A Creditor’s Guide to Bankruptcy

Bankruptcy is difficult for a debtor, but did you know it can also be complicated for creditors? While big creditors have sophisticated processes for dealing with bankrupt customers, small businesses are often the ones left out.

As soon as a customer files bankruptcy, there are several key steps you should take to protect your interests:

  1. 1.Contact your attorney. Bankruptcy laws are complicated and if you don’t follow the bankruptcy court’s rules, you can end up with nothing or even having to pay back what you’ve collected.
  2. 2.Collect and preserve your business records for that customer. Those records are important to prove your claim.
  3. 3.If you’ve sold goods to the customer on credit, you might be able to reclaim those goods if you quickly send a reclamation demand to the customer. You should also stop goods that are in transit or hold goods not yet shipped to the customer.
  4. 4.File a proof of claim. This proof of claim is necessary in order for you to have any right to potential distributions.
  5. 5.Stop the collections process. Filing for bankruptcy automatically stops creditors for pursuing other collections options, like filing a lawsuit.

Unfortunately, you can’t accept payment from the customer once they’ve declared bankruptcy or even in the period immediately before declaring bankruptcy (with some exceptions). It seems unfair, but the goal is to prevent customers from paying favored creditors while others are shut out. You may end up being sued to repay the amount. If a customer suddenly offers to pay an old bill, check with your attorney first before accepting.

Understanding your rights and limits when a customer declares bankruptcy can give you the best chance to come out of the process on top. And remember: a good process for handling bankruptcies is no substitute for having a solid, consistent collections process up front.

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