims to the court clerk no later than the date stipulated in the bankruptcy ruling. It should also be noted that the right to submit a debt claim expires one year after the bankruptcy ruling.
The creditor must also submit all available proof (purchase order, invoice, general terms and conditions or formal notice, if any) to the receiver to ensure that the latter will take this declaration into account.

Once in possession of all the necessary information, the judge will then decide whether the debtor in question is or is not at fault for the bankruptcy. If the judge decides that the debtor is “excusable”, they can no longer be pursued for unpaid debt problems related to the bankruptcy. Excusability can only be granted to a natural person if the latter is recognised as being “unfortunate” and as having acted in good faith.

P.S.: The creation of the Registre Central de la Solvabilité, or Central Solvency Registry (RegSol), offers real benefits in terms of time savings and lower administrative and travel costs, since creditors can now submit their debt claim declarations online.

You wish more details on what we can do for you? Please don’t hesitate to contact TCM.  Surf our website or contact us!

Added 23 March 2018: Please read additional information on the effect of bankruptcy on the credit score. There are two examples to make it easier to understand different bankruptcy scenarios.

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