What it means
When a business files for bankruptcy, the filing date draws a line through its history. Everything before the line is pre-petition, and everything after is post-petition.
The distinction decides who gets paid, when and how much. Pre-petition creditors, such as suppliers, lenders and landlords, typically cannot demand payment once the filing is made.
Most legal systems impose a stay, which is a court order freezing collection actions and lawsuits. Creditors must instead submit a claim and wait for the court-supervised process to decide how much they receive.
Debts incurred after the filing are treated more favourably. A company that keeps trading needs suppliers to deliver goods, so costs of running the business after the petition are usually paid as they fall due, often with priority.
New loans taken during the case, known as debtor-in-possession financing, are generally repaid ahead of many older claims. Courts sometimes allow exceptions.
A judge may permit the payment of certain pre-petition debts, such as employee wages or the claims of a critical supplier without whom the business could not operate. These payments must be justified, because they favour some creditors over others.
For anyone dealing with a distressed customer, the lesson is practical. An unpaid invoice for goods delivered before the filing is a pre-petition claim and may recover only a fraction of its value, while a new sale made afterwards with court approval is more likely to be paid in full.
Credit teams should check the filing date and the status of the case before shipping more goods. Secured creditors sit in a stronger position than unsecured ones.
A lender with a claim on a specific asset can usually look to that asset first, while unsecured creditors share what remains after secured and priority claims are paid. Knowing which category a debt falls into is the best predictor of how much will be recovered.
In practice
Real-world examples.
Example
A retailer files for bankruptcy protection on 1 March. A supplier's invoice dated 15 February for $80,000 is a pre-petition claim, while goods shipped on 10 March for cash on delivery are post-petition transactions.
Example
A bank lent a manufacturer $5,000,000 secured on its factory before the filing. The loan is a pre-petition secured claim, which is paid first from the proceeds of the factory up to its value. If the factory is worth $4,000,000, the remaining $1,000,000 of the loan ranks alongside other unsecured claims.
Example
A court approves paying a key parts supplier $120,000 of pre-petition debt because the factory cannot run without its components. Other unsecured creditors are told the payment protects the value of the business for everyone. The judge asks the company to show that no alternative supplier exists.
Formula
Calculation
Recovery on a pre-petition claim = Claim amount x Recovery rate
A supplier is owed $1,000,000 for goods delivered before a customer's bankruptcy filing. The plan of reorganisation pays unsecured creditors 20 cents on the dollar.
Recovery = $1,000,000 x 0.20 = $200,000.
The supplier's loss is $1,000,000 - $200,000 = $800,000, whereas a $50,000 order delivered after the filing and approved as an operating expense would normally be paid in full.Case study
Seen in the real world.
Harlow Foods is a fictional food distributor that filed for bankruptcy protection after losing its biggest customer. A packaging supplier was owed $240,000 for deliveries made before the filing and was unsure whether to supply any more.
The supplier's credit manager studied the court documents, learned that new deliveries would be paid weekly as an administrative expense and agreed to continue on strict terms. In this illustrative case, the supplier submitted its pre-petition claim on time, received 18 cents on the dollar later, and earned full payment on all post-petition deliveries. The supplier also asked for a short payment period, so that its exposure never exceeded one week of orders.
The credit manager concluded that continuing to supply on safe terms had protected the customer relationship, and that submitting the claim promptly had preserved the right to a share of the recovery.
Watch out
Common mistakes.
- Trying to collect a pre-petition debt directly after the customer has filed, which can breach the court's stay.
- Failing to submit a claim before the deadline, which can lose the right to any recovery, so credit teams should diarise the bar date as soon as they learn of the filing.
- Treating post-petition sales as risky as pre-petition ones, when they usually receive stronger protection.
Questions
People also ask.
What does petition mean?
It is the formal request filed with the court to begin bankruptcy proceedings.
Do pre-petition creditors always lose money?
Not always, since secured creditors may be repaid in full, and unsecured creditors often receive part of what they are owed.
What is the stay?
A court order that stops creditors from pursuing collection actions after the filing, so the company can reorganise or be wound up in an orderly way.
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