Bankruptcy in Brief

a service of the Moran Law Group

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Doing business with troubled customers

In the beginning:

With every customer to whom you extend credit, consider the impact on your business if the customer doesn't pay. It doesn't take too many non paying customers to create trouble for your business.

When the customer opens an account, get complete information about the customer: full legal name of the entity; banking reference; names of trade creditors.

Consider asking for a personal guarantee by the principals of small corporations: do you want to put your business at risk for someone who won't personally back his business' commitment to pay?

When payments lag:

Cash checks promptly. Keep records as to when checks are received.

Condition future business on payment for the new goods AND some reduction in the past due amounts. Payments that are "contemporaneous exchanges" are immune from preference challenge by the trustee, but without evidence that payments were for the new goods, rather than the old balance, courts tend to apply payment to the oldest charges. Selling COD is excellent protection against preference litigation. More on preferences.

Consider retaining a security interest in the goods sold until they are paid for.

Don't let the threat of bankruptcy keep you from filing suit, if you think the account debtor has assets from which your claim can be satisfied. Talk to your collection attorney about your rights to a pre judgment attachment.

Don't hesitate to accept payment on account because of the possibility that the payment may be avoidable as a preference if the customer files bankruptcy. It is not wrong to accept money genuinely owed to your business; neither is it wrong of the soon-to-be-debtor to pay it. It simply may be recoverable by a trustee. Remember the old saw about possession being nine/tenths of the law? Possession of the funds may not be forever, but it does give you negotiating leverage in a suit to avoid the transfer.

[ Relief from stay ] [ Contesting discharge ] [ Bankruptcy creditor FAQ ] [ Preventing losses ] [ Preferences ] [ Post discharge ]

1/7/07