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The Unsecured Creditor

Writer: Yuval Yishay, Attorney.

Of the many businesses that open, only a few survive. The situation is even worse for small businesses. These businesses that collapse often leave behind many creditors.

Among groups of creditors[1] there are often differences and conflicts of interest, such as those between employees, customers, suppliers, and the authorities. To illustrate, we will highlight an example of a customer who bought goods and paid the full consideration for them, from a supplier who is supposed to supply the goods through a business and did not receive payment for the goods. For example, they will work in coordination with other creditors, since they can receive their money (at least in part) from the National Insurance Institute, while the other creditors understand that the collapse of the business is likely to result in default.


The large, powerful bodies that usually receive legal advice know in most cases how to protect themselves, both within the priority given by law, and by initiating preliminary legal proceedings, for example by registering a lien, obtaining security, or even a personal guarantee by the business that later collapsed. For example, this is how the banks or other large suppliers work.

State authorities also know how to protect themselves, for example, through legislation.

Those who cannot usually protect themselves are the "little ones" that because of the nature of their work and their "lack of power" in terms of business, find themselves when the business collapses and leaves behind debts that are unlikely to be repaid. Even debts that are not too large, for a small business that is based on a small turnover - even a few thousand Shekels - could undermine it. More than once it has happened that one business collapse leads to the collapse of more businesses (the most prominent example is the collapse of the Club Market chain).

 

What Can a "Small" Creditor Do?

Prevention

As with a "flu" - prevention is the best medicine. A supplier or business must refrain from granting long-term credit in very large amounts to another business. A business sold on credit and does not meet its payments and doesn’t check the situation well, perhaps is about to collapse. The parties will want reduce the damage expected and the potential damage, but our business friends often make mistakes when they "pour" in more goods so that the business can continue to work, and in effect have increased their debt to them.

Minimize Damage

If the business has already collapsed or is about to collapse, the creditor has several options - first, take back the goods that you gave to the business. The accepted legal rule is that the supplier owns the goods until all payments have been paid. Another possibility, somewhat limited, is offsetting. When there are mutual charges between two parties, and one party is insolvent - then one party may deduct from the other party the obligation that was not repaid to him.

Filing a Debt Claim

If you cannot use one of these methods to minimize the damage and you are in a situation where you are owed money, and you do not have any security or someone who will repay you, you must file a debt claim (commonly known as "proof of debt").

In many cases, a creditor will begin legal proceedings against a party that owes him money, and at the end of the process, the creditor discovers that "there is no one to collect from," since the business has closed or collapsed or the debtor is in insolvency proceedings. To make these legal proceedings unecessary, the law provides that a party that claims that it is owed money may submit a "debt claim" whose status is almost the same an ordinary claim at court. The debt claim is submitted to the official receiver or an appointed court appointee, and all evidence supporting the claim must be attached. The court appointee has a "quasi-judicial" status and he considers the debt claim and decides whether there is a debt and its amount, and his decision can be appealed to the court.

A debt claim must be submitted on a form that can be found on the Internet and as noted all evidentiary documents should be attached. Please note - the right to file a debt claim is limited in time and after that date, the consent of said court appointee is required to accept the debt claim that was submitted late.

Within the framework of his authority, said court appointee must prepare a list of the debtor's assets, to sell them, and use the funds that will be received to pay (at least part of the debt) the creditors. Thus, at least, it is possible to receive some of the money due.

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[1] A creditor is a party entitled to claim a sum of money from the debtor, on any grounds.

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*This article is not meant to constitute legal advice for a particular client, for which consultation with a qualified attorney is required.