Things are going great at your company — until you find out your largest customer has filed for bankruptcy. And it’s into you for $1 million.
“If your business operates on any type of credit, at some point you likely will be affected by an organization’s insolvency or bankruptcy filing,” says William Kelleher, a partner in the law firm Cohen & Grigsby.
The American Bankruptcy Institute’s latest figures reveal that more than 35,000 businesses filed for Chapter 11 bankruptcy protection in 2000, including 382 in Western Pennsylvania. About a quarter of those will emerge as financially viable companies, Kelleher says.
While avoiding credit risks with your customers and dealing with their bankruptcy filings are complex matters, says Kelleher, there is some “preventive maintenance” you can perform to mitigate the situation.
* Review documentation. Make sure your agreement is properly documented. The written contract should completely and unambiguously reflect the deal you have with your customer.
* Consider restructuring the agreement. Secured creditors are entitled to recover at least the value of their collateral, so consider restructuring your agreement into a secured transaction.
* Review terms and conditions. Are the terms and conditions on your printed forms adequate? Do they provide for a purchase money security interest, late charges, interest and collection of attorney’s fees in the event of a default?
* Minimize preference exposure. If you receive payment on a past due debt outside the ordinary course of business and your customer files for bankruptcy within the next 90 days, you may be subject to a preference challenge, requiring you to repay some or all of that payment.
* Position yourself as a critical vendor. Many large Chapter 11 debtors recognize they cannot successfully reorganize without the support of certain critical vendors. To entice critical vendors to continue to provide normal trade credit, debtors request special approval to pay some or all of their pre-bankruptcy debt.
* Monitor the debtor’s activity. Most companies telegraph their plight into financial failure. Recognizing the early warning signals increases your chances of acting accordingly and appropriately.
* Be prepared to act. Understand available rights and remedies even after the bankruptcy filing.
* Look for opportunities. Financial troubles may force your competitors or suppliers to sell some or all of their businesses.
* Call an attorney. Bankruptcy and creditors’ rights attorneys can provide a legal assessment of your current risks and make recommendations that will help you steer out of troubled waters.