When a Customer Files For Bankruptcy – Part 2

After reading my last article, you might wonder: what about the money owed for goods you sold more than 20 days before the bankruptcy filing? There still may be hope.

First, ask yourself:

• Did the customer receive the goods within 45 days before the bankruptcy? And,

• Did you sell the goods in the ordinary course of your business?

If you answer “yes” to these questions, you should make a written demand for “reclamation” (literally, you are demanding that the goods be returned). If you make this demand soon enough, and if another creditor does not already have a security interest in the goods, you may be entitled to payment for the goods before other, “unsecured” creditors receive anything.

Here is a possible scenario:
On each of June 1, June 21, July 1, and July 11, you sell, on credit, a box of parts to a manufacturer. Each box is worth $10,000. On July 21, you are owed $40,000, and the manufacturer files for bankruptcy.

Provided that you meet the necessary deadlines and substantiate the claim, you may seek payment of $20,000 (the value of the goods sold within 20 days before the bankruptcy filing) ahead of other, “unsecured” creditors.

You may make written demand for “reclamation” of the goods sold within 45 days before the bankruptcy filing, which consists of goods worth $30,000 (but if you recover $20,000 based on the above, this demand cannot recover more than the remaining $10,000).

And, what about the money owed for the goods you sold on June 1st? Unfortunately, you might have to wait with the rest of the “unsecured” creditors for this money. Actually, you could do better than that, but that is a topic for another article….

When a Customer Files For Bankruptcy – Part 1

If a customer files for bankruptcy, will you recover only pennies on the dollar, or, can you collect the full amount owed?  This question weighs on the minds of vendors and services providers when they receive that fateful notice, typically from the bankruptcy court, that a customer has filed for bankruptcy.  Now, let’s try to answer it.  First, ask yourself:

•    did you sell “goods” (rather than only services)?  And,

•    did the customer buy the goods from you in the ordinary course of the customer’s business?  And,

•    did the customer receive the goods within 20 days before the bankruptcy filing?

If you answer “yes” to these questions, and if you have not missed the deadline to file a proof of claim, you may be entitled to recover the entire value of the goods you sold.  If there is not enough money to pay your claim, you at least may be paid before other, “general unsecured” creditors.

The next time you receive a bankruptcy notice for a customer, just remember: you may be able to recover some or all of your claim.