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5 Things to Do When a Client Files Bankruptcy

by Erica Nelson on February 17, 2015

Client Files Bankruptcy

When attempting to collect past due debts, it’s inevitable that your business will eventually encounter a client who has filed for bankruptcy. In 2013, nearly 35,000 companies filed for for bankruptcy nationwide. Bankruptcy can mean that you may no longer be able to collect on a debt, but there are still a number of tactics you can implement to at least get a portion of your money back once the bankruptcy is complete. A few things to do to make it more likely that your business will collect the money that you are owed:

1. Cease All Contact with the Client

When an individual or business files for bankruptcy, any creditors must stop collection activities. Contacting them to collect on a debt after they’ve filed is a violation of US bankruptcy laws. If you were in the process of suing the client, the suit will be stayed until the bankruptcy is complete. The best thing your business can do is contact an attorney or court appointed trustee to discuss all of your options when it comes to how your debt will be handled through the bankruptcy process.

2. Gather Information

Find out the type of bankruptcy the client filed for. Chapter 7 a complete liquidation which both individuals and businesses can use; non-exempt property is liquidated to pay creditors. Chapter 11 and 13 are reorganization bankruptcies designed to give companies that intend to reorganize a temporary reprieve from creditors.

3. Do a Risk-Benefit Analysis

Assess whether it is worth the time and cost to pursue what you are owed. For instance, if a business grosses $1 million a year, but has $3 million in debts to 20 creditors, there may be little chance of getting any of your money back. You can find the debtor’s income and expenses in the bankruptcy filing.

4. Stake Your Claim

If you decide that it is worth going forward, you will generally need to file a proof of claim to be able to collect. This is a form used to notify the debtor and the trustees that asserts your right to a share of the distribution. You’ll need to include the bankruptcy case number, amount owed, the basis for your claim and information about whether the debt was secured or unsecured.

Check the filing to find out when the deadline is to file. If you miss the deadline, you eliminate any chances of getting paid back. The proof of claim is a simple one-page form which can be filed for a small fee.

5. Watch and Wait

Once a bankruptcy is complete, debts are paid back in an order set up under federal law. Secured debts such as mortgages are paid before unsecured claims like fees for goods or services. Typically, if you do get paid back, it will be around 10% of what you were originally owed.

Find out when the 341 creditors meeting is scheduled. This is a meeting with the debtor, the court-appointed trustee and the creditors. At this meeting, the debtor explains why the bankruptcy occurred and how debts will be settled. You may have the chance to ask questions during the meeting. If you think that the debtor is committing any sort of fraud, you can address it at this meeting. After the meeting, a repayment plan will be issued. For the plan to go forward, it must be approved by half of the creditors and address at least two-thirds of the debt owed.

While it can be difficult to collect after a client goes bankrupt, it can be worthwhile to follow proceedings to recover a portion of what you are owed. By assessing the likelihood of getting your money back and the effort involved, you can make informed choices and find the best balance of risk and reward.

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