Treatment of Post-Petition Expenses in Bankruptcy

When a company enters into Chapter 11 bankruptcy, the purpose is to reorganize the business so it can manage existing debts and hopefully come out a healthier business.  But operations do not stop the day bankruptcy is filed.  The business keeps on running, which means expenses continue to accrue after the petition date.  So how does the bankruptcy court treat those debts accumulated after the bankruptcy action is filed?

Logically speaking, what person or business would want to extend credit to a company in bankruptcy?  The fact that they are in bankruptcy means the company cannot and will not pay its debts right?  That is not necessarily the case.  A debtor in bankruptcy is required to pay all post-petition expenses in the normal course of business, or when they naturally come due.  It is only pre-petition claims that cannot be collected while the action is pending, pursuant to the automatic stay.  A holder of a claim that arises post-petition can proceed with collection as though the debtor was not in bankruptcy.  But what happens if the debtor still does not pay?

In order to induce continued business transactions with the bankruptcy debtor, the rules provide a priority status to claims arising from post-petition transactions with the debtor.  This priority is given in the form of an administrative expense claim.  There are a number of different forms an administrative expense claim may take as provided in 11 U.S.C. § 503.  Examples of an administrative expense claim include compensation and expenses incurred by the trustee, professional services of an attorney or accountant for the estate and any actual, necessary costs and expenses of preserving the estate, among others.  In order for a claim to be given priority as an administrative expense claim, the party seeking priority must file a motion for allowance of the claim and receive a court order finding that the claim is indeed an administrative expense claim.  In the case where the debtor incurs expenses post-petition, and fails to pay the amounts due, the creditor can motion the court for an allowance of an administrative expense claim.

So why is it important for the court to find the post-petition debt is an administrative expense claim?  Priority in payment, of course!  If a party with debt incurred post-petition, such as a manufacturer who provides the debtor with parts essential to the operation of the business, does not seek allowance of the claims as an administrative expense claim, there is no special method of enforcement.  This often means that only a small portion of the debt will be paid, or none at all.  If an administrative expense claim is allowed, the holder of the claim is one of the first parties to be paid instead of the last.  The Code sets forth the priority order in which certain parties are paid.  In the case of unsecured debt, the first to be paid is a holder of a claim for domestic support obligations, then the trustee followed by all other parties with allowed administrative expense claims.  11 U.S.C. § 507(a).  Now isn’t that a better position to be in?

It is important to note that neither the Code nor the Bankruptcy Rules of Procedure set forth a deadline for moving to allow an administrative expense claim.  The deadline is set by court order during the proceedings, so it is important to monitor the status of the case and ensure your motion is timely file.  In some instances, the court may allow for a tardily filed administrative expense claim.  However, if you have a debt that arose post-petition which exists before expiration of the deadline, it is unlikely that the grant will allow a tardily filed motion for allowance.  It is very important to pay attention to this deadline, if one is set by the court, or you may risk losing your opportunity to get paid.

Do not worry if you have a client that suddenly files for Chapter 11 bankruptcy, but continues to request your services.  The debtor must continue to pay any bills that accrue post-petition in a timely fashion.  If the debtor does not, you can always file for an administrative expense claim and seek priority of payment through the court system.