Prepetition Liability

What Is a Prepetition Liability?

At the point when a company or individual documents for bankruptcy, they must initially list every one of their debts. These are called prepetition liabilities. Post-petition liability, then again, is everything the debt incurred after the bankruptcy case is logged. These two types of liabilities are much of the time displayed on the balance sheets of companies in bankruptcy protection and are isolated to recognize which outstanding balances are expected to be paid in full.

Figuring out a Prepetition Liability

At the point when a company petitions for bankruptcy, it must rundown in full all that it owes. These liabilities are then split into two categories: prepetition debts incurred prior to filing and post-petition liabilities taken on a while later.

This classification is important as it affects how much the company should pay. When the defaulting entity documents for Chapter 11 bankruptcy, creditors will experience issues collecting on its prepetition obligations including amounts owed on loans and bonds, lease payments, pension payments, and other contractual obligations.

Most prepetition liabilities are diminished or excused during bankruptcy procedures, so creditors are probably going to just get a small part of the original value of what they are owed except if these liabilities are secured by assets. As such, that means that mauling back payments is "subject to compromise."

At the point when a liability is recorded on the balance sheet prior to the bankruptcy petition, creditors can hope to recover just a negligible portion of that debt.

Liabilities registered as post-petition on the balance sheet, then again, are not viewed as a part of the bankruptcy case and, thus, must be respected and paid in full — expecting the company exits bankruptcy protection with everything looking great.

Limitations of a Prepetition Liability

Not all prepetition liabilities are unrecoverable. A secured creditor can in any case uphold a lien against property owned by the debtor, while certain liabilities probably won't be subject to compromise. When leaving bankruptcy, a company must recognize in its financial statements between its prepetition liabilities that are subject to compromise and those that are not. Obligations not open to negotiation generally incorporate taxes owed and whatever was not listed by the debtor.

One more category of liabilities, or claims, can become possibly the most important factor during the bankruptcy cycle. Contingent liabilities are set off by a future event and could possibly show up on a company's financial statements — frequently, they are portrayed in the footnotes accompanying the statements. Ought to unliquidated claims of this nature not be remembered for the bankruptcy petition, it very well may be challenging for the debtor to stay away from payment.

Ordinarily, reorganization agreements likewise contain a provision restricting any payments to shareholders "except if creditors concur" until prepetition liabilities have been paid in full.

Special Considerations

In certain cases, companies in the Chapter 11 bankruptcy cycle might assign providers of key parts or services with which it carries on with work as "basic sellers." If the bankruptcy court endorses the assignment, the company can pay prepetition claims from these vendors in full to keep important operations running. There are, in any case, limitations to this practice.

Companies in bankruptcy could likewise dismiss contractual and lease obligations and liabilities and clawback payments made to creditors while technically ruined however prior to the bankruptcy filing. It might likewise ask the bankruptcy judge supervising its reorganization to discharge, or cancel, its prepetition liabilities.

Features

• Classification of a liability as either prepetition or post-petition on the balance sheet impacts the amount the company should pay.
• At the point when a company petitions for bankruptcy, all that it owes is sorted as either prepetition debts, incurred prior to filing, or post-petition liabilities, assumed after the bankruptcy filing.
• Not all prepetition liabilities are subject to compromise, and a company must recognize which are not in its financial statements.
• Creditors are probably going to collect just a small portion of the value of the prepetition liabilities they are owed, not normal for post-petition liabilities, which must be paid in full.