By Kelly McDonald, Partner, Co-Chair of Bankruptcy Practice
As a business owner, you might encounter a situation where one of your customers or somebody you do business with has filed for bankruptcy. What do you do? You can continue doing business with someone after they file for bankruptcy, but there are several things you need to be aware of. Above all else – don’t ignore the issue and be deliberate in planning your next steps.
Consider getting cash up front or negotiating faster payment terms. You can be more diligent moving forward in the methods you take to collect payment, but you can’t require them to pay any old bills to continue doing business with them. In fact, you can’t try to collect any money that is owed to you before the bankruptcy filing. Any collection efforts have to go through the bankruptcy court.
What happens to the money you are owed? In most bankruptcies, the amount of funds to pay creditors is limited. Keep a careful eye on deadlines and stay on top of things to ensure you’re in the best position possible to maximize the amount you receive.
Be prepared for measures you might not expect. It seems like not getting paid by someone who files for bankruptcy is the worst-case scenario, but in some cases you might actually have to refund money you have already received. If you received a payment in the ninety days before the filing, you might be required to pay it back. There are a number of defenses to that kind of claim, so don’t do it automatically, but be prepared for the possibility.
You might have the opportunity to be part of a creditors’ committee. This doesn’t give you a leg up over other creditors but it does give you a lot more input into the process. As a member of the creditors’ committee, you help make decisions on how to maximize recovery for the creditors and have a say in how the bankruptcy unfolds.
The bottom line in working with someone who files for bankruptcy is don’t just ignore it and hope for the best. Pay attention to the process and, depending on how much you are owed, make sure you participate to protect your rights. You can reach out to a member of our Business Reorganization and Insolvency Practice Group if you’d like more information on managing this type of relationship or learning more about what your rights are.