Although corporate bankruptcy filings have steadily declined in the years since their astronomical peak in 2002, that doesn’t mean you’ll never have to deal with one of your customers filing for bankruptcy. Obviously, there are more bankruptcies when the economy is bad, but unforeseen circumstances, such as not being able to fulfill orders or not getting paid themselves, may force your customers to file for bankruptcy.
The key to your business’s survival is to stay one step ahead and thoroughly vet new customers to minimize the risk of loss from bankruptcy. If your customers do declare bankruptcy, you may be able to claim some of the monies owed to your business—as long as you’ve done your homework. Here are some tips to help:
Do a thorough credit check
Before you take on a new client, have the business complete a credit application and verify its information by contacting a credit agency. Check the business’s credit score, and check references from other businesses they’ve dealt with. If the company is just starting out, checking personal credit references (and scores) is a good way to see what kind of financial responsibility the principals are bringing to the table.
Get everything in writing
If both parties sign a contract and you have proof of payment promised, you’ll have a better chance of receiving your money in bankruptcy court. Include a clause about payment in case the party is unable to pay or in the case of bankruptcy. The clearer you are on this point, the more power on your side.
Monitor payments
Watch your receivables carefully and pay attention to customers who are suddenly paying slower. If the customer is behind a few payments, contact them and set up a plan requiring payment before any more product is shipped or services are provided. It’s not rude to ask a client if there is a cash flow problem or what issue is causing payments to be late.
Managing bounced checks
If a client’s check bounces, first call the client to find out if there was a mistake. The business may issue you a new check, want to pay by credit card, or ask you to wait a few days and try to cash the check again. Your next step is to send a certified letter about the check so that, if necessary, you can show the bankruptcy court you tried to collect payment. Keep good records of all correspondence.
Dealing with bankruptcy
Once you know for sure that a customer has filed for bankruptcy, you need to get more specifics. With a Chapter 11 or Chapter 13 filing, the business is still required to pay its debts according to a repayment plan the court sets up. In a Chapter 7 bankruptcy filing, the business is closed permanently, assets are liquidated, and debts discharged. Do not contact the business directly in any case. You must contact the attorney or court-appointed trustee to work out an arrangement for your payment. They can help you file a claim to receive what you’re owed or at least a portion of what you’re owed. Don’t give up because you think it’s too much hassle. The system is set up to help you get what’s due.
