What Happens When a Paid Contractor Declares Chapter 13 Bankruptcy?


A recent question concerns a contractor hired by a New Jersey homeowner to perform a job. The contractor filed for Chapter 13 bankruptcy before the consumer paid to have the work done.

The question is, can the homeowner sue or is it necessary for him or her to wait until the bankruptcy is discharged?

This unfortunate question is asked by far too many honest property owners in New Jersey. The answer about how to obtain a refund depends partially on when the homeowner signed an agreement with the contractor and the contractor’s Chapter 13 bankruptcy status.

For single individuals or married couples with regular income, a Chapter 13 bankruptcy allows the debtor(s) to propose a repayment plan so that all or some of the debts are paid over a certain time period.

Bankruptcy law requires to a debtor to pay its general unsecured creditors, those who don’t hold liens against its assets, the greater sum of 1) excess monthly income in the Chapter 13 plan or 2) the amount that an unsecured creditor would’ve received if assets of the debtor were liquidated in Chapter 7 bankruptcy.

For that reason, an unsecured creditor may receive, at the minimum, partial payment toward a pre-petition claim. It’s also possible for the creditor to receive a full payment on the “allowed” pre-petition claim filed with the court:

  • If the homeowner’s transition was incurred pre-petition, then the contractor was required to list him or her on the schedule.
  • If that’s the case, it’s necessary to consult with an experienced bankruptcy attorney about how to file a claim against the contractor’s Chapter 13 estate.
  • If the consumer’s transaction occurred post-petition, the contract isn’t required to list him or her on the schedule of creditors. The contractor is liable for the debt.

However, after filing a Chapter 13 bankruptcy, an automatic “stay” is in place. Typically, that stay precludes a pre-bankruptcy creditor from starting or continuing a collection action or proceeding in state court.

If the homeowner’s transaction occurred post-petition, the homeowner may initiate a lawsuit to recover funds advanced to the contractor. Practically speaking, many attorneys file a motion with the New Jersey bankruptcy court to seek an order to vacate the automatic stay.

This would enable the homeowner to initiate a collection action in state court.

Unfortunately, construction is often a high-risk business. Professionals in the real estate world say it’s all too common to encounter a party that disappears from a project after signing agreements or files bankruptcy before or in the midst of a project.

An experienced bankruptcy attorney can help you know the current status of the contractor’s bankruptcy case. This can inform you about the timing of the action you decide to take against him or her. Contact The Law Office of Joel R. Spivack in Cherry Hill, NJ for help in getting your money back from a contractor at 856-488-1200.

The articles on this blog are for informative purposes only and are no substitute for legal advice or an attorney/client relationship. If you are seeking legal advice, please contact our law firm directly.

We are here to help you.

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We are licensed to practice in New Jersey and Pennsylvania.

Attorney Joel R. Spivack is an experienced bankruptcy and residential real estate transactions lawyer in Cherry Hill, New Jersey. Clients come to us for legal services, but what we really provide is peace of mind. For more than 30 years, Attorney Spivack has helped people make wise, informed decisions about bankruptcy filings, debt relief options and residential real estate transactions.
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