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Chapter 11 bankruptcy creates challenges, especially for unsecured creditors who need to know when and how they will receive payment. Understanding repayment order and expectations helps businesses manage cash flow efficiently. These are critical questions—especially for businesses reliant on timely payments to maintain cash flow.

What is Chapter 11 Bankruptcy?

Chapter 11 doesn’t mean the company is shutting down. Instead, it allows them to restructure their debts and keep operating. This process stops collections, enables the company to negotiate with creditors, and helps them create a plan to move forward. The period before a debtor files Chapter 11 is referred to as pre-petition; once the filing occurs, the period is referred to as post-petition. Some debtors are not able to restructure and liquidate, meaning they convert from Chapter 11 to Chapter 7. However, many debtors recapitalize and successfully emerge as a new entity.

Debt Classification in Chapter 11 Bankruptcy for Unsecured Creditors

When a company files for Chapter 11, it must list all debts and assets in its schedules. Debts are categorized by priority, meaning some debts are treated more favorably than others. The debts are generally classified in the following order:

1. Secured claims – can be a lender or bank that has a lien on some or all of the assets (collateral).

2. Priority Unsecured claims – unsecured tax claims, costs of administration such as professional fees.

3. General Unsecured claims – typically suppliers selling on open credit.

Businesses file for Chapter 11 when they cannot meet their obligations. Unfortunately, the news is not all that positive for unsecured creditors. Because of their priority, unsecured creditors have the most to lose in the bankruptcy filing. The question is usually not when they will be paid but whether there will be any recovery at all for the unsecured creditors. Further, a large corporate bankruptcy filing could take years to resolve, meaning even if there is recovery for the unsecured creditors, it could take years before their claims are satisfied.

Related Video: Chapter 11 Bankruptcy, An Overview

Source: “Chapter 11 Bankruptcy: An Overview,” LawShelf, YouTube Video, accessed 1/28/2025.

Major Chapter 11 Bankruptcies Affecting Unsecured Creditors

Following are the 25 biggest bankruptcies in American history:
The 25 Biggest Bankruptcies in American History

Amazingly, they range from The Hertz Corporation with $25B in assets to the largest — Lehman Brothers with $691B in assets. The reasons for filing varied, from poor business models, downturns in the economy, corporate malfeasance, and corporate liability caused by natural disasters. Unsecured creditors waited from a few months to years until a final order determined their recovery. A number of these bankrupt entities never emerged and were either liquidated or the assets were acquired, leaving the unsecured creditors holding the bag.

Credit Insurance Protection for Unsecured Creditors in Chapter 11

Bankruptcies often leave creditors scrambling to understand their position in the payment hierarchy. Many assume they’ll be made whole, but this is rarely the case. Trade credit insurance provides nonpayment protection that ensures creditors can recover losses—even when clients file for Chapter 11.

Trade credit insurance allows policyholders to receive payment for pre-petition receivables without waiting for the lengthy bankruptcy process. This allows businesses to maintain stability and focus on growth, even in challenging economic environments.

Making Informed Credit Decisions

At Securitas Global Risk Solutions, our expertise empowers clients to make smarter credit decisions. From determining which customers are safe to extend credit to, to guiding policyholders through the claims filing process, we ensure businesses are prepared for the unexpected.

Debtors filing for Chapter 11 bankruptcy force creditors to navigate complex legal proceedings. With trade credit insurance, the process is streamlined, and the insured often receives claim settlement within 30 days of filing the claim.

Industries Most at Risk

Certain industries, like retail, are particularly vulnerable to financial distress. Our clients often seek trade credit insurance to mitigate their credit exposure, ensuring they’re protected when a major customer faces insolvency.

In any industry, securing tailored coverage can determine stability or financial loss.

Proactive Steps for Creditors

The best way to prepare for potential bankruptcies is to act now. Reach out today to secure a trade credit insurance policy designed to protect your receivables. With the right coverage, you’ll have the confidence to extend credit and grow your business—even in uncertain times.

Additional Resources for Unsecured Creditors

Navigating Chapter 11 as an unsecured creditor can be challenging. Here are three authoritative resources offering valuable advice:

Conclusion

Bankruptcies challenge creditors, but the right strategies and protections create significant advantages. Trade credit insurance provides a proactive way to ensure your business remains financially secure, even when faced with the unexpected.

Don’t wait—contact us today to learn how we can tailor a policy to fit your business needs and protect your receivables. 

 

Since 2004, Securitas Global Risk Solutions, LLC (“Securitas”) has helped clients develop credit and political risk transfer solutions that provide value on numerous levels. As an independent trade credit and political risk insurance brokerage, Securitas is focused on developing comprehensive solutions that meet the needs of clients, ensuring a complete understanding of policy wording and delivering excellent responsive service.