Much of the corn that Ethan Awl raises is sold to Beau Plymouth for Beau’s company Plymouth’s Pride to feed its turkeys. Ethan’s payment terms are net 30 days. As the economy worsened and alternative fuels gobbled up corn supplies dramatically increasing feed costs, Plymouth’s formerly prompt payments from Beau are well beyond 30 days and are nearing 60 days before payment is received. Before Ethan Awl cries foul, Plymouth advises that he filed for bankruptcy protection. What should Ethan do?
First, stop all contact with Plymouth’s business immediately. Once a person or business files for bankruptcy any collection activity, from demand letters to litigation, must stop; otherwise, Awl risks sanctions from the bankruptcy court. Next determine whether the business bankruptcy filed by Plymouth’s Pride contemplates liquidation (Chapter 7) or a reorganization (Chapter 11) that might allow Plymouth to continue in business. In either case Awl can expect Plymouth to file schedules of its assets and liabilities and give certain notices to its creditors. Reviewing Plymouth’s bankruptcy schedules and attending the mandatory “341” Creditors Meeting can provide Ethan valuable information to assess whether it is even worth his time to attempt to collect the receivable or simply to take the loss. In any event, check the bankruptcy notice for the deadline to file a claim with the bankruptcy court. Failing to file a “proof of claim” will almost certainly eliminate any chance of payment from Plymouth.
Bankruptcy issues for businesses are not yet behind us. Even though business bankruptcies seem to have peaked in 2009 with 60,837 filings, non-business filings in calendar year 2010 were up 9 percent to 1,536,799.
Tilting the Scales in Your Favor. If you want to maximize collection of your receivables in an uncertain economy, at a minimum consider –
- Get Paid Early to Avoid Danger. At least get paid on time. Payments regularly made by Plymouth within 30 days that were later extended to 45 days and beyond are more than a cause for casual concern. Plymouth payments received by Ethan in the 90 days before Plymouth filed for bankruptcy may be “preferential payments.” The bankruptcy court trustee may demand that such payments be repaid to the court for the benefit of all creditors creating a lawsuit requiring you to participate just to keep the money you were paid.
- Credit Check. Perform a credit check on your customer. Background checks and credit checks should be a routine step in opening an account with a new customer. If payments become later or other behavioral changes are noted, a follow up credit and background check may be in order.
- Protect Your Business Upfront. Depending upon the nature of your business (construction and manufacturing, for example), you may be able to negotiate or file a security agreement in the goods that you are delivering or the services you provide. Also consider getting a deposit, collateral or, preferably, a personal guarantee – certainly for a new business.