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Understanding the Automatic Stay in a Debtor-General Contractor Bankruptcy Case

Authored by attorney Shalanda Franklin

What do you do when the general contractor files for bankruptcy before paying your invoices?  When you receive notice that a general contractor of a project that you have been involved with has filed for bankruptcy, you must immediately stop any actions you may have begun to collect unpaid invoices.

United States bankruptcy law requires all creditors to stop collection activities when a person or company files for bankruptcy.  This automatic stay of collection activities applies to, and thus prohibits you from, demanding payment, filing a law suit to collect payment, or enforcing any judgments already obtained against the bankruptcy debtor. During the course of the bankruptcy case, you may receive notice to file a proof of claim regarding any debt the debtor owes to you.  The proof of claim is your opportunity to obtain payment of the debt.  By filing a claim, you may become eligible to receive a partial or full payment from the debtor.

The bankruptcy stay does not prohibit a subcontractor or materialman from filing a mechanic's lien in accordance with Virginia law.  In fact, a mechanic’s lien for a pre-petition debt may be perfected after the bankruptcy case is filed by recording the lien in the appropriate Virginia Circuit Court.  This right to perfect a mechanic’s lien does not include the right to file suit to enforce the lien.  Suits to enforce a mechanic’s lien are prohibited by the bankruptcy stay.  As a result, the mechanic’s lien holder must either obtain the bankruptcy court’s permission to file suit or wait until the case is dismissed without discharge to file suit.

For more information about the bankruptcy stay and your rights when named as a creditor in a bankruptcy case, please contact us

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