This post was written by John O’Keefe and Eric Rosenberg. 

All businesses, inevitably, will have customers which experience credit issues or may even file for bankruptcy protection.  Once a bankruptcy case is filed, all collection activities against the “debtor” must stop.  While it is possible to make a reclamation claim and demand that all goods delivered within 20 days of the bankruptcy be returned, no business wants to find itself in this position.  After all, if the reclamation claim does not prevail, a creditor will only have an administrative claim for these goods which is entitled to payment prior to a general unsecured claim. 

More importantly, if you suspect a customer is struggling financially, there are precautions which can be taken to mitigate the risk of a potential bankruptcy.  The first step is recognizing the red flags when a customer is experiencing cash flow issues.  These concerns might include the customer missing a payment when due, seeking to renegotiate payment terms, or coming up with excuse after excuse as to why a payment is late or not made in full. 

If you have serious concerns about a customer bankruptcy, you may want to consider obtaining collateral to secure repayment.  You may also want to consider modifying payment terms to reduce significant accounts receivable or requiring that payment be made in full before any goods are delivered.

In addition to these examples, there are other potential avenues to protect yourself when you fear a customer is on the brink of bankruptcy.  Consulting with legal counsel to discuss a customer’s credit account, collection, pre-bankruptcy activities, and protections to take post-bankruptcy filing are also issues which any company must deal with when its customer cannot pay its bills.

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