Credit guru Thea Dudley has spent more than 30 years in LBM credit management. Now she's here to answer your credit and collection questions. Got a question for her mailbag? Contact Thea at email@example.com
I received a bankruptcy notice in the mail today on one of our customers. I just spoke to the account a few days ago and she never mentioned it. What can I do? What options do I have?
Signed, Lacking Understanding in North Carolina
Well that wasn't very neighborly of them, was it? Nothing chaps me more then having a conversation with a customer and then getting a "surprise gift" in the mail. Why couldn't they have just mentioned it in our conversation? You know--something like, "Hey BTW, we filed bankruptcy a few days ago, just wanted you to know." I still would have hated it, but at least they would have shown enough respect to tell me. Instead, what you got is the equivalent of a sticky note saying "It's over, and you got stuck with the bill."
Bankruptcy abso-freaking-lutley stinks. But that's enough complaining; let's move toward the answers.
You didn't mention a few details. Was the bankruptcy filed under chapter 7, 11, or 13 of the federal bankruptcy laws? Is it a prepackaged bankruptcy? Was the customer past due with you or current? Were you still selling them at the time they filed? When was the last time you got a payment? All these questions and many more come into play.
Over the years I have become quite a connoisseur of the chapters, having been exposed to the pleasures of new "learning opportunities" that frankly, I wasn't looking for on this subject. But I live in the real world of credit so I can just kiss that fantasy good bye.
There are a lot of ever-moving parts to bankruptcy, regardless of the chapter. Everything about it sounds like you have landed in another country. Reclamation, 503(b)9 claim, automatic stay, preferred vendor, secured, unsecured, proof of claim, unsecured creditor committee blah, blah, blah. A foreign country with its own language.
That said, you do have some options. None of them you will like much, but you do have things you can do to increase your chances of recouping as much money as possible. I want to be clear: The chances of you being made whole on the amount you got stuck for is about the same chances you have of seeing Bigfoot. There have been sightings and there are urban legends, but no one actually has seen the fat check for payment in full come through.
For many years, when that notice came through the mad scramble would be on to figure out what steps to take. That doesn't even count when we would get a preference claim notice months later and I would have to rip off the scab that has just begun to heal and figure out how to keep the money I did get out of the deadbeat before they inflicted that wound.
Step 1: Freeze the Account
Frst thing, look up the account and make sure it is on hard hold. Stop any shipments you may have in transit. Inform all the appropriate people--sales rep, counter people, anyone who needs to be aware.
Know too that once you receive the bankruptcy notice, the Automatic Stay comes into play and stops any and all collection action. You may not call for payment or continue pursuing any legal means to achieve payment.
Step 2: Look for Details in the Notice
The notice should list the date the customer filed for bankruptcy, which chapter was used, and who the Trustee is. If the notice doesn't answer all your questions (and it won't) I recommend you jump on PACER--Public Access Court Electronic Reporting--and look up the case. (Note: You will need to set up an account and pay for filings that you download. The price is relatively low--15 cents a page for the first five pages downloaded, for instance.)
Chances are high that you are behind on all that has transpired. I like to see the actual schedule filings. This allows you to see how much they owe vs. assets, who they owe and how much, how many secured creditors there are ahead of you. I want to know details so I know what I am up against.
I am also following the notices. What is the proof of claim deadline? Is there an opportunity to be on the unsecured creditors committee? When and who do I petition to get on that? Don't overlook the opportunity to be on that committee. Regardless of the size of your debt, the trustee is looking for diversity of debt so all unsecured creditors are represented, not just the very large. Of course, the larger the debt owed to you, the higher your chances are of getting on the creditors committee. What a great benefit! (Yes, that was sarcasm.) You learn a lot on these committees, and it gives you an inside look at what is going on.
Step 3: Write a List
Once you have flagged the account and taken the preliminary steps, make a bankruptcy checklist. This will enable you to go through all options without having to go by memory. Some things you should include on you summary checklist include:
- Account name and number
- Amount of debt at time of notice
- Bankruptcy chapter
- Is this a personal or business bankruptcy? (If it's a business bankruptcy, you still can sue them personally.)
- Date of filing, what state filed in and case number
- Confirm that account has been moved to "No Sales Allowed" status
- Confirm sales has been notified
- Confirm no ships are in transit or orders in progress
- Do you have a personal guarantee? Did the guarantor file as well?
- Do you have any other security
- If it's a restructuring (i.e., a chapter 11 bankruptcy) is it beneficial to request preferred vendor status?
- If prepackaged how do you fit in?
- If it's a chapter 11 bankruptcy and debtor-in-possession rules apply, we will be setting up an account?
- Are we pursuing becoming a member of the unsecured creditors committee ?
- Pull files from PACER; print and review schedules
- Pursue guarantors if applicable
- Pursue security if applicable
- Reclamation--Can you pick up products received by debtor within 45 days before filing bankruptcy? Will the debtor allow it?
- 503(b)9 claim (administrative priority claim for goods received by debtor within 20 days prior to filing that we did not reclaim): What is the amount available?
- Unsecured proof of claim--when does it need to be filed by?
- Secured proof of claim--do we have one? If so, what is the filing date?
- Collect relevant data
- Copies of all invoices for 90 days prior to and including filing date
- Copies of proof of delivery for above invoice copies
- Copies of all payments for 90 days prior to and including file date (this will allow you to determine receipt and clear dates in the event of a preference claim)
I know the list is long and may seem obsessive, but it will save you time and stress in the long run. You can add or delete from the list as you use it but this gives you a starting point.
The amount of effort you have to put in really depends on which chapter of the bankruptcy law is cited and what details are involved. A chapter 7 No-Asset filing takes a ton less work then a chapter 11 debtor-in-procession restructuring with preference claims.
Spend some time getting familiar with the terminology of nobody's favorite game of bankruptcy. Sooner or later, you will find yourself playing, whether you want to or not. So adopt a preparedness motto: in bankruptcy, more data is better.