The call, the email, or the court notice arrives without warning: a customer who owes you money has filed for bankruptcy. In the next several days and weeks, the decisions you make will determine how much you recover — and mistakes made early in the process are often impossible to correct later. This page explains what to do immediately, what rights you have as a creditor, and how to protect your interests in a customer’s bankruptcy proceeding.
Stop Collection Activity Immediately
The most important thing to understand in the first hour after learning of a customer’s bankruptcy filing is the automatic stay. The moment a bankruptcy petition is filed, the automatic stay goes into effect and prohibits virtually all collection activity against the debtor. This means no phone calls demanding payment, no letters, no lawsuits, no setoffs against amounts you owe the debtor, and no repossession of goods. Violating the automatic stay — even inadvertently — can result in sanctions, contempt findings, and liability for the debtor’s attorneys’ fees. If you have collection activity underway, it needs to stop immediately.
Identify What Type of Bankruptcy Was Filed
Not all bankruptcies are the same. A Chapter 7 filing means the business is liquidating — operations will cease, a trustee will be appointed to sell assets, and you will receive a pro-rata share of whatever is left after secured creditors and administrative expenses are paid, which for unsecured trade creditors is often very little. A Chapter 11 filing means the business intends to reorganize and continue operating. That is better news for ongoing relationships but creates its own complexities, including the question of whether to continue doing business with the debtor and on what terms. Subchapter V of Chapter 11, used by smaller businesses, moves faster and has a different plan confirmation process than traditional Chapter 11.
File a Proof of Claim Before the Deadline
To participate in any distribution from the bankruptcy estate, you must file a proof of claim — a formal document stating what the debtor owes you and the basis for that debt. In most cases, a proof of claim form is straightforward, but the deadline to file is strictly enforced. Missing the bar date — the court-set deadline for filing proofs of claim — typically means you lose the right to any recovery, no matter how much money you are owed. As soon as you learn of a customer’s bankruptcy, find out the bar date and calendar it as an immediate priority.
Understand Your Position as a Creditor
Whether you are a secured creditor or an unsecured creditor determines almost everything about your recovery prospects. Secured creditors — those with a lien on specific collateral — have priority over unsecured creditors with respect to that collateral. If you extended credit without taking a security interest in the debtor’s assets, you are almost certainly an unsecured creditor, which means you stand in line behind secured lenders, administrative expense claimants, and various priority unsecured creditors before you receive anything. In many Chapter 11 cases and most Chapter 7 cases, general unsecured creditors receive cents on the dollar, or nothing at all.
Watch for Preference Demands
One of the most unpleasant surprises in a customer’s bankruptcy is receiving a demand to return money the customer already paid you. These preference actions allow the bankruptcy trustee or debtor-in-possession to recover payments made to creditors within ninety days before the bankruptcy filing — on the theory that those payments gave you an unfair advantage over other creditors. The ordinary course of business defense and the new value defense can eliminate or reduce preference exposure, but you need to act strategically when you receive a preference demand rather than simply paying it to make it go away.
Decide Whether to Continue the Business Relationship
In a Chapter 11 case, the debtor continues to operate and may want to continue doing business with you on credit. This is a decision that requires careful thought. Post-petition obligations — amounts owed to you for goods and services provided after the bankruptcy filing — are treated as administrative expenses and have priority over pre-petition unsecured claims. Continuing to supply goods or services can therefore improve your position for new receivables, but it does nothing to recover what you were owed before the filing. You are not legally required to continue extending credit to a bankrupt debtor, and demanding cash in advance for new orders is a common and legally permissible response.
Getting Legal Help
For small amounts owed by a bankrupt customer, the cost of hiring a bankruptcy attorney may exceed what you can realistically recover. But for significant receivables, legal representation in the bankruptcy proceeding — including participation in the unsecured creditors’ committee if one is formed — can meaningfully improve your outcome. An attorney familiar with bankruptcy law can help you evaluate whether you have reclamation rights to undelivered goods, identify any preference defenses available to you, assess whether the debtor’s reorganization plan is fair to your class of creditors, and determine whether to accept or object to the plan.