So you have a customer that's consistently behind on payments, and before you know it you get a notice that the company has filed for bankruptcy protection.
This is a scenario most business owners dread.
Getting paid can be difficult in bankruptcy proceedings, but knowing the process and looking for warning signs before the filing can help mitigate loss.
"You need to know your rights and be proactive if you want to protect your interests," says Andrew Thaler, managing member at Thaler Law Firm PLLC in Westbury, specialists in bankruptcy and insolvency.
Pay attention to detail. When you get the bankruptcy notice, it will tell you what kind of bankruptcy it is, Thaler notes. With a Chapter 7 bankruptcy the business' assets are liquidated by a federally appointed trustee, and the company essentially shuts down. In a Chapter 11 or 13 bankruptcy the goal is reorganization with the debtor retaining assets and setting up a repayment plan to creditors.
In all cases, at the point of filing an automatic stay immediately goes into effect and all collection efforts must stop, says Thaler, a Chapter 7 trustee for the U.S. Bankruptcy Court in the Eastern District of New York.
"If anyone wants to seek any type of relief, they have to go through the bankruptcy court," he notes.
Don't call. You can't even make a collection call, notes Sharon Levine, a partner in the Roseland, New Jersey, office of Lowenstein Sandler LLP and a former co-chair of the American Bankruptcy Institute's Unsecured Trade Creditors Committee. If you ignore this, the debtor can go to court and claim a violation and "you're potentially subject to damages," she explains.
The only exception is a secured creditor -- one with some type of collateral, such as a lender -- who could file a motion to "vacate the automatic stay," but that would have to be approved by the bankruptcy court, explains Steve Taitz, managing partner at Roe Taroff Taitz & Portman LLP in Bohemia.
File a claim. Unsecured creditors can file a "proof of claim," a necessary step if they want even a chance of getting paid, Taitz notes.
"If you don't file your claim, then they don't have to pay you," he says, adding you'll either see the filing date on the initial notice or get it at a later date.
Filling out the proof of claim is easy, notes Levine. Generally it has the debtor's name, case number, your name and address and the dollar amount owed, she says.
If possible, attach vouchers and proof, Thaler suggests.
Keep in mind, secured creditors will take precedence over unsecured creditors in getting paid, adds Levine.
Act fast. Also consider that if you shipped goods to a customer shortly before a bankruptcy filing, you may have the right to reclaim those goods.
But you must act fast, advises Taitz. The likelihood of getting the goods back is slim, but you could end up taking priority over another unsecured creditor, he explains.
Still, despite your efforts, you may end up with nothing.
In Chapter 7 cases most creditors unfortunately don't get paid because there are no assets, says Frank Battaglia, assistant vice president of collection services at ABC-Amega Inc., a Buffalo-based commercial debt collection agency. "If you can recover 20 percent in a Chapter 13 bankruptcy, you're doing very well," he notes.
Don't ignore hints of trouble. It's important to recognize warning signs before a client files for bankruptcy, Battaglia says.
An obvious sign is the client stops paying you. Depending on the circumstances, you may want to change your terms to cash on delivery until the company becomes current on its bill, says Battaglia.
Another sign is the customer stops communicating with you, he says. It's a good idea to pull a credit report to see if the firm is behind with other creditors, too.
"There's a lot of signs," Battaglia notes, "and a lot of them get ignored."