In the third quarter of 2008, 11,504
businesses filed for bankruptcy. What
happens if one of your customers happens to go bankrupt? The best thing to
do is keep up good businesses practices
in extending credit and collection of
accounts receivable so you’re prepared
for the worst-case scenario and can keep
your business afloat.
“It should improve your cash flow
by keeping the customers current and
limit the amount of any claim in bankruptcy should a customer file bankruptcy,” says Gary A. Barnes, shareholder at
Baker, Donelson, Bearman, Caldwell &
Berkowitz PC.
Smart Business spoke with Barnes
about the legal rights you have when
customers go bankrupt and the steps
you should take if that happens.
What legal rights do creditors have?
If you’re a creditor in a bankruptcy
case, you have a right to have the correct
amount of your debt listed as a liability
of the company that has gone into bankruptcy. That can be done by confirming
that the debtor has properly listed the
amount that you’re owed and by filing a
proof of claim, if necessary. When filing
a proof of claim (a form provided by the
court) attach the documents that support your claim, send the documents to
the bankruptcy court, and include an
extra copy to be returned with a date
filed stamp so you have proof that it has
been filed.
Creditors can work with an attorney
who will assist them with filling out and
filing the proof of claim. The attorney
can also help the client determine
whether or not it’s in the client’s best
interest to participate in one of the committees for the bankruptcy, attend hearings or take other action in the case in
order to collect on the debt owed.
Companies that file bankruptcy do
have to list all of the companies or people they owe money to at the time of filing. The list is mailed out by the
bankruptcy court, and you will get a notice if
you are owed money at the time. But if
nothing is due, no notice is given.
Are creditors subject to litigation?
Yes, potentially. There is a concept in
bankruptcy of a preference. Generally, a
preference is a payment that is received
for a payment of an invoice for goods or
services that are in the past, as opposed
to a payment on a current invoice.
Trustees in bankruptcy and sometimes
companies in Chapter 11, even though
they are in the process of reorganizing,
are allowed to claim against creditors
who have received payments within 90
days of the filing of the case if those payments are considered a preference.
Sometimes creditors are not aware a
company has filed bankruptcy because
they had been paid in full. These creditors learn of the bankruptcy when they
receive letters from trustees or law firms
attempting to collect preferences. You
should not ignore these letters, as it may
result in lawsuits being filed against the
company to collect these alleged preferences.
What steps should a company take when it
finds itself in this situation?
If a company is not experienced in handling preference claims, it should refer
this matter to an attorney who is familiar
with bankruptcy proceedings and can
efficiently monitor and give advice on
these issues.
What should businesses be aware of when
dealing with customers who have gone
bankrupt?
Businesses need to make a decision
about whether or not they need to take
active steps in the bankruptcy case to
protect their interests. It may be as simple as filing their claim to see if they can
get a recovery, but just because a company has a claim doesn’t necessarily
mean it will receive money. It could be
that the bankrupt company doesn’t have
enough money to pay its claims; if it’s an
unsecured claim, it may only pay a portion of the claim, and sometimes there
may be objections to the claim.
General recovery in bankruptcy cases
is far less than a full payment of the
amounts claimed. In cases of Chapter 7,
there may actually not be any payment
on your accounts receivable claim,
which are considered unsecured claims.
In Chapter 11 cases, the payments could
range from 20 to 30 cents on the dollar to
possibly 100 percent.
GARY A. BARNES is a shareholder with Baker, Donelson, Bearman, Caldwell & Berkowitz PC. Reach him at (404) 221-6509 or
[email protected].
