It is a common misconception that there are no remedies available for construction defects when contractors file for bankruptcy. In fact, a claimant may still pursue compensation through the contractor’s liability insurance or the subcontracting companies after seeking leave from the bankruptcy court. When the contractor has liability insurance, a claimant can ask for the bankruptcy to be set aside to allow for the collection of a settlement or judgment from the contractor’s insurance carrier. Similarly, subcontractors that worked on the project and contributed to the alleged defects may also have liability insurance to pay for a portion of the damages. A final option is for the homeowners to pursue creditor claims through the bankruptcy case.
Effect of Bankruptcy on Construction Defect Claims
When a company files for bankruptcy protection, the court generally issues an automatic stay ordering the creditors to cease enforcement actions to collect the judgments and settlements secured against the business. The effect of the automatic stay on construction defect claims and judgments is that they will immediately be halted while the bankruptcy case is pending. While creditors can file claims with the bankruptcy court to be included in a Chapter 11 reorganization plan or a Chapter 7 liquidation plan to receive a portion of the proceeds of the bankruptcy estate, this will likely leave a homeowner with construction defects and only a very small percentage for recovery of damages. This is because of the business’s other creditors, including those with secured loans that will likely be in front of the homeowner for purposes of recovery in the bankruptcy action. Homeowners who hear that negligent contractors are considering filing for bankruptcy protection might want to weigh whether or not to seek a quick settlement before the petition is filed. Homeowners may also consider whether or not the claim is worth pursuing through the bankruptcy case and if insurance proceeds are available.
Availability of Liability Insurance
When a contractor has liability insurance and files for bankruptcy protection, a claimant may have more options. The claimant can file a request to have the bankruptcy case set aside so that he or she can pursue a claim against the contractor’s liability insurance carrier. The insurance company should pay any judgment or settlement that is obtained by the claimant. Subcontractors that worked on the project may also have contributed to the alleged construction defects and might have liability insurance to go after. By identifying all of the potentially liable parties, a construction attorney may help the claimant to find more sources of recovery to recoup losses that were caused by the defective construction.
If you are a homeowner dealing with a contractor who is out of business, contact a construction attorney to find out your rights. There may be hope for recovery even if the contractor filed for bankruptcy.