Protecting Your Business Against Bankrupt Customers

Any of your customers or clients could file for protection in a Chapter 7 bankruptcy case.
When this happens, you’ll want to be a secured creditor, so that you’ll be assured payment
eventually.

by Vicki Gerson NFIB.com

"In the event that you are a secured creditor, you have the right to ask the debtor to sign an
agreement agreeing to pay the remaining balance on the debt. This is called a reaffirmation
agreement," says Lois Kulinsky of Lois Kulinsky & Associates, LTD. "The bankruptcy court
usually will approve the agreement."

For example, if an individual takes out a loan to buy an automobile, the loan company is
considered a secured creditor. The security for the loan is the automobile. If the debtor
doesn’t sign a reaffirmation agreement, then he or she must give up the automobile to the
loan company as the secured creditor. If the debtor signs the agreement and the court
approves it, then he or she keeps the vehicle and pays the remaining debt.

If you are an unsecured creditor, however, the debt will be discharged and you will receive
nothing. "Therefore, it’s very important that you have a proper contract drafted for any large
purchases that a person wishes to make from you. Your contracts should indicate that you
are a secured creditor," Kulinsky says.

When a debtor files for bankruptcy, there is an immediate stay placed against all creditors.
This means whether you are a secured or unsecured creditor, you may not contact the
debtor directly, by telephone, mail, email or otherwise. "Any attempt to contact the debtor
directly will be considered a violation of the automatic bankruptcy stay, and you can be
sanctioned by the bankruptcy court," Kulinsky explains.

You will receive a notice of the filing of the bankruptcy case, meeting of creditors and
deadlines. This notice is mailed to you from the bankruptcy court and will list the debtor’s
name, address and telephone number; the attorney for the debtor; and the bankruptcy
trustee’s name, address and phone number.

The bankruptcy trustee is the representative of the bankruptcy court. Your contact should be
with no one other than the attorney for the debtor or the bankruptcy trustee. The notice will
set a meeting of creditors at a specific date and time. You are welcome to attend the
creditors’ meeting.

If you are listed as a secured or unsecured creditor, the notice from the bankruptcy court will
advise you as to whether to file a proof of claim indicating what is owed to you. "Don’t file a
proof of claim unless you receive an additional notification from the bankruptcy trustee or
bankruptcy court," states Kulinsky. "If you are notified that a proof of claim should be filed,
contact your attorney immediately. If you don’t do so, you’ll miss the deadline and will be
barred from filing a claim."

After a claim is filed, the bankruptcy trustee via the bankruptcy court will determine how
much in assets is available to be divided among the various creditors. Creditors are
prioritized in the bankruptcy. Secured creditors are paid before unsecured creditors are paid
in a Chapter 7 proceeding.

Although you may not receive all of your claim, you may receive a pro rata amount based
upon what is available in the bankruptcy court for distribution. Therefore, the deadline to file a
claim must be heeded.

If you believe that the creditor has defrauded you in some way by misrepresenting facts to
you, you may wish to consult an attorney to determine if the monies owed to you are
dischargeable or whether you can file an adversary complaint objecting to the discharge of
the debtor. The facts and circumstances of your particular situation will be crucial.

The notice that you receive from the bankruptcy court will give you a deadline for filing a
complaint objecting to the discharge of the debtor. This is also an important deadline.
Consult your attorney if you think this applies to you.

In today’s soft economy, it is important to be watchful of your accounts. Try to keep your
customers’ debts as low as possible and insist on shorter payment cycles for goods or
services. That way, you’ve already taken steps to protect yourself against Chapter 7 filings.

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