Getting paid when your customer goes bankrupt
Wednesday, September 10, 2014
Every company has concerns that a customer will file for bankruptcy protection with open receivables, leaving the company high and dry. The dread of receiving a bankruptcy notification is hard to understate. Not only is the form itself dreadful and complicated to manage, but so too is the fear that the account will eventually get written off.
Here is a guide to getting paid in the face of a bankruptcy.
Part I: Getting money from a bankrupted party
There isn't much great advice in this section of the article. In fact, you've probably already heard all the advice you need in this area.
First, make sure you get your proof of claim into the bankruptcy proceeding on time. If you don't file your proof of claim, your debt is going to be discharged completely and not contemplated in any proceeds distribution. It is bad, bad business to not send in a proof of claim, even if you think the prospect of recovery is hopeless.
Second, stay current with the proceedings as much as is practical. The bigger your account, the more attention you'll want to pay to the proceeding. If the account is large enough, it may justify hiring an attorney to work the claim. Attorneys can aggressively establish preferred positioning and find money where it may otherwise look impossible.
In large part, however, you want to be in a position where you can leverage other nonbankrupt parties, which is explored in the next section.
Part II: Circumventing the bankrupt party
Those in the construction industry have an effective weapon to use against bankruptcy situations: mechanics liens and bond claims. Many folks don't realize that a mechanics lien or bond claim frequently enables them to circumvent a bankruptcy filing entirely.
Take, for example, a supplier of electrical materials who contracts with an electrical contractor. If the electrical contractor files for bankruptcy protection while owing the supplier money, the supplier — through a mechanics lien or bond claim — can seek payment directly from the property owner, construction lender and/or general contractor on the project(s) where supplies were installed.
This is an enormously fortunate position to be in. Instead of the supplier having to slug around in the bankruptcy, the property owner or general contractor will be regulated to the bankruptcy proceeding to get reimbursed. The supplier's lien enables it to collect directly from the money source and not deal with the bankruptcy at all.
Having a customer go bankrupt is a dreaded situation. However, those in the construction industry have the opportunity to insulate themselves from the risk by protecting and utilizing their security rights.
Taking actions to preserve their mechanics lien and bond claim rights, and then executing on the same when necessary, will enable companies to avoid losses and write offs when a customer goes bankrupt.
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