I recently ran into an issue with a client that owed me money who filed for bankruptcy. So you can avoid the many mistakes I made trying to collect the money my client owed me, and give yourself a better chance at collecting some or even all of the money your client owes you, I created this article. I hope it helps you!
Due to the influx of bankruptcy cases, chances are high that you may receive notices of bankruptcy filings from your clients sooner or later. When this happens, don’t waste your energy being worried or angry. Depending on the details of the bankruptcy, if you act promptly you may be able to receive payment for all or at least a portion of the unpaid debt that is owed to you.
Every year an enormous amount of money is lost because businesses think that collecting debts owed to them from clients who have filed for bankruptcy will consume too much of their time and resources, and that they probably won’t be able to get paid anyway. However, that way of thinking is not true. In fact, receiving payment from a client that has filed for bankruptcy is not nearly as difficult as many businesses think it is (https://www.entrepreneur.com/article/171228).
Below is a short and basic introduction to bankruptcy. It includes reasons for you to give particular attention to any correspondence you may receive about a bankruptcy filing from one of your business clients and how to safeguard your interests that might otherwise be breached during a bankruptcy.
Determine the Type of Bankruptcy
There are generally two categories of bankruptcy cases: Chapter 7 and Chapter 11. The first category, Chapter 7, completely eliminates the insolvent’s debt (as long as no DAS is involved. What is a DAS? Find out here). The second category, Chapter 11, reorganizes the insolvent’s debt and provides a chance for partial repayment.
If your customer files a Chapter 7, it means they have decided to go out of business, liquidate all assets and pay whatever they can in accordance with the bankruptcy code. In this case, your chance of getting paid depends on whether the debt was secured (with collateral) or unsecured. If it was secured, you’re much more likely to be reimbursed than if it was unsecured.
With Chapter 11, the debtor files a plan that outlines their intention to modify and repay the debts. Once the plan is sanctioned by the bankruptcy court, payments are made according to the agreed upon proposal. In general, it is better if a client files a Chapter 11 bankruptcy compared to a Chapter 7, but even then, Chapter 11 is no guarantee that you will get paid (http://www.inc.com/guides/2010/11/11-things-to-do-when-a-client-files-bankruptcy.html).
Steps for Collecting Debts from Clients who are in Bankruptcy
After learning the type of bankruptcy filing your client is going through, you need to do the following:
1. Stop Contact With Your Client Immediately
Once a client files for bankruptcy, your business needs to stop any collection activity. If your business makes any contact with your client to try and collect the money that is owed to you. you will infringe on the bankruptcy code and you can actually get sued. Even if you filed a lawsuit against your client, it gets stayed until the bankruptcy is completed. However, what you can do is work with an attorney or a commercial collection agency that specializes in collecting debt owed by businesses that have filed for bankruptcy.
2. Read Your Client’s Bankruptcy Papers
Your customer will file paperwork with a bankruptcy court to get the court’s protection. This file contains a list of all of the debtor’s property — those that are part of the bankruptcy and those that are not. It will also have a list of creditors and whether their statuses are secured or unsecured. Knowing these details — a list of creditors and the property available — will help you make a realistic evaluation of your chances for success (http://www.entrepreneur-resources.net/5-biggest-commercial-debt-collection-obstacles-facing-business-owners).
3. File a Proof of Claim
A proof of claim is a one-page document that states your desire to be part of the bankruptcy proceedings. It proves the validity of the allegation and gives you a right to be part of the bankruptcy proceedings right from the beginning. Check the bankruptcy file to see when the deadline is for filing a claim with the bankruptcy court. In case there’s any money left after the tribunal proceedings, relevant creditors will be paid anything that is leftover.
4. Meet with Your Client
You will be given an opportunity to meet with your client, the debtor, for an open examination. Take this chance to ask the debtor about your claim and any other property that might prove relevant to satisfying your payment request (http://www.forbes.com/sites/financialfinesse/2014/08/01/7-steps-to-deal-with-debt-collectors/#52f31e4175e5).
5. Attend the Court Hearing
If the debtor filed under Chapter 11, creditors might be asked to recommend a reorganization and payment plan for the debt. If the court receives numerous plans proposed to repay the debt, you will vote on which proposal gets adopted.
6. Wait for the Bankruptcy to Proceed
Once you’ve attended the hearing, you should be in line to receive what is owed to you. This will be overseen by a bankruptcy trustee who will supervise the proposed repayment plan (Chapter 11) or monitor the distribution of assets upon liquidation (Chapter 7). (http://www.inc.com/guides/2010/11/11-things-to-do-when-a-client-files-bankruptcy.html).
I hope this article helps you collect some or all of the debt owed to you by a client who did not to pay your invoice and then proceeded to file for bankruptcy.
To your business success!