Utility Service During Bankruptcy
This page provides information on the legal rights and responsibilities of municipal utilities in Washington State in relation to customers who have filed for bankruptcy.
Since bankruptcy is a very complex area of the law, MRSC recommends seeking proper legal advice before taking any action.
A utility customer who files for bankruptcy receives protection from creditors, including utilities. Because filing for bankruptcy gives the customer what amounts to a fresh start, utilities must stop all collection activity on pre-filing account balances and delinquencies. In most cases, utilities must provide service as if the customer were signing up for the first time. Customers who enter bankruptcy must still pay for the service they use while in bankruptcy.
Practice Tip: Because the remedies available to collect payment for services differ depending on whether the charges were incurred before or after filing, MRSC recommends establishing a separate account to track the post-filing charges for customers who have filed for bankruptcy.
The Bankruptcy Code provides two tools utilities may use to manage delinquencies that may be incurred by a customer after filing for bankruptcy:
- Adequate Assurance of Payment – Utilities may request adequate assurance of payment from a customer who has filed for bankruptcy to ensure payment for utility service. If a utility requests adequate assurance of payment and the customer does not provide it, the utility may terminate service, but only after 20 days from filing for bankruptcy (30 days for Chapter 11 filings). Examples of adequate assurance include cash deposits, letters of credit, certificates of deposit, surety bonds, and prepayment of utility charges.
- Administrative Expense Claims – Utilities may file administrative expense claims with the bankruptcy court for utility charges and fees incurred after the customer files for bankruptcy. Administrative expense claims are not always a reliable means of ensuring payment because they take second priority. This means that when the court distributes the filer’s assets to pay off creditors, administrative expense claims for utility charges are only paid if there are any assets left after higher priority claims have been satisfied.
The Bankruptcy Code prohibits discrimination against utility customers who enter bankruptcy. As a result, utilities terminating service to customers going through bankruptcy procedures must use the same policies and procedures used for all other customers. A utility is not required to reconnect service to an already-disconnected customer just because that customer has filed for bankruptcy.
When utility customers who have not paid their bill enter bankruptcy and continue to be delinquent, the period of delinquency resets to begin on the day the customer filed for bankruptcy. Therefore, if a utility’s shutoff policy specifies a number of days an account must be delinquent before termination, it may not use the first day of a customer’s delinquency as its starting point if, in the interim, the customer filed for bankruptcy. This is because filers get what amounts to a fresh start on their utilities. Delinquencies incurred before the date the customer files for bankruptcy are treated separately from those incurred after the filing date.
The Bankruptcy Code requires that utilities shutting off service to a customer in bankruptcy follow these three basic steps:
- When a customer files for bankruptcy, the customer’s creditors, including the utility, receive notice and must cease all collection activities.
- Upon receiving notice that its customer has filed for bankruptcy, the utility may demand adequate assurance of payment.
- If adequate assurance of payment is not received and 20 days have passed since bankruptcy was filed (30 days for Chapter 11 filings), the utility may disconnect service.
It is important to remember that utility customers in bankruptcy who are facing disconnection or termination of service must receive the same process applied to those not in bankruptcy. That process must include proper notice and opportunity for a hearing. See Collection Practices for Delinquent Utility Accounts.
Utilities may not file or foreclose a lien against the property of a customer in bankruptcy. When a utility customer files for bankruptcy, the court imposes an “automatic stay” that prevents, among other things, filing liens against the customer’s property to secure the utility’s claims for debts the customer owes. The automatic stay applies to charges incurred before and after filing. See Collection Practices for Delinquent Utility Accounts. For water and sewer utility liens, this stay also prohibits shutting off water for pre-filing delinquencies.
The Bankruptcy Code treats customer deposits received prior to filing differently than those received after filing. This is another reason why it may be helpful to establish a separate account for a customer’s post-filing utility service.
- Pre-Bankruptcy Deposits – Once a customer files for bankruptcy, deposits received before filing may not be used to offset any delinquencies.
- Post-Bankruptcy Deposits – Deposits received after the customer files for bankruptcy may not be used to offset pre-bankruptcy delinquencies but may be used to offset post-bankruptcy delinquencies.