10 May My contractor filed for bankruptcy-what now?

Q. I hired a contractor who never did the job. I want to sue him, but I learned he filed for Chapter 13 bankruptcy three months before I paid him for the work he didn’t do. Can I sue him, or should I wait until the bankruptcy is done? I don’t want him to add me to his list of creditors so I can’t get back my money.
— Scammed

A. Your options to pursue a refund of your money will depend, in part, on when you entered into the agreement with this contractor and the status of his bankruptcy case.

From what you said, it sounds like this was a wholly post-petition transaction, meaning that you contracted for the work and paid him after he had filed for bankruptcy protection.

First, it’s important to understand how a Chapter 13 case works.

Chapter 13 filing is an option available to an individual or a married couple with regular income seeking to reorganize his/their debts and retain assets, said Ilissa Churgin Hook, a bankruptcy attorney and member of Hook & Fatovich in Wayne.

She said a Chapter 13 case normally lasts three to five years and involves a payment plan which allows a debtor to repay all or part of his/her debts over time.

“The bankruptcy code requires that the debtor pay general unsecured creditors — those creditors who do not hold a lien against the debtor’s assets — the greater of (i) the debtor’s excess monthly income during the duration of the Chapter 13 Plan, or (ii) what unsecured creditors would have received if the debtor’s assets were liquidated in a Chapter 7 bankruptcy,” she said.

Therefore, in most Chapter 13 cases, unsecured creditors receive at least some payment towards their pre-petition claims, she said. In some cases, creditors receive full payment on their allowed pre-petition claims filed with the court.

If yours was a pre-petition transaction, the contractor should have listed you on his schedules, Hook said.

“If he did not, you should consult with an attorney regarding the filing of a claim for payment against the Chapter 13 estate,” she said. “A motion to the bankruptcy court for permission to file a claim out of time due to the debtor’s failure to give you notice of the bankruptcy filing may be necessary.”

Assuming that this is a wholly post-petition transaction, Hook said, the contractor did not have to list you on his schedules of creditors. A bankruptcy petition and schedules reflect a debtor’s assets and liabilities as of the filing date of the bankruptcy case, she said.

“Generally speaking, a debtor does not receive a discharge of debts that accrue post-petition, and remains liable for those debts,” she said.

Upon the filing of a bankruptcy case, an “automatic stay” goes into effect, Hook said. Generally, the automatic stay of the bankruptcy code precludes pre-bankruptcy creditors from commencing or continuing any state court collection action or proceedings.

“Assuming that this is a post-petition transaction, a lawsuit to recover the funds paid to this contractor would technically not violate the automatic stay of the bankruptcy code,” Hook said. “However, the preferred practice of most attorneys is to file a motion to with the bankruptcy court seeking an order vacating the automatic stay, allowing you to proceed with a state court collection action.”

Hook said such an order would negate any question by the state court as to whether you could proceed in a lawsuit against the debtor while his Chapter 13 case is pending, which could last for the next several years.

She recommends you consult with an experienced bankruptcy attorney to determine the current stage of the Chapter 13 case.

You should learn if a payment plan been confirmed by the bankruptcy court, whether the case been converted to a Chapter 7 based upon the debtor’s inability to confirm a repayment plan or if the case has been dismissed.

“The current status of the bankruptcy case will also determine your options, and importantly, the timing of any action you may be able to take against this contractor,” Hook said.

Email your questions to .

This story was first published in May 2017.