CHAPTER 6: COLLECTIONS
If a customer actually files for bankruptcy, AR’s course of action depends on whether the customer has filed for Chapter 11 (in which case it is trying to reorganize and stay open), or Chapter 7 (in which case it is closing down the business and liquidating its assets). If a customer does file bankruptcy, sit tight. You may not attempt to collect a debt while a customer is in the bankruptcy process, so cease collection efforts. However, it is important to document the payment history and communication with the customer pre-bankruptcy. Your company should be furnished with a schedule of open debts on behalf of the customer; if you do not receive one or the amount owed your company is incorrect, it’s important to notify your legal department, controller, CFO or other authority so that this can be corrected. A proof of claim may need to be filed in order to be in line to receive payment when the bankruptcy process is included. You will also want to notify the sales department. Your company may decide to suspend doing business with a customer in bankruptcy, since there may be understandable concerns about whether the invoices will ever be paid. However, if your company and the customer are bound by a contract at the time the bankruptcy is filed, permission from the court is required to terminate it. In a Chapter 11 bankruptcy, a company stays open while it tries to reorganize. Creditors, including your business, will be invited to join a creditors committee, but secured lenders, like banks, will wield the most power. You will be among those to whom the customer presents its reorganization plan, and hopefully that plan will allow the customer to start turning a profit. If and when that happens, you’ll get your receivables. If the customer is unable to come up with a reasonable reorganization plan, it will probably enter Chapter 7 bankruptcy, a process in which the company closes its doors and liquidates its assets. In that case, a trustee will sell off the company’s assets and distribute the proceeds, with the secured lenders getting paid first. WHAT TO DO IF A CUSTOMER FILES CHAPTER 11 Chapter 11 filings are more complicated than Chapter 7 filings. The customer is required to notify you of its petition (filing Chapter 11) and the amount of money it owes you. If the amount it reports matches your receivables, then you typically do not have to take any action. However, if you dispute the amount (they say they owe you $1,000, you say they owe $2,500), then you have to file a “proof of claim” in the bankruptcy court, as mentioned previously. You must specify and document exactly how much the customer owes you. If you have a dispute, pay attention to the bar date. This is the date by which you are required to file a proof of claim. In large cases, it can be one or two years after the petition (the official date the bankruptcy is filed in the court). If you fail to file a proof of claim before the bar date, your claim is tardy and most likely won’t be counted. The customer will mail you most of the forms and the crucial information you need. However, you can also check local court websites for additional forms and protocols. Most bankruptcy courts are on the PACER system (see http://pacer.psc.uscourts.gov ).
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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