It happens to us all, you watch the A/R (accounts receivable) from a historically good account go past 30 days, sail past 60 days and pretty soon it’s 90 days past due and altogether questionable to ever be collected. Or worse, you get the notice that the customer has entered Chapter 11 bankruptcy. Once your blood pressure returns to Earth, we recommend you evaluate what type of claim you actually have, what does it mean, and what can you do to alter the expected result. It’s about protecting yourself and your company.
Unless you are an employee, a taxing authority, an ex-spouse or a lender, it is more than likely you are holding what will be a general, unsecured claim against your account debtor (your customer or client), should the debtor enter bankruptcy.
To better position your ability to be paid if a bankruptcy is filed, the following options are available:
1. Demand Security from the Debtor. This rarely used technique is likely the best protection. As a secured creditor (particularly with a properly perfected interest in the goods you sold), you move to the front of the line.
2. Payment Plan. Negotiate a payment plan with your client/account debtor to catch up past due amounts. Watch each payment closely with an eye toward a 90-day clock, after which the payment is likely protected from a dreaded avoidance action. To the extent payments are trapped in the 90-day preference window, any Bankruptcy practitioner will advise it is better to have a sizable potential preference than a big claim. Control of the money is always key.
3. COD/CIA. Finally, consider moving the account to COD or CIA. This is an easy step and will require your customer to have credit. But if they are more than 90 days late, provide credit at your own risk.
These are just a few of the techniques and options available to creditors when payments start to get behind.