Business insolvency is on the rise, enhancing the threat that some of your current clients could declare bankruptcy this year. In fact, in 2020, business failures are set to rise for the fourth consecutive year.
Under Chapter 11 bankruptcy, a company can reorganize and create a plan to repay creditors over time. The company can continue to operate, but financial decisions (like paying off creditors) must be approved by a bankruptcy court. That means that your cash flow can be seriously impacted: that client’s past-due invoices may eventually be paid, may eventually be paid but not paid-in-full, or may never be paid. Trade credit insurance can help you avert that cash-flow problem.
In a Chapter 11 bankruptcy, the company that has filed Chapter 11 is allowed to continue to operate under the supervision of the bankruptcy court and pursuant to an approved plan of reorganization. Unless you have a contract with the client that states otherwise, you can still choose to do business with a company in Chapter 11 bankruptcy.
Conducting Business Post Filing
You may be wondering,”if a client files for Chapter 11, will I get paid?” Once a company files for Chapter 11 bankruptcy, it may still continue to operate in the ordinary course of business. That means, it can still purchase essential goods or services necessary for the business to run. These purchases (made after Chapter 11 has been filed) typically get administrative claim status and the company must pay for them even though debts accumulated prior to the Chapter 11 filing are held until the restructuring plan or liquidation plan are confirmed and the bankruptcy court approves payment.
Before you conduct business transactions with a company in Chapter 11, you should first be sure a transaction will receive administrative claim status. Seek approval for the transaction from the bankruptcy court or the trustee. If you choose to do new business with a client in Chapter 11, you should consider certain protections, such as:
- shortening trade credit terms;
- requiring cash on delivery; and
- requiring a deposit or letter of credit before delivery.