These are turbulent times, says James
C. Bastian, Jr., a partner in the law
firm of Shulman Hodges & Bastian LLP. “Bankruptcy is back in a big way.”
According to a report in the Los Angeles
Times, more than 90,000 bankruptcy filings
were made in March of this year, the highest since insolvency laws became more
restrictive in October 2005. Filings in
March were 30 percent above those of
March 2007. And California led the nation
with a 42 percent increase in bankruptcy
filings at an annual pace in the first quarter.
The sad fact is that one or more of your
customers may be in financial trouble at
this very moment. Financial trouble that
could result in a bankruptcy filing, affecting
your own company’s near-term cash flow.
“Evaluate the situation,” Bastian says. “If
you feel you’re getting the runaround, and
if you’re hearing things you never heard
before and if you’re dealing with an industry that is risk-laden, you can no longer
assume that your customer can pay you. At
the first sign of trouble, you need to be
aggressive. Even the companies with the
best intentions will string you along and
put you in a worse position.”
Smart Business talked to Bastian about
the steps you can take to avoid getting
burned by deadbeat customers.
What are the first signs that a customer
may be in the initial stages of filing for
bankruptcy?
Industries like automotive, food service,
restaurants, real estate and certain segments of the retail market are struggling. So
are any industries that are more sensitive to
the recent dramatic changes in fuel costs.
If your business is related to an industry
that is generally in trouble or on the edge,
you need to be more aware of possible
bankruptcies than you have ever been,
monitor your receivables and not deviate
from your normal collection schedule.
When a good, long-time customer pays late
or doesn’t pay at all, should you assume the
worst?
There is always that balance between
wanting to accommodate your customers
and clients versus not getting extended to
the point where your company’s economic
health is being affected.
For a long-time customer, you might
extend payment terms , but you still must
maintain a normal collection schedule. In
this economic climate, you cannot take for
granted that customers will be able to keep
payments current. You have to assume that
there is always a possibility — greater now
than ever — that the company you are
dealing with will end up in bankruptcy.
You also cannot let any personal relationships with customers interfere with smart
business decisions — and some companies
struggle with that.
When are you at risk to have to return payments made from a company that ends up
in bankruptcy?
When a company files bankruptcy, any
payments you have received within the 90
days before the bankruptcy can possibly
be recaptured by either the trustee or the
company in bankruptcy through a preference avoidance action. Bankruptcy law
allows creditors to be sued to bring that
money back under many circumstances
and spread it evenly among all the
claimants. There are some things you can
do that may give you a defense, including
reaching a written agreement for new payment terms or language in your initial
agreement that allows you to change payment terms.
It can even pay to sue a customer whose
payments have fallen behind. If you obtain
a judgment lien and it’s in place for more
than 90 days before the bankruptcy filing,
you can jump ahead of other creditors and
possibly be first in line for any distribution.
If bankruptcy seems inevitable, you may
be better off pursuing collection and getting a judgment to put yourself in a better
position. Even if you get a judgment, you
need to be flexible enough to accept less
than that full amount — because that may
be all you get. Recovery for unsecured
creditors may be very, very minimal, so it
may be far better to get 30 or 40 cents on
the dollar than pursue litigation and obtain
a worthless judgment.
What happens after a customer files for
bankruptcy?
Creditors receive notice of the bankruptcy filing in the mail. When that happens,
you need to gather all invoices, file a simple
one-page proof of claim with the bankruptcy court and attach your documentation.
That puts the court, other creditors and the
company on notice that you have a claim.
Then you must closely monitor the bankruptcy case. You do not necessarily need to
hire an attorney in every case because you
can incur a lot of fees. If the bankruptcy
distribution amounts to practically nothing, you don’t want to throw good money
after bad.
Creditors in bankruptcy receive notices
with language — possibly veiled in legalese
— that will affect your legal rights. If you
consult a lawyer, he or she might see something that needs attention and deal with it
as necessary. But good lawyers will only
charge for acting on your behalf on issues
that really affect you and should not nickel
and dime you on every piece of paper that
comes across their desk.
JAMES C. BASTIAN, JR. is a partner in Shulman Hodges & Bastian LLP. Reach him at [email protected] or (949) 340-3400.
