June 24, 2025
By: Carolina Y. Sales

Seven Reasons You Might Need a Bankruptcy Attorney When You’re Not the Debtor

When you, or your successful business, deal with another party facing financial distress (such as a client, vendor, customer, or tenant that files bankruptcy), the complexities of bankruptcy law can be overwhelming. Consulting a skilled bankruptcy attorney is essential to navigating these challenges and protecting your interests. Below are seven reasons you might need a bankruptcy attorney, even though you’re not the bankrupt debtor.

1.) Filing a Proof of Claim

When a debtor files bankruptcy, in various instances creditors must file a proof of claim to assert their rights to receive payment from the debtor’s estate. A bankruptcy attorney can ensure that this document is prepared accurately and timely filed, and that you adhere to filing requirements. Errors or missed deadlines can result in your claim being denied, leaving you uncompensated. An attorney also evaluates the claim’s priority and secured status, as well as other complex issues (such as a landlord’s computation of rejection damages when a tenant rejects the lease), thereby maximizing the likelihood of recovery.

2.) Defending a Preference Action

A preference action may be filed against you when a bankruptcy trustee seeks to recover payments made within 90 days before the debtor’s bankruptcy filing (or 1 year for “insiders”), claiming the debtor favored you over other creditors. Defending against such claims may require a skilled attorney to assert defenses under the U.S. Bankruptcy Code (11 U.S.C. § 547(c)) such as “ordinary course of business” or “contemporaneous exchange for new value.” Without asserting such defenses, you may be forced to return funds you rightfully received, which could impact cash flow and operations.

3.) Defending a Fraudulent Transfer Action

In bankruptcy, trustees may pursue fraudulent transfer actions to recover assets transferred by the debtor to you before the debtor’s bankruptcy filing, under the U.S. Bankruptcy Code (11 U.S.C. § 548) or state law (via 11 U.S.C. § 544). The trustee could allege that the transfers were actual fraudulent transfers that were made to hinder, delay, or defraud creditors, or that they were constructive fraudulent transfers in which the debtor received less than reasonably equivalent value in exchange for the transfer or obligation. A bankruptcy attorney can help you defend against these claims, such as demonstrating that the debtor was not insolvent or that you provided reasonably equivalent value. Such counsel can prevent costly judgments that could affect your financial stability.

4.) Pursuing a Nondischargeability Action

Certain debts, such as those arising from fraud, willful injury, or breach of fiduciary duty, may be declared nondischargeable, which means that the debtor remains liable post-bankruptcy. A bankruptcy attorney can help you pursue a nondischargeability action against the debtor to ensure your claim survives the debtor’s bankruptcy discharge. This requires filing a lawsuit and proving specific legal elements, with an attorney’s expertise to navigate evidentiary rules and court procedures effectively.

5.) Obtaining Stay Relief

The automatic stay in bankruptcy halts collection efforts against the debtor, thereby stopping your ability to recover outside of bankruptcy. In various instances, a bankruptcy attorney can file a motion for relief from stay (11 U.S.C. § 362(d)), allowing you to proceed with actions such as repossessing collateral or pursuing litigation. Drafting a motion requires legal precision to demonstrate cause, such as a lack of adequate protection of your interest in the property or other circumstances, such as the debtor’s bad faith.

6.) Navigating Complex Bankruptcy Procedures

Bankruptcy involves intricate rules, deadlines, and filings, whether under Chapter 7, 11, or 13. A bankruptcy attorney guides you through the processes, ensuring compliance, and protecting your rights. For example, in a Chapter 11 reorganization, an attorney can file a motion to seek payment of your administrative expense claim, advocate for favorable plan terms, and safeguard your position as a creditor or stakeholder.

7.) Strategic Risk Management and Planning

Beyond immediate legal actions, a bankruptcy attorney can provide strategic advice to mitigate risks. They assess your exposure in bankruptcy proceedings, advise on terms to minimize future losses, and develop strategies to protect your interests. This approach helps you avoid potential issues in connection with a debtor’s bankruptcy.

In conclusion, a bankruptcy attorney is indispensable for non-debtor parties navigating the complexities of bankruptcy law. From filing proofs of claim to defending against preference and fraudulent transfer actions, pursuing nondischargeability actions, and obtaining stay relief, their expertise ensures legal compliance and maximizes recovery. Additionally, they simplify procedural complexities and offer guidance, safeguarding your interests in challenging financial landscapes. Consulting a bankruptcy attorney is not just a reactive measure (and not just for bankrupt debtors), but rather a proactive investment.