Research · 10 min read
What Happens to Your Money If the Company Closes
A prepaid year with a company that files for bankruptcy stops being a purchase and becomes a claim. The federal statute says where that claim sits in the queue, what stops the moment a case opens, and on what condition anybody speaks up about your data.
Key takeaways
- A prepaid subscription stops being a contract and becomes a claim against an estate, ranked by statute rather than by fairness.
- The filing operates as a stay applicable to all entities, halting actions against the company and any act to collect a claim that arose before the case.
- Consumer deposits for undelivered property or services have a statutory priority, capped per individual, and it is seventh on the list.
- The ceiling printed in the statutory text is not the one in force — a footnote points to adjustment notices issued by the Judicial Conference, the most recent of which took effect in April 2025.
- Customer information is property of the estate, and the restriction on selling it applies only where the company had published a policy prohibiting transfer to unaffiliated persons that was in effect when the case began.
- The statute's definition of personally identifiable information is built on contact identifiers, and reaches other details only where they are identified in connection with one of those.
Answer first: you stop being a customer and become a creditor
A prepaid subscription is money you have handed over for something not yet delivered. While the company trades, that is a contract.
If the company files a bankruptcy case, the same money becomes a claim against an estate, ranked against everyone else's claims by statute rather than by fairness.
That reframing is the single most useful thing to understand in advance, because it changes what your options are and who you are dealing with.
It is also the reason a long prepaid term is a different kind of decision from a monthly one. The discount is real, and so is the exposure.
The moment the case opens, most things stop
Filing a petition operates as a stay, and the statute says it applies to all entities. Not to creditors, not to plaintiffs. All entities.
It stays the commencement or continuation of a judicial, administrative or other action or proceeding against the debtor. That covers an action that was or could have been commenced before the case, and one that seeks to recover a claim arising before it.
It also stays any act to collect, assess or recover such a claim, and the enforcement of a judgment obtained before the case.
So a small-claims action you were considering, or one you had already filed, does not continue in the ordinary way. Neither does a demand letter.
The stay has its own list of exceptions in the following subsection, and none of them is a consumer refund. The route that remains runs through the case itself.
Where a prepaid subscription sits in the queue
The statute has a section listing which expenses and claims have priority, and it puts them in an explicit order. Consumer money is on that list, which surprises people, and it is seventh.
The seventh position covers allowed unsecured claims of individuals, up to a stated ceiling for each individual. The claim must arise from the deposit, before the commencement of the case, of money in connection with the purchase, lease or rental of property, or the purchase of services. That property or service must be for the personal, family or household use of those individuals, and must not have been delivered or provided.
Read the qualifiers, because each one does work. The deposit has to precede the case. The purchase has to be for personal, family or household use. And the thing bought must not have been delivered or provided.
A prepaid program month that never arrives fits that description closely. A month you already received does not.
Ahead of it sit six other categories. Domestic support obligations, administrative expenses of the case, certain recent wages, contributions to employee benefit plans, and claims of grain producers and fishermen against particular kinds of debtor.
The ceiling is per individual, and it is modest by design. It was written to reach the deposit an ordinary household loses, not to make anyone whole.
The number printed in the statute is not the number in force
This is worth its own paragraph, because reading the statute alone would mislead you in a specific and checkable way.
The figure printed in the seventh-priority sentence carries a footnote. The footnote sends you to a block of notes under the section headed Adjustment of Dollar Amounts.
Those notes record that the amounts in the section have been adjusted at intervals, by notices of the Judicial Conference of the United States under the code's own adjustment section. Each notice names a Federal Register citation and an effective date.
The most recent notice recorded there took effect in April 2025 and raised the seventh-priority ceiling again. The printed text was never updated to match.
So the operative ceiling is the adjusted one, and it moves. Anyone quoting the number on the face of the statute is quoting a figure that stopped being current decades ago.
Your data is an asset of the estate
A bankruptcy trustee may use, sell or lease property of the estate outside the ordinary course of business, after notice and a hearing. Customer information is property.
The statute carries a specific exception for that kind of property, and it turns on something the company already published.
Suppose the debtor, in connection with offering a product or a service, disclosed to an individual a policy prohibiting the transfer of personally identifiable information to persons not affiliated with it. Suppose that policy was in effect when the case commenced. Then the trustee may not sell or lease such information except in one of two ways.
The first is that the sale is consistent with that policy. The second is that a consumer privacy ombudsman is appointed and the court then approves the sale, after notice and a hearing. The court must give due consideration to the facts, circumstances and conditions of the sale. It must also find that no showing was made that the sale would violate applicable non-bankruptcy law.
Notice what the trigger is. The protection is conditioned on the company having promised not to transfer the data in the first place.
A company whose published policy permits transfer to unaffiliated parties has not engaged the condition. In that case nothing in this section stands between the file and the buyer.
What an ombudsman is, and what the term covers
Where the hearing is required, the court orders the appointment of one disinterested person, not later than seven days before the hearing begins, to serve as consumer privacy ombudsman in the case.
That person may appear and be heard, and must give the court information to help it consider the facts, circumstances and conditions of the proposed sale.
The statute lists what the information may include. The debtor's privacy policy. The potential losses or gains of privacy to consumers if the sale is approved. The potential costs or benefits to consumers. And the potential alternatives that would mitigate potential privacy losses or potential costs.
The ombudsman is also bound. The section states that a consumer privacy ombudsman shall not disclose any personally identifiable information obtained under the title.
The defined term itself is narrower than most readers expect, and it is worth knowing before relying on it. It applies to information provided by an individual to the debtor in connection with obtaining a product or service primarily for personal, family or household purposes. The items are a name, a residential address, an electronic address, a telephone number for that residence, a social security account number, and a credit card account number.
A second branch reaches further, but only by attachment. Where identified in connection with one of those items, it also covers a birth date, and a birth or adoption certificate number or place of birth. It reaches any other information about an identified individual that, if disclosed, will result in contacting or identifying that person physically or electronically.
So the definition is built around contact identifiers. Clinical content enters it through that second branch rather than on its own footing, and the health privacy rules are a separate body of law with their own article here.
What is worth doing before any of this is relevant
Almost all of it is documentation, and it costs nothing while a company is healthy.
Keep the receipt and the terms as they were when you paid, not as they read later. A page can be edited; a saved copy cannot.
Keep the full legal name of the entity that charged you, which is what any court record is searched by, and is frequently not the brand.
Keep whatever the privacy policy said about transferring data to unaffiliated parties. That sentence is exactly the one the sale provision turns on.
Ask for a copy of your records while asking is easy. A request answered in a week today is a different proposition from a request made to a company that has stopped answering.
And treat a long prepaid commitment as the decision it is. The saving is a real saving, and the money is genuinely at risk in a way a monthly charge is not.
What this article does not cover
It does not cover a company that simply stops trading without a bankruptcy case. Dissolution and state receivership are different processes with different law behind them.
It does not cover an acquisition. A company being bought is not an insolvency, and the data question there runs through state privacy statutes that a sister article addresses.
It does not describe chapter-specific procedure, deadlines or how to file a proof of claim. The sections read here are the general ones, and the details differ by chapter and by court.
It does not tell you whether a card dispute is open to you. That is a different mechanism with its own timing rules, covered by the refund article rather than this one.
And it is not advice about your situation. What a claim is worth in a particular case is a question for someone advising you directly.
Sources
- 11 U.S.C. 507, Priorities (subsection (a))That subsection (a) lists expenses and claims having priority in a stated order, and that the seventh position covers allowed unsecured claims of individuals, to the extent of a stated amount for each such individual, arising from the deposit, before the commencement of the case, of money in connection with the purchase, lease, or rental of property, or the purchase of services, for the personal, family, or household use of such individuals, that were not delivered or provided. The categories ahead of it in the same subsection: domestic support obligations, administrative expenses allowed under the named section, certain claims arising in an involuntary case, wages and commissions within the stated period, contributions to an employee benefit plan, and claims of persons engaged in the production or raising of grain and of United States fishermen against the described debtors. Also the section's Adjustment of Dollar Amounts notes, which record that the dollar amounts specified in the section were adjusted by notices of the Judicial Conference of the United States pursuant to section 104 of the title, with the most recent notice recorded there dated January 30, 2025 and effective April 1, 2025 raising the subsection (a)(7) amount — which is why this article says the figure printed in the statutory text is not the figure in force. No figure is reproduced here.
- 11 U.S.C. 363, Use, sale, or lease of property (subsection (b)(1))That the trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate; and the conditional restriction that follows in the same paragraph — that if the debtor in connection with offering a product or a service discloses to an individual a policy prohibiting the transfer of personally identifiable information about individuals to persons that are not affiliated with the debtor, and if such policy is in effect on the date of the commencement of the case, then the trustee may not sell or lease personally identifiable information to any person unless such sale or lease is consistent with such policy, or unless, after appointment of a consumer privacy ombudsman in accordance with section 332 and after notice and a hearing, the court approves the sale or lease giving due consideration to the facts, circumstances, and conditions of the sale or lease and finding that no showing was made that it would violate applicable nonbankruptcy law. The conditional trigger — a disclosed policy prohibiting transfer, in effect at commencement — is quoted rather than summarized because it decides whether the rest of the provision applies at all.
- 11 U.S.C. 332, Consumer privacy ombudsmanThat where a hearing is required under the named paragraph of section 363(b)(1), the court shall order the United States trustee to appoint, not later than seven days before the commencement of the hearing, one disinterested person other than the United States trustee to serve as the consumer privacy ombudsman in the case, and shall require timely notice of the hearing to that ombudsman; that the ombudsman may appear and be heard and shall provide the court with information to assist its consideration of the facts, circumstances, and conditions of the proposed sale or lease; that such information may include presentation of the debtor's privacy policy, the potential losses or gains of privacy to consumers if the sale or lease is approved, the potential costs or benefits to consumers if it is approved, and the potential alternatives that would mitigate potential privacy losses or potential costs to consumers; and that a consumer privacy ombudsman shall not disclose any personally identifiable information obtained by the ombudsman under the title. The section's own Editorial Notes record that the seven-day period was substituted for a five-day period by the 2009 amendment.
- 11 U.S.C. 101, Definitions (paragraph (41A), personally identifiable information)The full definition, including its opening condition that the information be provided by an individual to the debtor in connection with obtaining a product or a service from the debtor primarily for personal, family, or household purposes, and its enumerated items: the first name or initial and last name of the individual, the geographical address of a physical place of residence, an electronic address including an email address, a telephone number dedicated to contacting the individual at that residence, a social security account number issued to the individual, and the account number of a credit card issued to the individual. Also subparagraph (B), which reaches, only where identified in connection with one or more of the items in subparagraph (A), a birth date, the number of a certificate of birth or adoption, or a place of birth, and any other information concerning an identified individual that, if disclosed, will result in contacting or identifying such individual physically or electronically. The article's statement that the definition is built on contact identifiers, and that other detail enters only by attachment through subparagraph (B), rests on that structure.
- 11 U.S.C. 362, Automatic stay (subsection (a))That, except as provided in subsection (b), a petition filed under the named sections operates as a stay, applicable to all entities, of: the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case, or to recover a claim against the debtor that arose before the commencement of the case; the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case; any act to obtain possession of property of the estate or to exercise control over it; and any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case. Also that subsection (b) contains the section's list of exceptions, which is the basis for this article's statement that the exceptions are set out there and that a consumer refund is not among them.
Frequently asked questions
If a company I prepaid goes bankrupt, do I get my money back?
You get a claim, and where it ranks is set by statute. The priorities section lists allowed unsecured claims of individuals, to a stated ceiling for each individual. The claim arises from money deposited before the case for the purchase of property or services for personal, family or household use, that were not delivered or provided. That is the seventh position on the list. Six categories sit ahead of it, including domestic support obligations, administrative expenses of the case, certain recent wages and employee benefit plan contributions. Whether anything reaches the seventh position depends on what the estate holds, which nobody can tell you in advance.
Can I sue or start a chargeback once a bankruptcy case is filed?
The filing operates as a stay, and the statute says it applies to all entities. It stays the commencement or continuation of a judicial, administrative or other action against the debtor that was or could have been commenced before the case. It reaches an action seeking to recover a claim that arose before the case, and any act to collect, assess or recover such a claim. So an action against the company does not proceed in the ordinary way, and a demand for payment is itself an act to collect. The stay has its own exceptions in the following subsection and none of them is a consumer refund. What remains is participation in the case.
Can my information be sold to whoever buys the business?
Sometimes, and the answer turns on what the company published before the case. A trustee may sell property of the estate after notice and a hearing, and customer information is property. The restriction applies where the debtor disclosed to individuals a policy prohibiting transfer of personally identifiable information to unaffiliated persons and that policy was in effect when the case commenced. Then the sale must be consistent with the policy, or must be approved by the court after a consumer privacy ombudsman is appointed. Where the published policy permitted the transfer, that condition is not met and this provision does not restrict the sale.
What does the consumer privacy ombudsman actually do?
Where the hearing is required, the court orders one disinterested person appointed to that role, not later than seven days before the hearing begins. The ombudsman may appear and be heard, and must give the court information to help it consider the facts, circumstances and conditions of the proposed sale. The statute says that information may include the debtor's privacy policy, and the potential losses or gains of privacy to consumers. It also names the potential costs or benefits to consumers, and the potential alternatives that would mitigate potential privacy losses or costs. The section also bars the ombudsman from disclosing any personally identifiable information obtained under the title.
Does personally identifiable information include my medical details?
Not directly, on the face of the definition. The term applies to information provided by an individual in connection with obtaining a product or service primarily for personal, family or household purposes. The items are a name, a residential address, an electronic address, a telephone number for that residence, a social security account number, and a credit card account number. A second branch reaches a birth date, and a birth or adoption certificate number or place of birth. It also reaches any other information about an identified individual that, if disclosed, will result in contacting or identifying that person. But that branch applies only where the detail is identified in connection with one of the first items. Health information is governed by separate rules with their own article here.
Is a prepaid annual plan a bad idea, then?
It is a trade, and the point is to make it knowingly rather than to avoid it. A longer commitment usually buys a lower rate, which is a genuine saving, and most companies do not fail. What changes with the term is exposure: money already handed over for months not yet delivered is the exact description the priorities section uses for a seventh-position claim. Weigh the discount against the number of undelivered months you would be carrying at any moment, and keep the receipt and the terms as they read on the day you paid.