6 Things That Happen to Vendors, Customers, and Shareholders When Companies File Chapter 11 Bankruptcy

When a company files Chapter 11, the people most surprised by the consequences are usually the ones who never read the petition: the supplier with an open invoice, the customer holding a deposit, the landlord, the shareholder. The Code has a provision waiting for each of them, and most of those provisions were drafted with the debtor's survival in mind rather than theirs.

Six things happen on the other side of the case. A few of them favor the counterparty. Most require the counterparty to act, in writing, on a deadline it did not know existed.

1. A Few Vendors Are Paid in Full, and the Rest Learn Why Not

A debtor that depends on particular suppliers will often ask the court, on the first day, for authority to pay those suppliers' prepetition invoices in full. The theory is practical: a vendor owed money on old shipments may refuse to make new ones, and a retailer without merchandise closes. Every other unsecured creditor, meanwhile, waits for a plan.

The Seventh Circuit examined that theory in In re Kmart Corp., decided February 24, 2004. Kmart had sought, on the first day of its case, to pay "in full, the pre-petition claims of all 'critical vendors.'" The court rejected the equitable powers of section 105(a) and the so-called doctrine of necessity as the source of authority, observing that "A 'doctrine of necessity' is just a fancy name for a power to depart from the Code." It found section 363(b)(1) more promising, but held that a debtor must prove, and not just allege, that without immediate full payment the vendors would cease dealing, and that the disfavored creditors would come out at least as well as they would without the payments. The record did not show it. The order fell.

Other courts take their own approaches, and a critical vendor order remains common enough in large cases that suppliers should expect to see the motion. Bankruptcy Rule 6003 adds a second filter: within 21 days after the petition, a court must not grant a motion to pay a prepetition claim unless relief is needed to avoid immediate and irreparable harm.

For the vendor, the useful conclusion is narrow. Being essential to the debtor is an argument, not a status (and vendors who are told they are critical are often asked, in the same conversation, to extend new credit on terms that would have seemed unreasonable a month earlier, which is the other half of the bargain the motion describes). The one who is not on the list is a general unsecured creditor.

That is where most vendors land.

2. Goods Delivered in the Last 20 Days Are Treated Differently

Section 503(b)(9) gives administrative expense status to "the value of any goods received by the debtor within 20 days before the date of commencement of a case" where the goods were sold in the ordinary course of the debtor's business. Administrative expenses rank second among priorities, ahead of every general unsecured claim, and a plan generally must pay them to be confirmed.

The word that limits the claim is goods. A staffing agency, a software vendor, or a law firm that provided services in the same twenty days holds no such priority, however much the work cost.

3. Reclamation Requires a Letter, Written Fast

A seller that delivered goods to an insolvent debtor within 45 days before the case may demand the goods back, but only by written demand within 45 days after the debtor received them, or within 20 days after the case began if the 45 days would otherwise run later. Section 546(c) makes that right subject to the prior rights of a secured creditor in the goods, which in practice is where most reclamation claims stall.

A seller that misses the demand still keeps its 503(b)(9) claim for goods received in the final 20 days. There are other limits on the remedy, though they tend to matter less than the lender's lien.

4. Customers Keep Buying, and Their Deposits Wait in a Queue

A company in Chapter 11 wants its customers to notice as little as possible. Honoring warranties, refunds, loyalty programs, or prepaid balances that arose before the filing is, in legal terms, paying prepetition claims, so the debtor typically asks for authority to continue those programs, subject to the same Rule 6003 limits that govern vendor payments.

Customers who are individuals and who paid deposits for goods or services for personal, family, or household use hold a priority claim under section 507(a)(7), up to $3,800 per individual under the amount adjusted April 1, 2025. Priority is a place in line. It is not a promise of payment.

Whether a particular gift card balance fits that priority is a question the statute does not answer in terms, and the answer tends to arrive through the debtor's first-day motion rather than through litigation.

5. Landlords and Contract Partners Learn Their Contract Is Now Optional

The debtor chooses which leases and executory contracts to keep. A rejected contract becomes a prepetition breach claim, paid in the same currency as other unsecured claims, and a clause that would terminate the contract because of the bankruptcy itself is, with limited exceptions, unenforceable against the debtor.

A landlord of commercial premises has more certainty than most: under section 365(d)(4), the debtor must decide on a nonresidential lease within 120 days, extendable by 90 days for cause, with further time only by the landlord's written consent. Until then the debtor owes postpetition rent on schedule. The landlord waits. It is paid while it waits, which is more than the vendor gets.

You sign a ten year lease with a tenant and then you find out the tenant can walk away from the last seven of them.

6. Shareholders Stand at the End of the Line, and Often Nothing Reaches Them

The absolute priority rule in section 1129(b)(2)(B) is the reason. When a class of unsecured creditors votes against a traditional Chapter 11 plan and is not paid in full, no holder of a junior interest may receive or retain property on account of that interest. Shareholders hold the most junior interest there is. A class that receives nothing under a plan is deemed to reject it under section 1126(g), so shareholders who are to be cancelled do not even cast a ballot.

The United States Trustee may appoint an equity holders' committee under section 1102(a) where appropriate, and in a solvent or nearly solvent case shareholders sometimes retain value. The owners of small private companies electing Subchapter V are treated differently, because that subchapter replaces the absolute priority rule with a disposable income test, and the equity can survive a dissenting vote.

For the Business on the Other Side of the Filing

A vendor stuck with an unpaid invoice from a customer in Chapter 11 still has payroll to meet, and some businesses in that position turn to merchant cash advances to cover the gap. Delancey Street reviews that kind of debt at no charge and in confidence, to see whether it can be restructured by negotiation. The company is not a law firm, and it works with independently licensed counsel on legal questions; a creditor that needs to file a proof of claim, object to a critical vendor motion, or preserve a reclamation right needs a bankruptcy lawyer for that work.