Let’s say you were buying something from someone or some business… could be home repairs, a medical procedure, a car, or maybe even a house. You pay and the good/service is suppose to be delivered or rendered in a few days. However, before it’s delivered, the individual or business declares bankruptcy and pockets the money you paid for your good. You find out there’s countless other creditors with more senior debts knocking on their doors. You order them to perform the service or deliver the good even though they have it in their inventory or have the time and ability to render the service but they tell you to pound sand.
Is this something that could realistically happen? I read about some guy paying a few grand for some pool services and the company declared bankrupcy in a few days… he’s left without his money and no services rendered… basically the company “stole” his money since they were gonna declare bankrupcy anyways.
Yes, happens all the time. I’d actually be shocked to hear of a business that stopped accepting new work because they were about to declare bankruptcy.
Happens in reverse too. I knew a guy who ran a commercial carpet cleaning business and did about $60k of work for a major franchise before they declared bankruptcy. That blow cost many cleaners their jobs.
You go to your local convenience store and buy some beer. You put the beer on the counter and hand the clerk the money. The clerk takes your money and takes away the beer. You make a fuss about it but the security forces you out the store.
Next day, you report the store to the authorities but they say the store has declared bankruptcy and you’ve got 105 creditors before you that need to be satisfied before you can recover the money you paid for the beer you never received.
Wiithin the last 10 days, this happened at a bar that I often went to in Brooklyn. The guy was accepting money for wedding receptions within the last few days before declaring bankruptcy and trying to run.
I liked the place, great food, nice selection of reasonably priced beers (during happy hour), large space, decent decor. I wondered how they were able to stay profitable. I guess the answer is - they weren’t.
I believe customers are dead last, or maybe employees are last. Whether or not they actually receive anything first depends if we’re talking Chapter 7 or Chapter 11. If it’s 7, customers will end up with nothing in the vast majority of cases. If it’s Chapter 11, the company continues to operate under the direction of a trustee and there is actually a very good chance of receiving your goods or services.
^I don’t think that’s right. I think the tax man is first, then customers, then employees, then suppliers. Bank debt, bondholders and stockholders come last.
I recall that employees were pretty high on the list (though there were other ways to screw them if there were pension agreements). I’d imagine that customers also would be pretty high.
Higher than those two would be Uncle Sam, and the bankruptcy attornes.
The Bankruptcy Code is also very explicit about the order of the different types of unsecured priority claims. Once you get a notification, if you think you have a priority claim, you must file a first day motion so that the court can approve it. If you snooze, you lose. You must prove to the court that you have a priority unsecured claim, otherwise you’ll go back in line at the end. For example, not all vendors ride along first - you must be a “critical vendor”. Not all pre-petition wages or customer obligations go through - there are caps on this. Even the IRS doesn’t get a full break - old uncollected tax obligations can be discharged by the bankruptcy court.
Needless to say, secured creditors and especially the unsecured creditors’ committee will be objecting everything and fighting tooth and nail to limit the amount of priority claims. And the bankruptcy court will be very strict to ensure that anyone who goes to the top of the line is indeed a “priority claim” and doesn’t get unnecessary preferrential treatment.
Long story short, if you’re a customer - you have a good chance to collect your payment first (subject to certain caps) - as long as you are proactive. If you sit and wait for a check in the mail, it won’t happen.
A few years back, my mom got a $50 gift certificate from her favourite gardening chain. Lo and behold, said chain goes mammaries up. My mom asks me if the certificate is any good. Jaded, old veteran of the financial world that I am, I say “No.” She is shocked (SHOCKED!!!) that the certificate is worthless and says the chain should have said something about their financial troubles BEFORE accepting $50 to cover the certificate.
Parents: you try to raise 'em right, but they just don’t listen!!!