Business Bankruptcy Issues

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Business Bankruptcy Issues The Financially Troubled Company

Preferences — How To Protect Yourself When Doing Business With A Financially Troubled Customer

It’s bad enough when you can’t collect everything you are owed because of a customer’s financial problems.  We’ve all faced that situation at one time or another.  Unfortunately, the U.S. Bankruptcy Code can add an entirely different wrinkle to the problem called a "preference."  (The word comes from the idea that your successful collection efforts enabled you to get preferred treatment over your customer’s other creditors that didn’t get paid.)  

Without some planning, an unhappy scenario can develop even if you aggressively move to collect the account.  If the customer files for bankruptcy, the customer’s bankruptcy trustee — or even the customer itself — may sue you to recover those payments you were lucky enough to collect, calling them preferences. 

There are defenses and, with some careful planning, you can act to protect yourself.  These range from waiting to ship new goods or provide new services until after you’ve received a payment to putting the customer on C.O.D. or other payment in advance arrangement.  Here are some pointers on minimizing the bankruptcy preference risk. 

Business Bankruptcy Issues Recent Developments

Will The New Bankruptcy Law Affect Your Business?

On October 17, 2005, the most significant revision to U.S. bankruptcy law in a generation took effect.  If you followed the media’s coverage of the new law before it became effective, you could easily have assumed that the changes were aimed only at consumers filing bankruptcy to get rid of credit card debt.  There is no question that the new law, called the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (bankruptcy lawyers just call it BAPCPA), was aimed at, and affects most significantly, individual consumers.  David L. Rosendorf of Kozyak Tropin & Throckmorton, P.A., in conjunction with the American Bankruptcy Institute, maintains an entire blog devoted to the new law’s changes and how it is being implemented.  His blog has a natural focus on those consumer changes.

However, the surprising news is that the new bankruptcy law changes also contained a host of provisions that will affect businesses.  Many bankruptcy lawyers (this one included) think the law will make it more difficult for some businesses to reorganize, which could end up reducing recoveries for unsecured creditors.  That said, other provisions in the new law benefit certain unsecured creditors.  For an overview of how the new law will affect businesses and their creditors, look here or here — and stayed tuned.