When a Customer Files for Bankruptcy

bankruptcy debt collections

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It’s happened: you’ve received a letter saying that a customer of yours has filed for bankruptcy to resolve their debt problems. While this can be a frustrating situation, don’t waste your time worrying about what may or may not happen. Depending on your customer’s bankruptcy details, acting quickly could result in repayment for a portion or even all the unpaid debt you are owed. The debt collection process in cases of bankruptcy are not as strenuous as many companies seem to think, especially if you know what your options are. This article will explain what happens when someone you’re trying to collect from files for bankruptcy and how to move through the debt collection process.

Before we dive in, it’s important to know the bankruptcy option your customer chose to file. There are three choices:

  • Chapter 11 and 13: These alternatives allows for reorganization, and through a court arranged repayment plan, the debtor pays the debt back. It is common for corporations to use Chapter 11 filings, while Chapter 13 is for individuals and sole proprietors.


  • Chapter 7: This option allows debtors (used by individuals and businesses) to go back to the drawing board as all debts are discharged. Chapter 7 is the most popular type of bankruptcy filing, and makes it tough for your company to collect. This alternative does permit creditor distribution when the debtor’s non-exempt property authorizes it.

Once you receive the bankruptcy filing notices, you’ll learn which course of action your customer has chosen. The notices contain the following information:

  • Date of filing
  • Bankruptcy type
  • Deadline to file a proof of claim
  • Rules on how to collect
  • Court location
  • When and where the first meeting of creditors occurs

The next steps in your company’s debt collection process

Cease all contact

Bankruptcy law requires that you stop all debt collection attempts, and if you do continue, you can get sued. Until the bankruptcy is completed, any lawsuit filed against your customer is stayed. However, you can contact the debtor’s lawyer or the court-appointed trustee. You can also hire a commercial collection agency that has expertise in collecting debt owed by customers that have filed for bankruptcy.

Do a cost-benefit analysis

It is important that you understand your customer’s obligations versus their resources. From there you can determine whether it is useful to attempt to collect the debt they owe or if it makes more sense to take a bad debt deduction on your taxes.

File a proof of claim

It is crucial that you file your proof of claim before the deadline to get repaid.

Sit it on the creditors meeting

The “341” creditors meeting is the gathering at the courthouse where the creditors, a court-appointed trustee, and the debtor meet to discuss the bankruptcy. Your customer will disclose why they are filing and you and other creditors will now have the chance to ask the debtor questions, cite possible objections concerning the repayment arrangements, or claim fraud if you have conclusive proof. You’ll need to wait to find out how the repayment plan will ultimately work. The court-appointed trustee will send you a final version to inspect, and the repayment plan is adopted once 51% or more of the creditors give their approval. The type of debt you’re owed determines where you stand in line for repayment.

While it is never a guarantee that you will get back what you’re owed from a customer, there are a few preventative measures you can take to keep yourself from ending up in circumstances like this. You can urge your customers to pay on time through a discount applied to on-time payments, consistently check for payment irregularities, and/or put together a contract detailing what happens in the event of a late payment.

Hopefully the above steps clarify the debt collection process in the event that a customer files for bankruptcy and you are able to avoid situations like this in the future using our advice.