News & Media
NEW MSMS Legal Alert on Creditors’ Rights for Medical Practices
The Michigan State Medical Society’s latest Legal Alert, Creditors’ Rights for Medical Practices Following Chapter 11 Bankruptcy Filing, was prompted by concerns from members who were owed money from Wellpath Holdings, Inc., the former healthcare provider for the Michigan Department of Corrections. Wellpath filed for bankruptcy in November 2024. MSMS Legal Counsel prepared an overview of the Chapter 11 bankruptcy process to assist medical practices seeking to recover outstanding balances owed from an entity that files for Chapter 11 bankruptcy protection.
MICHIGAN STATE MEDICAL SOCIETY
LEGAL ALERT
Creditors’ Rights for Medical Practices Following Chapter 11 Bankruptcy Filing
February 2025
Kathleen A. Westfall, J.D. and Danielle M. Love, J.D.
Kerr, Russell and Weber, PLC, MSMS Legal Counsel
On November 11, 2024, Wellpath Holdings, Inc. and its affiliated companies (“Wellpath”) filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the Southern District of Texas (Case No. 24-90533). The Honorable Alfredo R. Perez has been assigned to oversee the jointly administered cases. According to a public statement, Wellpath intends to continue operations and fulfill go-forward obligations while restructuring its financial affairs.
For medical practices which are owed money by Wellpath or any other entity that files for Chapter 11 bankruptcy protection, this Legal Alert is intended to provide an overview of the Chapter 11 bankruptcy process and the rights of unsecured creditors, and outline practical considerations for medical practices seeking to recover outstanding balances owed.
Chapter 11 Bankruptcy and Automatic Stay on Collections
Chapter 11 Bankruptcy is a process for which a business can “reorganize” their debts and pay creditors while remaining in business. Upon the filing of a bankruptcy petition in a bankruptcy court, the filing debtor will obtain an “automatic stay,” which will immediately halt all collection activities against the debtor. This includes lawsuits, demands for payment, and other efforts by creditors to recover amounts owed. The automatic stay is intended to alleviate pressure from creditors (including medical practices owed money by the debtor) and provide the debtor with breathing room to restructure their debts during the bankruptcy process.
Creditors who receive notice or become aware of a bankruptcy filing by a business debtor should immediately suspend all efforts to collect payment from the debtor. Violation of the automatic stay can result in penalties, including court fines or the debtor filing a lawsuit against the creditor. Creditors may also be held liable for actual damages, punitive damages, and attorney’s fees.
Meeting of Creditors
Following the automatic stay, the bankruptcy court will schedule a meeting of creditors, also known as the “Section 341 meeting.” This is a mandatory hearing that all debtors must attend in any bankruptcy proceeding. In a Chapter 11 bankruptcy case, the meeting is conducted by a representative of the United States Trustee. During this meeting, the debtor is placed under oath and questioned about various aspects of its bankruptcy filing, including its bankruptcy petition, schedules, financial affairs, and assets. Creditors are notified of the meeting and have the opportunity to attend and ask the debtor questions.
The meeting is scheduled by the bankruptcy court and typically occurs 21 to 50 days after the bankruptcy petition is filed. While creditors are not required to attend, their participation can provide valuable insight into the debtor’s financial position and plans for reorganization.
Monitoring the Bankruptcy Case
The debtor is required to serve all known creditors with notice of the case. Beyond the initial notice, it is up to each creditor to take steps to gather additional information about the case and the treatment of their claim(s).
As a creditor, medical practices can stay informed about a bankruptcy case by monitoring the bankruptcy docket for the case, which is accessible on the applicable bankruptcy court’s website. Depending on the size of the bankruptcy case, creditors can often find dockets available for free online. Creditors can also file a request to be added to the service list. This ensures that creditors will receive notice of key developments, including deadlines and court filings for a bankruptcy case. Medical practices can engage an attorney to assist them with monitoring a bankruptcy case.
Filing a Proof of Claim
Creditors who are owed money by the filing debtor are permitted to file a document called a “proof of claim” with the bankruptcy court which asserts the creditor’s right to receive payment from the bankruptcy case. The proof of claim generally outlines the amount of debt owed by the debtor and provides evidence supporting the claim.
Sometimes, the creditor’s claim will already be included in a debtor’s bankruptcy petition. Creditors should review the debtor’s bankruptcy petition and schedules to determine if their claim is listed, and if it is listed, how their claim is treated. If the creditor’s claim is (i) not listed in the debtor’s schedules, (ii) listed in the debtor’s schedules, but the amount of the claim is incorrect, or (iii) the creditor’s claim is listed as “disputed,” “contingent,” or “unliquidated” in the debtor’s schedules, the creditor must file a proof of claim to preserve its right to payment and ability to vote on the debtor’s bankruptcy plan.
Are creditors required to file a proof of claim?
Creditors are generally required to file a proof of claim to receive payment in Chapter 7, Chapter 12, and Chapter 13 bankruptcy cases. In a Chapter 11 bankruptcy case, the creditor is not required to file a proof of claim if the creditor agrees with the debtor’s listing of the creditor’s claim in the debtor’s schedules; however, it is still recommended to file a proof of claim to record the right to payment.
How do creditors file a proof of claim?
A proof of claim form is available online at the following link: www.uscourts.gov. Completed forms can typically be filed online, by first-class mail, or by hand delivery. While creditors can handle the filing on their own, it is recommended to consult an experienced attorney who can assist with the preparation and filing of a proof of claim to ensure all requirements are met. The proof of claim must be filed by the deadline set by the bankruptcy court.
Distributions under the Bankruptcy Plan
Chapter 11bankruptcy allows debtors to reorganize or liquidate their assets according to a bankruptcy “plan.” The plan outlines the debtor’s strategy for addressing creditor claims and emerging from bankruptcy. Creditors are typically provided with a copy of the proposed plan and a disclosure statement that contains detailed information about the plan and the debtor’s finances.
Creditors may also have the opportunity to vote on the plan and receive notice of the confirmation hearing where they can object to the plan’s confirmation. The plan does not become effective until it is approved, or “confirmed,” by the bankruptcy court.
How are creditor claims treated under the bankruptcy plan?
The bankruptcy plan outlines how creditors will be paid. Generally, payments are made according to a statutory priority system. Secured claims, administrative expenses, and other priority claims are paid first. At the bottom of the priority hierarchy are general unsecured claims. These claims are not secured by collateral and may include trade creditors, credit card companies, and personal loans. Often, monies owed to medical practices for services rendered are unsecured claims in the absence of a written agreement or other instrument securing the debt. Since general unsecured claims are only paid after higher-priority claims have been satisfied, recoveries for these creditors are often minimal, with unsecured creditors typically receiving only a small percentage of their total claims.
When do creditors receive payments under the bankruptcy plan?
The timing of payments under a Chapter 11 bankruptcy plan varies widely depending on the complexity of the case and the debtor’s financial circumstances. In some cases, a debtor may file a proposed plan immediately upon filing for bankruptcy, while other plans may not be submitted until months or even years later.
Payments to creditors, particularly general unsecured creditors, typically occur only after the bankruptcy court approves the plan. Creditors should review the plan’s disclosure statement for detailed information about the anticipated distribution amounts and timelines for payment. This document provides insight into how much creditors can expect to recover and when those payments will likely occur.
The Debtor’s Discharge
Upon confirmation of the Chapter 11 bankruptcy plan, the debtor may receive a discharge of certain debts, which may include all or part of a creditor’s claim. A discharge releases the debtor from liability for the discharged debts and prohibits creditors from attempting to collect these debts, except as explicitly provided in the Chapter 11 bankruptcy plan.
While most debts are subject to discharge, there are exceptions. If a creditor believes that its claim should not be discharged, the creditor must take proper legal action to preserve its rights. This typically involves filing a complaint with the bankruptcy court and asserting that the debt falls under an exception, such as those related to fraud or willful misconduct by the debtor.
The bankruptcy court will establish a specific deadline, known as a “bar date,” by which any objections to discharge must be filed. Creditors who fail to act within this timeframe may lose their ability to challenge the discharge of their claims.
Practical Steps for Creditors
A creditor’s ability to participate in a Chapter 11 bankruptcy case can often vary, and the potential recovery of monies owed will depend on the outcome of the restructuring process. Accordingly, medical practices that are creditors of a business that has filed Chapter 11 bankruptcy should take the following steps:
- Ensure compliance with the automatic stay and cease collection activities;
- Consider attending the meeting of creditors to obtain additional information regarding the debtor’s financial condition;
- Monitor case developments;
- Consider filing a proof of claim to preserve the right to payment;
- Review the disclosure statement and bankruptcy plan to understand how their claim will be treated; and
- Assess whether their claim may be excepted to discharge.
Medical practices owed monies by a business that has filed for bankruptcy should strongly consider engaging an experienced bankruptcy attorney to help navigate the complexities of the bankruptcy process, ensure compliance with substantive and procedural requirements, and take necessary steps to maximize potential recoveries.
This publication is furnished for informational purposes only. It does not communicate legal advice by the Michigan State Medical Society or Kerr, Russell and Weber, PLC. Receipt of this publication does not establish an attorney/client relationship. © 2025 Kerr, Russell and Weber, PLC