Shutdown Delays Payouts to Bankruptcy Creditors

Jan 3, 2019News

Shutdown Delays Payouts to Bankruptcy Creditors

Trustees aren’t able to get Justice Department approval for payment plans to ex-employees, vendors

The Justice Department’s U.S. Trustee Program oversees the chapter 7 bankruptcy trustees who are in charge of returning money to people and businesses waiting for payments from a bankrupt company.

By: KATY STECH FEREK, Jan. 3, 2019 3:41 p.m. ET

The partial government shutdown is delaying payments from collapsed companies to former workers and other creditors who weren’t paid during a business’s final days of operation.

The country’s bankruptcy trustees, who are in charge of sending out those payments after a business files for chapter 7 protection, aren’t able to get approval for payment plans from the Justice Department, which supervises the payout process.

The shutdown threatens to delay the already long process of paying a bankrupt company’s final bills, which can take months. Trustees made more than $2 billion worth of payments in 2016 to creditors of more than 43,000 bankruptcy cases, according to latest data from the Justice Department.

Illinois trustee Jeana Reinbold said she felt the urgency of these payments after trucking company Omni Specialized LLC shut down and ended up in chapter 7 bankruptcy in June 2017. Many of its roughly 140 employees were waiting on several weeks of paychecks and wanted to know when they would get paid.

“The calls started almost immediately,” said Ms. Reinbold, who largely wrapped up the case last fall after sending out more than $164,000 in wages. “Put yourself in the shoes of the average family who relies on this income.”

That uncertainty is now compounded in cases that have yet to reach closure. It is unclear when the partial shutdown will end and how long it will take for department officials to clear the backlog of trustee review requests when they return to work.

Struggling companies often close their doors before filing for chapter 7 protection, a process that enables an outside financial professional to take control of dormant operations, find valuable property, sell it and then split the money among unpaid bills.

A total of 13,682 businesses filed for chapter 7 protection during the 12-month period ending on Sept. 30, the latest statistics available from the Administrative Office of the U.S. Courts.

The Justice Department’s U.S. Trustee Program oversees the country’s roughly 1,000 chapter 7 bankruptcy trustees in all states except North Carolina and Alabama who are in charge of returning money to people and businesses stuck waiting for payments from a bankrupt company. Trustees put together a payout plan and send a report summarizing that plan to Justice Department officials for approval. The plan also needs approval from a federal judge. Federal courts are operating through the shutdown, but that could change if the stalemate lasts beyond next week.

Amid the partial shutdown, federal workers, including Justice Department lawyers and employees, are banned from working except in emergencies involving the safety of human life, the protection of property or other special circumstances.

Vermont lawyer Raymond Obuchowski, who is also president of the National Association of Bankruptcy Trustees, was told by a Justice Department official several days into the shutdown that reviewing and approving reports “is not considered an excepted activity.” He has heard from trustees in more than half of the division’s regional offices that officials are following that directive.

Legal experts said some creditors, such as major corporations or banks, may not feel financial pinch during the current payment delay. People and small businesses are more likely to be anxious for money during the wait, Massachusetts bankruptcy lawyer Steven Weiss said.

“They may have their own financial problems as a result of the [company or individual’s] bankruptcy, so whether they get a distribution and when they get it is important to them,” said Mr. Weiss, who has been a trustee for 31 years. “There’s a ripple effect to all of this.”

The government shutdown has hung up one of Mr. Weiss’s long-running cases, which has left a woman waiting years for alimony payments. He said he needs clarification from a Justice Department official before he can move forward on the payout process.

The shutdown will also delay payments to federal, state and local governments. Chapter 7 trustees distributed roughly $170 million to state and federal tax authorities in 2016, according to the National Association of Bankruptcy Trustees. Their work is a major source of revenue collection for taxpayers, Illinois trustee Neville Reid told federal lawmakers last year.

Write to Katy Stech Ferek at