10 tips to protect your business when a client files for bankruptcy

When operating your business one of the most challenging scenarios you can face is when one of your key customers or clients files for bankruptcy, especially in the instance where you are left with outstanding bills. But is there anything you can do to protect your business from severe losses?

Determining your first steps in a crisis like this is vital, that's why it's best to have a plan or checklist ready just in case. Although each situation will be unique and have a different set of circumstances, a checklist is a great starting point to consult should the situation arise.

If you feel overwhelmed at the thought of dealing with the crisis there are several professionals such as financial counselors, registered trustees, accountants, lawyers or community advice centres that can act as a great reference throughout the process.

However, if you feel confident handling the situation on your own, here are 10 initial measures to help protect you from potential loss. 

  1. Contact the carrier and ensure that all goods in transit are returned to your office.
  2. Zero your credit limit. It's best to take this precaution until the dust settles and the debtor has received authorisation to use cash collateral.
  3. In cases involving liquidation you may have to defend your business in a potential preference claim. If you do happen to receive a claim consult a legal advisor and learn about your rights and options before making a payment.
  4. Consult the debtor and request a statement showing the invoices and balances that are due to your company as of the filing date. Once the debtor provides that information begin to gather documentation to support your claim for payment as quickly as possible.
  5. Avoid taking the debtor to court. If a dispute is to arise over the amount of a claim try to negotiate first. Chances are the debtor would rather settle the dispute outside of court, especially in the instance you can document your claim. 
  6. Make sure you send the proof of claim before the established deadline. It's best to deliver the documentation personally or via registered mail to ensure it arrives at its location. If you are using registered mail be sure to file the return receipt in a secure location just in case any issues arise. 
  7. It's possible for your claim to be rejected due to a mistake that's either recognised by yourself or the debtor. In this instance amend the claim and resubmit it with the error corrected.
  8. File a claim regardless of the amount owing. Even if you are only owed a small amount it's still better to receive what you can rather than fronting the burden of the loss out of your own pocket.
  9. Seriously consider joining the official unsecured creditors committee if consulted with the opportunity during the process. Being a member of the committee will give you a good degree of influence over the activities of the debtor.
  10. Revisit all documentation and communication between you and your debtor. It may take hours of reading before you uncover something of interest, but it's better to be over prepared rather than have no preparation at all.

Want to know more? Click here to learn more about bankruptcy.

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