It can be frustrating when a customer doesn’t pay what they owe you. It’s likely they are having financial troubles. In some cases, the customer may have filed for bankruptcy. It is important to understand the rules surrounding bankruptcy. Once you know them, you can make your best attempt to recover on the money that is owed to you, while avoiding running afoul of the rules that protect people who have filed for bankruptcy.

It is possible to sue individuals for money they owe you, but business owners often do not attempt this, or may not even attempt to recover the money at all. This is because business owners often assume that the costs and challenges of getting their money from a customer who is in financial straits would not be worthwhile. There may be another path to getting the money you are owed if the customer files for bankruptcy. Below are some steps to follow for business owners trying to recover money from bankrupt customers.

What are the Steps for Pursuing a Bankrupt Customer?

It’s important to comply with rules that are in place for protection of debtors as they go through the bankruptcy process. Here are some steps to follow as you attempt to recover payments you are owed from customers who have filed for bankruptcy?

  1. Comply with the Automatic Stay: When someone files for bankruptcy, their creditors are notified of this. This puts an “automatic stay” in place, which prevents creditors from trying to collect from the customer/debtor while they are in the bankruptcy process. This includes any collection agencies a business owner might send their debts to for collection.
  2. Review the Customer’s Bankruptcy Notice and Papers: The information filed with the court by the individual declaring bankruptcy should give an idea of whether a business owner is likely to be able to collect what they are owed. This includes how much of the individual’s property will be protected by the bankruptcy, and how much will be available to pay creditors. It should also include a list of creditors, and their status among the creditors (secured claims, such as mortgages, rank higher). Creditors collect in order of their status until there is no money left to pay them.
  3. Meet with the Customer at the Meeting of Creditors: This meeting, also called a “341” meeting, is held to allow creditors to question the debtor regarding their assets and debts. Although creditors don’t often show up to these meetings, they can be used to get an idea of how capable your customer/debtor really is of paying what they owe you.
  4. Determine Whether it’s Worthwhile for You to Continue Pursuing the Matter: After reviewing the customer/debtor’s information and attending the meeting of creditors, do you feel you have a good chance of recovery?
  5. File a Proof of Claim: If you file your claim with the court, you become part of the proceedings. You will need to provide proof as to what the customer/debtor owes you.
  6. Attend the Customer’s Bankruptcy Hearing: Follow up on your claim by attending the bankruptcy proceedings to see what the outcome is.

Also, be sure to follow through with any extra court proceedings that apply. Once you have followed the steps, you must allow the bankruptcy to proceed and leave the customer alone.

What are the Penalties for Failing to Comply with Bankruptcy Rules?

A creditor who attempts to harass a customer/debtor in violation of the automatic stay can face penalties. The debtor may report the attempt at collection to the court, which may hold the creditor in contempt, and assess financial penalties.

A creditor may also be sued by the debtor for violation of the automatic stay. Ultimately, there can be severe penalties that will be administered if the creditor violates the automatic stay. Depending on the circumstances, violating it can include harassing phone calls, repossessing items (against the court’s direction), and sending demand letters to their home.

Does the Type of Bankruptcy Filed Matter?

Yes. Chapter 11 bankruptcies, used mostly by corporations, and Chapter 13 bankruptcies, used mostly by individuals (or solo business owners), involve repayment plans where the debtor agrees to repay their creditors according to the plan. If your customer/debtor files a Chapter 13 or 11, you can ask to be included in the repayment plan.

If you customer/debtor files a Chapter 7 bankruptcy, as the majority of individuals do, their goal is to get rid of as much debt as possible. Creditors who are farther down the rankings ladder are less likely to recover any money.

How Likely Will a Creditor Be Able to Collect from a Bankrupt Customer?

This depends not only on the type of bankruptcy filed, but on your involvement in the proceedings. A creditor who follows all the steps mentioned above is more likely to recover some of the money they are owed than a creditor who skips the creditors’ hearing and bankruptcy hearing and does not stay aware of the proceedings.

Should I Consult an Attorney If I Need to Collect a Debt from Bankrupt Customers?

Please consult a bankruptcy lawyer to help you go through the collections process. Additionally, the lawyer will help you assess the case to do a cost-benefit analysis of pursuing the customer.