For creditors in a Chapter 11 bankruptcy case, quick action is essential in protecting rights, asserting and monitoring claims, preventing unnecessary pitfalls, and maximizing the eventual recovery amount. These six early steps can help creditors get on the right track from the beginning of the case.

Stop contact with the debtor.

When a company files for Chapter 11 protection, an automatic stay that stops all collection activity against the debtor takes immediate effect; this includes any lawsuits that were initiated prior to the Chapter 11 filing. Creditors who continue to pursue the debtor for any type of claim after bankruptcy has been filed are in violation of the bankruptcy code, and may find themselves exposed to legal action.

Conduct a cost-benefit analysis.

A variety of factors will influence if, when, and how much a creditor may be able to receive from a debtor who has filed for Chapter 11 bankruptcy; these include details such as the debtor’s total amount of debt, the number and type of other creditors, and the anticipated timeframe of the bankruptcy proceedings. It is important for creditors to consider these factors carefully before deciding whether to go forward with the recovery process, because the amount they can expect to receive from the debtor may not be worth the time and effort of pursuing it.

File a proof of claim if necessary.

When seeking Chapter 11 relief, a debtor must file a number of petitions and documents, including a schedule of creditors and claims. This schedule is the main document that constitutes evidence of both the validity and the amount of claims against the debtor. As such, it should be reviewed carefully by all creditors in order to ensure accuracy. Creditors who are listed correctly on this schedule, and whose claims are not listed as contingent, disputed, or unliquidated, do not need to file any additional proof of claim in order to be able to vote on the debtor’s proposed reorganization plan or to participate in any eventual distribution under that plan. However, creditors who have claims that are not scheduled, claims that are scheduled as contingent, disputed, or unliquidated, or claims that are not listed accurately must file a proof of claim, as well as the necessary evidence for the claim, in order to be treated as a creditor for voting and distribution purposes. When a proof of claim is filed properly, it supersedes any prior scheduling of that claim. Forms to file a proof of claim are available on the United States Courts website.

Pay attention to “first-day” motions.

Typically, among the first things to happen when a debtor files for bankruptcy is what is known as a “first-day hearing.” This is a series of motions filed by the debtor and heard by the bankruptcy court in which the debtor requests certain authority outside the specifications of the Bankruptcy Code. In most cases, some of these “first-day” motions include requests to treat certain claims differently than they should normally be treated according to the priority scheme of the Code. Typical requests in this category include the authority to pay certain types of unsecured claims immediately, such as pre-petition wages and benefits or critical vendor claims, in advance of other unsecured claims. Another common first-day motion is the debtor’s request to either obtain debtor in possession financing or use cash collateral, or both. Motions of this nature can have a major impact on creditors’ rights, particularly regarding the recovery priority scheme, and thus it is important for creditors or their advisors to carefully read and consider all first-day motions filed. If creditors have objections to any motion, they may either file an objection or attend the hearing in order to object in person.

Attend the 341 creditors meeting.

This meeting is essentially an overview of the bankruptcy case in question; it is conducted by the US trustee and attended by the debtor’s representative and counsel and the creditors concerned. Both the US trustee and creditors have the opportunity to question the debtor under oath about the debtor’s conduct, acts, and property, as well as the administration of the case. In addition, the US trustee and debtor’s counsel can provide a case status summary and further general details about the Chapter 11 process, and can answer creditors’ additional questions. Attending the 341 creditors meeting is the best opportunity for creditors to get as much information as they can early on in the case.

Stay informed.

Once the debtor has notified creditors of the Chapter 11 filing, it is the responsibility of the creditor to stay informed about further developments in the case and how the treatment of claims is proceeding. Creditors can file a request to be added to the service list, which allows them to receive copies of all filings in the case. In addition, the Office of the US Trustee is usually a good source of further information, and can also help in providing details that creditors may have difficulty deciphering from the court documents without assistance.