My Customer Just Filed for Chapter 11 Bankruptcy – Now What?
There are few words business owners want to hear from their clients less than “bankruptcy”. However, they’re an inescapable fact of life and something that you’ll have to face eventually. In fact, they will likely account for most of your bad debt losses. While there is no way to avoid dealing with client bankruptcy filings, there are things you can do to mitigate their impact on your own business.
Before and After
One of the first things to understand here is the difference in how a business bankruptcy will affect your invoices. Those sent before the client filed for bankruptcy will be included in the filing, but those filed afterward will not. They will be due and payable, plus the client will have positive cash flow at this point. Invoices filed before the filing date are subject to discharge unless the case is dismissed, after which you can resume collections activity.
Steps to Take When Dealing with a Business Bankruptcy
Step 1 – Verify the Filing and Date
First, verify that the client is filing for bankruptcy and, if so, the official filing date. You can use the PACER website to do this: https://www.pacer.gov.
Step 2 – Is It Chapter 11 Bankruptcy?
Next, determine the type of filing and understand the differences inherent in Chapter 11 vs. Chapter 13. Chapter 11 is essentially a reorganization of the business, while Chapter 13 offers a little more flexibility. Chapter 7 means you have little chance of seeing any money, though.
Step 3 – Should You Consider Doing Business with Them?
The third step is a combination of two different ones. First, decide if you should continue working with the client. If you decide to sell cash in advance after a bankruptcy filing, there is no risk at all. You may decide to sell based on credit, but make sure to verify whether any debtor-in-possession financing is available first. Second, consider your volume and margins. Selling post-position hinges on them, as well as your tolerance for risk with this specific customer.
Step 4 – Communicate
Especially if the client is a major account, contact them and start communications. Ask them for clarification on what’s happening and see if you can divine whether they’re legitimately going to reorganize or if there’s a liquidation in the offing.
Step 5 – Work with Your In-House Rep
After speaking with the customer, go to your in-house sales rep who is responsible for the account. Get their take on the situation, including any variables that might help you better understand the client’s ultimate game plan.
Step 6 – Check for Other Creditors
Use the PACER site to determine who the other major unsecured creditors in the situation are and verify your position among them. Note that you cannot get this information from PACER until after the schedule is filed, so you may be better off simply asking the debtor for a list of their 20 top creditors.
Step 7 – Choose Your Strategy
If the amount is relatively small, make sure that you’re on the creditor list and write the A/R balance off to bad debts. However, if the debt is larger, you’ll want to delve into the situation and determine if there’s a chance of any distributions.
Help When Dealing with a Business Bankruptcy
Have questions about dealing with a client filing for bankruptcy? We can help. We’ve worked with clients large and small to save them time, money, and hassle. Download the Free Bankruptcy Guidebook today which also includes a referral to one of the nations top bankruptcy attorneys for questions you may have or a consultation.