When it comes to business debt recovery in todays economy, business bankruptcies will normally account for the majority of business bad debt losses. Business bankruptcies have increased 54% from year end 2007 to year end 2008.
The first thing you should do depends on how you heard about it. If the bankruptcy is unconfirmed (ie: your customer tells the collector they have filed for bankruptcy or the sales rep hears from their contact they have filed), you should go to the PACER website to verify the filing. Refer to the Product Review for PACER (in this email or at the Resource Center).
If you received a Notice of Commencement from the debtors’ attorney, you may want to contact that attorneys office for more information.
Once a bankruptcy is confirmed, the PACER site can provide you with the following:
- Complete contact information for debtors’ attorney.
- Case summary including date filed, nature of debt, trustee information, and status
- List of other creditors
- A copy of the formal notice
- Schedule or docket for a list of hearings and dates of all steps in the process
The majority of business bankruptcies are Chapter 11. If you are owed a substantial amount of money, the following guidelines will help you to optimize your recovery.
1. Do I continue selling to this customer? Some creditors automatically refuse to sell to a customer in Chapter 11. This can be a great opportunity to make back some of your losses. Find out if there’s debtor-in-possession (DIP) financing available. Base your credit decision on those numbers and if you decide to sell, set up a new account for the DIP entity and make the terms Net 15.
2. Consider your volume and margins. Whether you sell post-petition or not depends on each of these six factors including your appreciation for risk with the particular customer and what your margins are with them. Have you made enough money historically so that the current bad debt associated with the pre-petition is minimal?
3. Call the customer. It’s always a good idea to confront the customer directly and immediately, especially if it’s a major account and there’s some relationship with the decision makers. Ask them what’s going on and what their intentions are. Try to get a reading on whether they’re trying to come up with a reorganization plan or if this is just a holding pattern until they figure out how to liquidate. The biggest risk is always that they convert to Chapter 7 and liquidate. The best information comes from direct conversations with the customer and prior knowledge you have about the company.
4. Why did they file? Perhaps there were specific issues that caused the filing not related to operations. Let’s say for example a company is viable and making money, but they had some leases or specific debt issues they used bankruptcy to resolve.
5. Find out who the major creditors are. Ask the debtor directly for a list of their top 20 creditors. If not, you can obtain them from PACER once the schedule is filed. Then contact a few creditors to determine their strategy. See if there’s any interest in getting involved in a creditors’ committee.
6. Determine a strategy. The biggest question is whether you think the customer is going to liquidate the business.
The last thing you want is to have to explain to top management why the company lost money selling to a Chapter 11 account. If you’re going to sell to them on terms, make sure it’s well thought out as per above. Otherwise, it’s cash in advance or no sale.
