What Happens When a Client Files for Bankruptcy?

For business owners who do not receive client payments upfront, receiving a notice that an indebted client has filed for bankruptcy can raise a great deal of questions and concerns, especially since it is usually unexpected. For this reason, guidance from a business attorney who is familiar with the bankruptcy process is key for navigating the situation effectively.

Our West Palm Beach business law firm also specializes in bankruptcy law, which provides our attorneys unique insight into this particular area of concern. Here are some tips for business owners who have recently been informed that a client is seeking bankruptcy relief.

Steps to Take Following the Notice

When a business is threatened by a client who cannot keep up with payments or fails to pay entirely, prompt action is of the utmost importance. However, sometimes a bankruptcy filing will disrupt the process of recovering payment. A business owner’s actions after learning of a client’s bankruptcy filing will ultimately determine how detrimental the event is for their company. As soon as the notice is received, the following steps should be taken:

• Cut communication. Moving forward, any contact with the client should be through the attorney retained by the business to best protect its interests. The attorney will then correspond with the bankruptcy attorney or trustee specifically, to avoid legal action stemming from laws that prevent collection efforts after a bankruptcy filing.

• Get more information. Through an attorney, one will need to learn more about the filing to determine what steps to take next. For instance, it is important to know what chapter the client has filed. If Chapter 7 was filed, there is a chance that the business will be repaid depending on its level of priority in the list of secured and unsecured creditors. The chances of being repaid increase if the client is an individual who filed Chapter 13, as well as with Chapter 11 if the client was another business. However, the time frame for which any repayment will be received may vary.

• Determine whether the loss warrants action. If the amount owed is not worth the time or effort and legal expense required to seek repayment, it may be best to cut one’s losses. A knowledgeable attorney can make recommendations regarding whether or not legal recourse is recommended.

• File a Proof of Claim. This document will ensure the court and trustee are aware of what the business is owed, and is necessary before any repayment can be granted. However, it will need to be filed within the noted deadline in the bankruptcy petition.

• Attend the Meeting of the Creditors. The 341 Meeting of the Creditors is conducted by the trustee, and will lay out the debtor’s plans for repayment. If the business owner elects not to attend this meeting, he or she may miss out on the opportunity to get answers to lingering questions and assert objections.

• Document everything. As with any legal matter, the stronger the paper trail, the more likely the outcome will result in one’s favor. Keeping detailed records is key for proving that a debt is owed, as well as for increasing the business’s chances of achieving repayment.

If you are dealing with a client who has filed for bankruptcy without satisfying his or her debts to your business, consulting a West Palm Beach business law firm with knowledge of bankruptcy law is essential for securing a favorable outcome. To discuss the specifics of your particular case, contact our office today to schedule a consultation.