You’ve spent months chasing down a company that owes you money. Now you hear the dreaded news: Your non-paying customer is filing for bankruptcy. After the time, money, and resources you’ve invested in this customer, you are likely wondering about your options.
Some businesses might write off the claim altogether upon learning this news. However, if the debtor owes a significant amount, you may want to consider pursuing the debt in bankruptcy court.
A Chapter 11 commercial bankruptcy filing is a serious legal matter that brings its own unique set of time constraints. Even in a best-case scenario — as a secured creditor — you could be waiting up to six years to receive payment.
Here’s what you need to know now about the legal process and your options once your commercial debtor files for bankruptcy.
Get the Facts
Whether you received papers in the mail or read the news online, it’s important to nail down the following:
- The bankruptcy case number
- The court where it was filed
- Date of filing
- The deadline for filing a proof of claim
If you haven’t received the official filing papers yet, call the bankruptcy court clerk to request that they send you a copy by mail.
Abide by the Bankruptcy Order
You most likely learned of the situation when you received an automatic stay from the bankruptcy court, instructing you to cease any attempts to collect debts from this customer, including sending invoices or making phone calls. Make sure you alert any collection agencies you work with about the situation and advise them to stop making collection demands.
Put a halt to any collection efforts while marking the account as bankrupt. Although you cannot contact the debtor directly, you can communicate with the court-appointed trustee or attorney managing the case.
Set Aside Your Records
Start gathering all the records related to this customer, including any documents involving products or services ordered by the customer, payments received, and a record of all attempts to collect from the customer. In a worst-case scenario, the debtor could file a lawsuit after bankruptcy to recoup money from pre-bankruptcy transactions, so these records will be instrumental in helping defend your case.
Review the Bankruptcy Orders
These will contain a listing of the amounts owed to each creditor, whether secured or unsecured. Make sure the amount the debtor lists for your company is accurate and doesn’t indicate it is “disputed, unliquidated, or contingent.”
You’ll also be able to find the debtor’s income and expenses in Schedules I and J of the bankruptcy petition. From there, you can make an informed analysis about whether you’re likely to receive any payment if you choose to pursue the matter in court.
File a Proof of Claim
If you decide that the claim is substantial enough to warrant further action, your next step is to formally enter the case by filing a “proof of claim.” The bankruptcy notice should detail instructions for filing a claim.
Call the court clerk to find out the deadline for filing a proof of claim. Collect any contracts, invoices, emails, and other records to verify the existence and amount that the bankrupt customer owes.
Note that you are not required to file a proof of claim if the debtor’s listing of the amount owed is in line with your company’s records, but it can still be a good way to formally record your entry into the case. However, a proof of claim is a must if the debtor listed an incorrect amount owed or an amount that is “disputed, unliquidated, or contingent.”
Consider Recent Orders
If the customer purchased something from you within 20 days of filing for bankruptcy, you might be able to elevate your claim to priority status over other unsecured creditors. You would need to file an administrative claim, which would effectively move your claim up in line and get you paid faster. If an order just went out, put a stop to it immediately, ideally before it’s delivered.
You also have recourse if your debtor purchased within 45 days of bankruptcy. If the goods have been delivered, you may be able to file a reclamation claim to take them back. This requires sending a letter of reclamation within 20 days after bankruptcy is declared.
Review Recent Payments
If the customer made any payments to you within 90 days before filing for bankruptcy, the bankruptcy court might consider that a “preferential” payment and order you to return it. You may not necessarily have to return the payment, but it’s best to set aside any amounts paid within that period just in case.
Get Involved in the Bankruptcy Proceeding
If you have one of the larger unsecured claims, consider asking to be appointed to the Unsecured Creditors’ Committee. As a member, you’ll help settle the eventual repayment and maximize the recovery of each unsecured creditor. It’ll also increase your company’s chances of getting paid. However, keep in mind that this may require several meetings and telephone calls, and the ultimate goal is to maximize recovery for all unsecured creditors — not just your own company. For some creditors, that level of involvement might just be too much.
As a less time-consuming alternative, consider at least attending the 341 meeting of creditors. At this meeting, the debtor will have the opportunity to share its reasoning for the bankruptcy filing as well as its plan for repayment or reorganization. You will be able to ask questions and object to any of the proposed plans. You may also be asked to propose a repayment plan of your own.
Monitor the Bankruptcy Proceedings
The bankruptcy court will follow an established plan for repayment of debts according to priority level. The first level is typically for professional services and administrative expenses, followed by secured claims, priority claims for wages and taxes, unsecured claims, and finally, equity claims.
Unfortunately, you cannot predict when you may receive payment on your outstanding debt. Even after the bankruptcy court approves the debtor’s restructuring plan and the company begins to make payments to creditors, there is simply no guarantee that any funds will be left after the debtor pays higher-priority classes of creditors.
Be patient, flexible, and understand that payment may take a different form — perhaps a promissory note, an offer of equity in the reorganized company, or an installment payment plan that allows the debtor to repay the claim over a set period.
Dealing with a commercial customer’s bankruptcy is a challenging situation that takes even more time, effort, and attention. Although your debt collection agency cannot help you out in these situations, it’s important to partner with an agency early on in the process that understands the importance of following regulations and maintaining adequate records that can help increase your chances of repayment down the road.