Special Treatment of Utility Creditors in Bankruptcy

When a debtor files for bankruptcy, one of the outstanding debts may be past due payments owed to utility companies, such as PEPCO or Washington Gas, for electric and gas service. The past due amounts may be discharged, however, in order to continue service, the debtor may be required to pay a new security deposit.

The Bankruptcy Code Section 366 provides that the debtor must provide “adequate assurance of payment” to a utility company within 20 days of the filing of the petition or the utility company may discontinue to provide the service. However, the utility company must still comply with state regulations regarding the turn off of the service.

Generally, what constitutes “adequate assurance of payment” is the payment of an additional security deposit to the utility company by the debtor. The deposit must be reasonable and the Code permits the debtor to challenge the reasonableness of the security deposit, Section 366(b), if he or she believes the amount requested by the utility company is not reasonable. The Bankruptcy Court will then schedule a hearing on the issue and make a determination as to a reasonable amount.

If the debtor was current on his or her utility bills before the case was filed, the court may look at his or her prior pay history to see if they were paid late, or whether the debtor was relying on credit cards to make the payments, to determine if the amount requested by the utility company is reasonable.

Once the debtor pays the security deposit, the utility company must continue or restart the service (if it was terminated prior to filing). If the debtor falls behind on the payments after filing, the utility company does not need to file a motion with the bankruptcy court to terminate the service, it can be automatically terminated (assuming the company complies with the state regulations on termination). This is true for case filed under Chapter 7 and Chapter 13.

In my experience, the utility company will send my office a letter asking that my client, the debtor in a bankruptcy case, pay it a certain sum for a security deposit. I forward the letter to my client and recommend that the person pay the bill. The amount requested by these companies has always been a reasonable sum, so that I have not had to file a motion with the court asking for a reduction.

Laura J. Margulies is a principal in the firm of Laura Margulies & Associates, LLC. Our web site is located at: www.law-margulies.com. We represent consumers in bankruptcy and litigation matters in Maryland and the District of Columbia.