If you’re a company that operates within the business to business sector, then you may have to eventually deal with a client who files for bankruptcy. To make matters worse, there is a good chance this client also has outstanding debt to you in the form of accounts receivable.
Hundreds of thousands of businesses across the country file for bankruptcy every year. Fortunately, if one of your clients files for bankruptcy, you still have an opportunity to collect. Here is what you need to know.
What You Can Expect to Collect
For a secured creditor, the average is 77 cents on the dollar. For unsecured creditors, the landscape is a bit bleaker. They often collect only two cents on the dollar. Armed with that information, do a cost-benefit analysis. It may not be worth your time to try and collect. Keep in mind, small companies or individuals filing for bankruptcy may not have tangible assets that can be sold off to aid in debt collection. However, if your company decides the case is worth it, here’s how to proceed.
- It’s a real “hurry up and wait” scenario. Your business must act quickly but be patient when it comes to actually collecting. The debtor may get years to repay, but you should probably take action right away. As soon as you learn a customer has filed for Chapter 11, examine what your company is owed.
- If the sale was made within 20 days of the Chapter 11 filing, you may be able to file an administrative claim. This claim moves you up in rank when payment is made. Once this is done, you will need to file a motion with the court to get the debt recognized and eventually paid.
- If the goods were sold within 45 days of the Chapter 11 filing, find out if they have been shipped and/or received. If the shipment has been received, the Uniform Commercial Code gives you the right to file a reclamation claim to take back the goods. You must send a letter of reclamation; include a detailed description of the goods. After the letter, you’ll need to go to bankruptcy court to get an Order of Reclamation, you should seek legal counsel for this portion.
- Keep an eye out for a payment plan. For the first 120 days, the debtor has the right and may actually propose a reorganization plan. If the court-appointed trustee signs of on the plan, your company will be notified.
Are you a secured creditor? If you are, your company stands a better chance of collecting. Even so, the debtor may have as long as six years to come up with the money.
If it was a piece of property that was sold to a now-bankrupt customer and the property is not required for the customer to reorganize, secured creditors might be able to get the property back. The automatic stay applied with Chapter 11 could be lifted by a court order.
If your company received a substantial payment from the customer within 90 days of the initiation of bankruptcy, there’s a chance the payment may have to be returned.
Pro-Tip: Also, sign up for PACER. This allows your company to keep on top of docket information from bankruptcy courts online. Companies that deal with substantial receivables should have employees regularly check for bankruptcy filings. One day of delayed action could reduce your ability to collect. If you do come across a Chapter 11 filing, seek a CPA Firm that specializes in bankruptcy.