What Should a Business Owner Do if a Customer Goes Bankrupt?

What should a Business Owner do if a Customer Goes Bankrupt?

As the American economy fights to find it’s footing, especially in states like California and Florida where home foreclosures have been rampant, increased numbers of Americans have been filing for bankruptcy to save them from their personal debt.  

For small businesses, who certainly haven’t had an easy time themselves, this presents a new problem: how to get paid by customers who have filed bankruptcy? Whether your customers and clients are individuals or businesses, when they get swept under the rug your business must have a plan to avoid falling to bankruptcy too.

Business Bankruptcy
If you provide services to businesses, avoid allowing clients to run up big tabs. Even if they are regular customers, receiving regular payments will protect you from taking a big hit if they go bankrupt. If a typically consistent customer starts lagging behind on payments, take this as a sign that they may be having financial troubles and stop providing service until their debt is paid off.

What kind of bankruptcy your client is filing is crucial to how much you will receive. Chapter 11 bankruptcy results in the company restructuring and staying in business. Chapter 7 bankruptcy results in the liquidation of the company’s assets. In both cases there is a hierarchy that decides who gets paid out. Employee wage claims come first, followed by secured creditors with liens like banks. Unsecured creditors, like service providers, come last.

Since you’re probably at the bottom of the barrel in terms of getting paid for your claim you should think long and hard if someone approaches you about buying your bankruptcy claim. Though you may get two to three times more than the buyer offered if you wait for the claim to be settled, settlement of your claim may take a year or longer. If you’re offered a settlement early on you should take it, the best deals usually come earlier on in the proceedings. Creditors are usually represented through a creditors committee; contact the committee to have more say in your interests.

Get Your Free Credit Score!

Personal Bankruptcy
Just because a client goes bankrupt doesn’t necessarily mean that the investment you’ve made is a loss. Also, if a customer who goes bankrupt has recently paid you you may be required to pay back some funds to disperse amongst other unsecured creditors as part of the bankruptcy settlement in accordance with the U.S. Bankruptcy Code.

Obviously as soon as you receive notice that a client has filed for bankruptcy you should end services immediately. If you provide goods that are delivered to them, try to stop them from being delivered.

According to the Bankruptcy Code as soon as bankruptcy has been filed all debt collection attempts must be stopped. Hiring a collection agency to deal with a pesky and illusive customer is a viable option, but as soon as the customer has filed bankruptcy you can be held accountable for their actions.

Gather essential documents that prove how much you are owed and present them at the creditors meeting. You will need to fill out a proof of claims form to present along with your documents. You may not receive all that you are owed, but a percentage based on the assets the debtor has left.

If you receive a letter from a bankruptcy trustee (the person assigned by the court to investigate the case) requiring you to pay back payments the debtor had previously made to you, don’t assume that you necessarily have to pay this amount. Negotiating the amount is completely your right under the law. Fight to keep as much of the money that you've been paid as you possibly can.

Bankruptcy laws and proceedings are very complicated. To make sure your interests are properly represented and that you get the payment you deserve you may want to hire an attorney to represent you. Don’t write off bankrupt customers as a loss, pursue payment that is rightfully yours.