Client Advisor - Response to a Bankruptcy Filing

Part Three of a Four-Part Series

If you’ve received notice that a customer has filed for bankruptcy, there are several steps you can take immediately to protect yourself and your company.

Take Action
First, contact the customer to confirm the filing and get more information. Then while the bankruptcy filing prohibits further efforts to collect past debts (automatic stay provisions of the bankruptcy code), you can take steps to improve your potential recovery, guard against possible claims, and make informed decisions about continuing to do business with your customer (the “Debtor”). These include:

  • Putting a hold on shipments and placing the customer on COD or cash in advance terms. You may be told that you have a contract and are obligated to continue shipping. Don’t be intimidated. You have a right not to commit financial suicide. Get more information regarding the Debtor’s ability to pay going forward. Ask questions and consult your financial and legal advisors regarding:
    • Is the secured lender willing to let the Debtor continue to operate using cash collateral (use cash on hand and from collections to pay suppliers)?
    • Is there post-filing (“DIP”) financing in place?
    • Does the Debtor have a cash forecast?
    • What is the strategy? A sale? Reorganization? Liquidation?
    • Was a “critical vendor” motion filed? If so, what criteria are to be used to determine who is critical?
    • Motions filed with the Bankruptcy Court for the initial hearing in the case (First Day Motions) should shed some light on these issues. You can obtain these online or through your advisors.

  • Sending out reclamation forms for goods shipped recently. This may improve your ultimate recovery.

  • Setting up a new customer number in your systems to track pre-petition activity and claims from post-petition activity.

  • Contacting your lender to advise them of the bankruptcy, particularly if the receivables from the Debtor secure your loan. Any receivables from the Debtor that had been eligible collateral will be removed. Estimate this impact as well as the net cash impact of having the Debtor on COD or deposit terms going forward. The news may not be as bad as you might think. It is better to show you are on top of the situation and engage in discussions with your lender than have them think you were unaware of the filing or you tried to hide the news from them.

  • Gathering and organizing transaction records and customer history.
    • Prepare and file a proof of claim.
    • Assess potential exposure and defenses to preference claims

  • Thoroughly reviewing your relationship with the Debtor. How important are they to you and you to them? Depending on the circumstances, you may want to try to expand the relationship or possibly end it.

 

Monitor the Case
If you are one of the largest unsecured creditors, the Debtor should list you on a schedule filed with the court. The U.S. Trustee will use this list to notify creditors of the filing and solicit interest in serving on an Unsecured Creditors’ Committee.

  • Even if you are not scheduled, get a copy of the list to see if you should be. Debtors’ records are notoriously poor and may not reflect the correct amount owed and proper contact information.

  • If you are eligible, try to serve on the committee.
    • Committee members have an inside view of the case, the time commitment is limited, and there is no out-of-pocket expense.
    • You will have input into the actions the Debtor and decisions that will impact recoveries in the case.


An active market has developed in the trading of bankruptcy claims. You may be contacted by someone interested in purchasing your claim. Case developments can drastically impact the outlook for both the timing and amount of creditor recoveries. Prior to agreeing to a sale, review, or ask your advisors to review, the court docket in order to make an informed decision regarding the sale of your claim.

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For more information, contact Mark Bober, partner and practice leader for BMF's Transaction Advisory Group at 330.255.2425 or by email.  

 

Part One - When It Comes to Troubled Customers, Knowledge is Power

Part Two - Risk Management in a Troubled Economy

Part Four - Preferential Transfer Claims, Adding Insult to Injury

 

 

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