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FEATURE STORY

When Clients File Bankruptcy

 When President Bush signed the new Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) into law in April 2005, sweeping changes made it far more difficult for debtors to wipe out their debt. Once haunted by little or no chance of regaining debt payments from customers, the new law may make small business creditors a little happier.

Chapter 7 vs Chapter 13

Previously, debtors filing under Chapter 7 bankruptcy protection were able to erase almost their entire debt and come out of the process with a clean slate. That made Chapter 7 filing an attractive option when the business venture failed. With the new laws, a majority of small business filers are obliged to file bankruptcy under Chapter 13, also called the wage earner’s plan which requires the debtor to repay a portion of their debt. It requires individuals with regular income to propose a repayment plan (via installments like electronic monthly payments) to repay all or part of their debts over three to five years. This requirement applies to those debtors who have an income level higher than the median income in their state. A means test will be used to determine the amount the debtor will be able to repay.

Filing the petition under chapter 13 "automatically stays" (stops) most collection actions against the debtor or the debtor's property. Filing the petition does not, however, stay certain types of actions listed under the bankruptcy laws and the stay may be effective only for a short time in some situations. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even make telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.

Protecting Your Business - What You Can Do

• Run credit checks on anyone to whom you are extending credit;
• Minimize the amount of time you allow business clients to pay you for goods and services;
• Get some advance payment whenever possible for large orders, and
• Don't be afraid to take legal action against a debtor when other options have been exhausted.

Often times there are no warning signs that a good customer is heading south financially, but sometimes there are a few things that in hindsight would have made you think twice. Look for these red flags and protect yourself and your business.

Be on guard for large orders from customers.

You’ve probably heard the stories before. A seemingly good customer finds itself in dire financial straits ‘loads up’ on goods or services knowing full well that they are going to file for bankruptcy. This ‘last hurrah’ is sometimes done in the hopes that the bankruptcy case will force the vendors to accept pennies on the dollar for the goods or services provided. One way to protect against this type of "load-up order" is to be very cautious about delivering large orders or providing large amounts of services to financially suspicious customers. That means, taking the time to obtain advance deposits, full payment on delivery, or some other financial guarantee to reduce your business’ risk.

Look out for large orders from new customers.

Be wary of a new customer who quickly places a large order. Take the time to check their financial situation before you deliver the order or risk being left with a big bill that the new customer never pays after they file bankruptcy. Protect yourself by always taking deposits, especially for large orders where you hold the greatest amount of risk, space your deliveries between payments, or take orders as cash on delivery (COD).

Watch out for ‘preference payments’

It may seem crazy, but t he preference law allows the bankrupt company in many instances to take back any moneys paid to your company within 90 days of the date of the filing of their bankruptcy case.

It works like this: You have an extremely slow-paying client who is running 180 days behind. Out of options, you finally notify the client that you’re halting delivery on orders until a good faith payment is made to bring the account current. The client promptly delivers a $10,000 check and you resume business as usual. Suddenly, seemingly out of nowhere,75 days later the client files for bankruptcy protection and a letter arrives demanding the $10,000 payment back as ‘preference’. Can this be legal? Why, yes it can.

Two ways to defend against ‘preference claw back’

• The BAPCPA now allows that businesses defending against a preference claim of less than $10,000 to file in the city where the business resides and not where the debtor is located. That means that previously high costs of defending a claim in a far away state can be reduced.
• Creditors are also benefitted by BAPCPA by eliminating the need to prove that the alleged preference payment was made in accord with "industry standards." Rather, the business will merely need to prove that the payment(s) were made in "the ordinary course of business" between the business and the bankrupt company.

Recapturing shipped goods

With the new laws, it is also easier for small businesses to retrieve shipped goods after a bankruptcy has been filed. It’s one of those nightmares that can keep a small business owner lying awake nights in a cold sweat. You deliver a large order in good faith only to discover shortly after delivery that the client has just filed bankruptcy. With the new law, your company will have 45 days to make a written reclamation demand. If you are unable to send your reclamation demand during that time frame, you may still be eligible to receive an administrative expense claim for the value of the goods received by the bankrupt company. This must be filed within 20 days prior to the business filing for bankruptcy if the goods were sold in the ‘ordinary course of business’.

Landlord’s Rights

If you’re a commercial landlord, you’ve often been one of the most abused victims of the previous bankruptcy laws. By law, a tenant filing bankruptcy had 60 days from the date of filing to make a decision about maintaining or terminating his lease. That doesn’t seem bad, but adding insult to injury, bankruptcy courts have been notoriously lenient allowing two and three extensions to the debtor, leaving the landlord without payment for months or even years and worse yet, unable to evict the tenant. Under the new laws, the bankrupt tenant has a limited timeframe of 90-days to either maintain or terminate the lease and the landlord also has additional rights should the eviction process be started prior to bankruptcy filing. The landlord must also approve any extensions to the agreement.

The new BAPCPA provides much needed safeties for business owners impacted by a client’s bankruptcy and the good news is that as a business owner, you do have rights in the process. If a client does file, take a deep breath, gather your documentation and talk with your financial and legal advisors to determine your next steps. Often bankruptcy doesn’t mean the end of your client relationships (most business people operate on good faith and will make every attempt to repay their debts). See if they have a plan for restructuring their business and how your accounts may be included in that plan. To learn more, talk with a Fiducial Advisor by calling 866-FICUCIAL or visit the web site at www.Fiducial.com.