Business Bankruptcy Fast Facts

Here are a few interesting facts about business bankruptcies:

• There are approximately 40,000 business bankruptcies filed each year in the United States.
• Contrary to popular misconception, a bankruptcy filing by a customer is not an indication that the credit department made a mistake in extending credit to that company.
• An automatic stay protects companies that file for bankruptcy. The automatic stay stops any lawsuit filed against the debtor as well as all actions against the debtor by a creditor, a collection agency or a government entity. Violation of the automatic stay may result in fines and other sanctions.
• Contrary to popular myth, there is no guarantee that a creditor selling on open account terms to a debtor in possession in a Chapter 11 bankruptcy will be paid in full. The "administrative priority" that post petition creditors receive as an inducement to extend credit to the DIP is, to some extent, illusory.
• Following a bankruptcy filing, trade creditors can lawfully:
  • Place the account on credit hold.
  • Stop all shipments in transit.
  • Arrange for the return of any merchandise in transit.
  • File a reclamation claim for any shipments received by the bankrupt debtor within a specific time frame.
  • Refuse to extend credit to the debtor.
  • Demand immediate payment against a personal guarantee or an inter-corporate guarantee.
  • Sue the guarantor if necessary to collect against an outstanding guarantee.
• Reclamation involves the right of a creditor to recover possession of goods delivered to an insolvent buyer during a specific period prior to the bankruptcy filing.
• Any payment received within 90 days prior to the bankruptcy filing date may be subject to a preference action. Preference avoidance power is granted to "ensure an equitable distribution of the debtor's assets"
• However, there are numerous defenses that can be raised by a creditor to a preference action.
• The creditor often needs an attorney to represent them to assert one or more of these defenses in response to a demand that a preferential transfer be returned to the estate of the bankrupt debtor.

One final thought: Less than half of the companies that go into bankruptcy successfully emerge from it. This sobering statistic should be kept in mind when considering a request from a debtor in possession for open account terms.

Source: Michael Dennis, author of "Credit and Collection Handbook" available at the NACM Bookstore.