What to Do When Your Suppliers and Customers Go Under
by Barbara Weltman on August 26th, 2009
What happens to you if you’re owed money? What if they file for bankruptcy? What legal protections do you have and what action must you take? Find out what steps to take and how to avoid problems.
Some companies are closing their doors, some consumers are filing for bankruptcy protection, and many small businesses that sell on credit are concerned about receiving payment—for good reason.
Understanding bankruptcy
If a company or person files for bankruptcy protection, most unsecured creditors stand at the back of the line; they’re lucky to receive pennies on the dollar. Some creditors may gain special status in a bankruptcy proceeding and will ultimately recover more than other unsecured creditors. For example, if you can qualify as a “critical vendor” who continues to supply goods to a company that has filed for a reorganization under bankruptcy protection, you gain a better spot in line for collection. You can’t do this simply by having the company dub you a “critical vendor;” you need to have an attorney file a motion with the bankruptcy court.
Returning payments. A bankruptcy court may send vendors of a company that has filed for bankruptcy a letter asking that the company return payments received within 90 days of the bankruptcy filing. This is referred to as a “preference” and a “claw back.” The trustee in bankruptcy has the right to undo certain transactions or payments and then use this money to make equitable payments to all creditors, not just you. If you don’t respond to the trustee’s demand letter, you can be sued and you could lose if the trustee can show that the company was insolvent at the time it made the payment to you (there are certain defenses to be raised in this situation that can save you).
Filing claims for unpaid invoices. If a customer has not yet paid you for goods or services you’ve delivered, you can file a claim with the bankruptcy court. Whether and how much you collect remains to be seen.
