What are the risks if a customer declares bankruptcy

One of the things I emphasize to my coaching clients with regard to time management is to keep up on your invoicing and collections. Nothing hits home more quickly about this than having a customer declare bankruptcy. My business coaching client and I were working on time management improvements when he called me in a panic. "DBA Corp (fictitious name) just told they are filing for bankruptcy on advice of their attorney, but they want me to continue doing their IT work. What do I do?" he said as soon as I said hello. He didn't want the client to lose his databases or his servers, but at the same time he wasn't clear that he would be paid for his work. Having seen this situation before, I tried to calm my client and talk about the facts. He had every right to worry about being paid for his work, both past and future, so we needed to get the facts clear. Now, I am not a lawyer, and don't want to be misconstrued as providing any type of legal advice, but the laws are quite clear about the basics. The first fact was that any contracts my client had with the bankrupt business were basically gone.

My client was dealing with a corporation, so the first question had to be what type of bankruptcy was being declared. If it is dissolution (Chapter 7) then the business has told the court it intends to shut its doors, so "future work" would only apply if it is required to protect the value of the assets that are to be sold/distributed to the creditors. Maintaining the servers and databases would likely be something required for a time period, but how can my client be paid for services? If the bankruptcy is reorganization (Chapter 11) then the business intends to restructure and try to continue, but there is no guarantee it will survive. The key to dealing with either of these situations is to know your rights and your risks.

There are numerous articles on the subject available (e.g. https://www.inc.com/guides/2010/11/11-things-to-do-when-a-client-files-bankruptcy.html, http://www.companybug.com/what-happens-when-your-client-goes-bust/ ), but the most important first step is to find out who has been appointed by the court to be the CRO (Chief Restructuring Officer) if the business is to continue, or the Receiver if there is no CRO. These are the new points of contact, as everything is now controlled by bankruptcy laws, and pretty much everything needs court approval. Key to my client's question was the fact that the point at which bankruptcy was filed is a divider of his world: bills for work performed before the filing would be treated like any other creditor; bills for work after that point would only be paid if the court approved the work as necessary to the restructuring. Your point of contact with the business was now going to be the CRO or the Receiver. Thus my client's life was going to be complicated and he risked getting only pennies on the dollar for the earlier work.

My reason for writing about this is that it happens all the time, and it is a good reminder to keep up on your invoices and collections regularly, because that "good client" who is behind on his bills might very well have your bills wiped clean if they declare bankruptcy.


I’d love to hear from you! If you have a question or comment please share it with me below and I will be in touch with you very shortly:

(* indicates required fields)