One of the issues that arises in a bankruptcy filing is whether a utility company (i.e., gas, water, light, etc.) can disconnect a debtor’s utility service after a bankruptcy case is filed. Under Section 366(a) of the Bankruptcy Code, a utility service is prohibited from “altering, refusing, or discontinuing service to, or discriminating against, a trustee or debtor solely on the grounds that the debtor has not paid its pre-petition debts when due.” Section 366(a) is a temporary prohibition, and it has qualifiers.
The key word here is “pre-petition”. For unpaid utility service that has occurred after a case has been filed, the prohibition on disconnecting service may not apply. Even for pre-petition utility debts, the prohibition on disconnection can only apply for a certain period of time.
In addition, Section 366(a) is conditioned on Section 366(b), for all bankruptcy cases except Chapter 11 cases. Thus, a debtor filing under Chapter 7, 13, or 12 would need to comply with Section 366(b). This section stipulates that “adequate assurance” of payment for services should be provided to the utility company within 20 days after the filing of the bankruptcy petition. Usually this means some sort of security deposit. This is not considered collection on a pre-petition debt.
The idea of leaving this deposit as “adequate assurance” is to theoretically protect the utility company from unreasonable risk. If some sort of deposit is not received during this time, the company may disconnect the service. These deposits are very small, and not every utility company asks for them. The good news is that we have never seen a situation where a debtor has been unable to pay a small deposit.
Things are different in a Chapter 11 case, as in so many other things. Section 366(b) does not apply. Rather, Section 366(c) comes into play. Under 366(c), a debtor in possession would need to provide adequate “assurance of payment” in the form of a deposit within 30 days after the filing of the petition. Utility providers end up with a bit more protection in a Chapter 11 case, but a creditor still cannot collection on pre-petition utility arrearages. Under Section 366(c), however, the utility company can still “recover or set off” against a security deposit given to the utility without notice or order from the bankruptcy court.
It sometimes happens that a debtor’s utility service has been cut off by the utility for the nonpayment of utility bills before the filing of a bankruptcy case. Section 366 entitles a debtor to restoration of the service once the case has been filed. There may be some requirement from the utility company for a nominal deposit, but this deposit can in no way be an attempt to collect a debt.
If a utility company does not normally collect deposits from new customers as a matter of course, it may have a hard time trying to do this for a debtor in bankruptcy. In Re Whittaker, 882 F.2d 791 (3rd Cir 1989). Furthermore, when a utility is entitled to a deposit for adequate assurance of future payment, the bankruptcy court has the authority to modify the amount requested by the utility company, and even to permit the debtor to pay it in installments.
Again, the intention here is to balance the interests of the debtor in getting utility service, but also to assure the utility company that they will not be taken advantage of. Utility companies often have formulas that they use to calculate such deposits, in an attempt to impose some fairness and neutrality in the process.
The lesson here is that a debtor is given significant protection from having utility service cut off when a bankruptcy is filed. The prepetition utility arrearage may be treated like any other unsecured debt, but the utility company can ask for a small deposit as “adequate assurance” of future payment. Note, however, that a debtor cannot continue to fall behind for utility bills incurred after the case is filed. If this were to happen, the utility company can eventually resume collection remedies with permission from the bankruptcy court.
If you have a question about this or any other area of bankruptcy law, call us for a consultation.