Use these simple steps to protect yourself.
A customer’s bankruptcy filing can have a major impact on your business. What can you do to survive this financial bomb?
Look out for the Warning Signs
The advent of radar saved countless lives in World War II because it identified enemy planes before they attacked. Similarly, it is essential that you continually watch for financial warning signs. Is the customer progressively slowing in its payments? Have there been adverse events that would impact the customer?
If financial threats are on the horizon, contact the customer to find out what is happening and request current financial information. Consider lowering the credit limit and, in more severe situations, change the credit relationship from open terms to cash-in-advance.
Beware of the Automatic Stay
When a debtor files for bankruptcy, the “automatic stay” immediately goes into effect. This prohibits you from taking any action outside of the bankruptcy process that would impact the bankruptcy estate. For example, you cannot seek to collect outstanding payments or even send a “notice of termination” under an existing contract. Entities that violate the automatic stay can be held liable for actual and punitive damages as well as attorney’s fees and costs.
Find out the Debtor’s Plans
The automatic stay does not prevent you from contacting the debtor, discussing the bankruptcy filing or exploring options going forward. It can be a big mistake to not open lines of communication following a bankruptcy filing by a bankruptcy attorney. A debtor who may have ignored your calls prior to bankruptcy may be much more open now that “the cat is out of the bag.” These early discussions can give you important information to help you make the most of a bad situation.
Contact Counsel Early
Protect yourself by consulting with legal counsel. Bankruptcy is a complicated process with many critical deadlines and certain possible advantages for different types of creditors. Failing to understand key deadlines and act in a timely fashion can seriously jeopardize your rights under the bankruptcy process.
File Your Proof of Claim
To collect monies, you must file a proof of claim. This is a simple form available from the Bankruptcy Court that can be completed without the assistance of counsel. It is critical that you file it by the proof-of-claim deadline. Include with your claim documentation such as invoices, bills of lading, contracts, etc., which support the debt that is owed.
Dealing with the Debtor after Bankruptcy Is Filed
A debtor that files for Chapter 11 may be reorganizing itself or selling off its assets to another company so that the business may continue. Your contract with the debtor can be assigned to any new entity that purchases some or all of the debtor’s assets. Goods or services provided to the debtor after bankruptcy are required to be paid in full before any pre-bankruptcy debts can be paid.
Avoid the Avoidance Actions
It is very common for bankruptcy trustees to sue creditors in an attempt to recover the monies that the debtor paid to a creditor in the 90-day period before bankruptcy. Creditors sometimes make the mistake of just paying the monies when they receive a demand letter. Don’t do that! There are several defenses that you may potentially assert to substantially lessen or wholly eliminate your liability. Legal counsel should assist in this regard.
Bankruptcy is always a financial bomb. But it doesn’t have to be nuclear for you. Looking for the warning signals and taking quick action can significantly lessen its impact on your business.
