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 protected]

Dear Thea:
I recently had a customer file bankruptcy. He told us not to worry because he did not include us in the bankruptcy filings and was going to make a payment to us real soon. I always thought that once someone filed for bankruptcy everything stopped. My sales rep is arguing with me that we will be fine since we weren’t included and that he is asking for us to have preferred status. Is this an option?
Signed, Banking on a Rumor in Rhode Island

Dear Banking,I love rumors. They lead to false hope, unrealistic optimism, and most likely the reason the phrase “ignorance is bliss” was coined. But as a judge frenemy of mine once told me (he told me this more than once along with some other gems I do not appreciate) that “ignorance of the law is no excuse”.

Just because you heard it, don’t make it gospel. Just because you might not be aware of the ins and outs of the “B” word, does not mean they don’t apply to you. Bankruptcy is the gift that keeps giving. Like a rash. Poison ivy to be specific. Itchy, oozy, it spreads and pops up where you least expect it, leaving some nasty scars.

I am doing some assumptions to your question since you did not say what chapter the bankruptcy was or the details. Generically speaking, just because you were “left off” the bankruptcy filing paperwork does not mean you have a free pass to conduct business as usual. If that were the case, many a supplier would be left off those filings so customers could maintain a relationship with at least one supplier, while the rest of the herd got nothing.

Where is your bankrupt customer getting the money to give you the alleged payment? I am assuming that he is talking about making this “phantom payment” on the past due account and not as payment new product. How and why are you the lucky holder of the golden ticket on his BK filing?

Depending on chapter filing and the Trustee involved, you most likely will be identified sooner rather than later. If you take that payment you may find yourself being asked to pay it back to the Trustee who will see that payment in different light then you, and the debtor, do. Talk about insult to serious injury.

The preferred status comment is perplexing and worth a bit of a giggle. It is a complete contradiction from the first comment. If you are not part of something, how can you request having a status, preferred or otherwise, in it? It makes you want to shout “get your poop in a group before you come in here with this story?” Are you or are you not bankrupt? If you are, I am working from the benchmark that we are part of it and all things stop until I have clear details.

Are you chapter 11 debtor in possession? Chapter 13 repayment plan? Straight up liquidating 7? Is there even anything to liquidate (besides what the Trustee is going to try to claw back from me)? What am I working with here?

While preferred or critical vendor status is a real thing and it can get your pre-petition bankruptcy balance paid or at least a higher status in said bankruptcy, it does come at a price. You have to be willing to sell the debtor-in-possession on terms and you have to meet the court criteria (critical has to be proven).

Bankruptcy is an emotional hot button for many credit managers. That notice comes across my desk and I know I will not be collecting that money. I understand why bankruptcy laws exist and the intent behind them. As a credit manager, I get to see the serial filers and the quick trigger pullers who use bankruptcy as a parachute out when the going gets tough. It is rare that we get to work with a company or individual who is genuinely working out of tough situations and is intent on making it right. After all, companies have taken the bankruptcy walk and come out on the other side, Chrysler, Ally Bank, General Motors, the Texas Rangers, and Marvel comics to name a few all filed and managed to put themselves back together.

Follow your credit manager instincts dear Banking. If somethings sounds too good to be true it usually is. As the saying goes, if you buy a diamond ring for ten cents you have a ring that isn’t worth a dime.