CHAPTER 6: COLLECTIONS
After you’ve filed the proof of claim, look back at the transactions between your company and the customer that occurred within the 90-day period prior to the bankruptcy. This is called the “preference period.” This is where AR’s actions really matter. The court wants to see that your transactions were consistent with your normal course of business—otherwise, you may have to return some payments. How can you avoid returning money paid to you by the customer during the preference period? If you suspect a customer might file bankruptcy soon, don’t suddenly raise your prices or start billing more frequently. For example, if you normally ship out 1,000 toothbrushes for $500 every month, continue to do so. Any shipments or payments outside of what is normal for your relationship with that customer—or what is normal for that industry—can be considered preferential treatment, and the court may order you to repay the money. If the payment is in the ordinary course of business, that payment could be defended and retained.
Note that, according to Professor Dan Schechter, “Most Chapter 11 cases fail. They are converted to Chapter 7 because reorganization is impossible.”
The law mandates a specific order in which bankrupt companies must pay their creditors:
1. Secured creditors—banks and other creditors with collateral; 2. Administrative creditors—anyone who provides services to debtors after the filing (lawyers, financial advisors, utilities, janitorial services, etc.); 3. Chapter 11 pre-petition creditors; 4. Unsecured creditors (suppliers, contractors, customers); and 5. Equity stockholders. In this procedure, the most important rule for AR to remember is that once the petition for bankruptcy is filed (at the very beginning), a line is officially drawn in the sand. Everything then becomes pre-petition and post-petition. “From the standpoint of the receivables, the only ironclad rule is to stop your collection efforts [for past-due amounts] as soon as the bankruptcy petition is filed,” says Schechter. If you want to pursue collection on those amounts, you have to go into the bankruptcy court and the judge may or may not allow you to do so. As mentioned earlier, you can continue to do business with that customer, but you should realign your relationship and set new terms such as credit card only or cash in advance. If you do not continue to do business, it could sabotage the debtor’s chances of recovery. If you are due a lot of money, you may decide that it is prudent to continue shipping, in order to permit the debtor to earn its way back to financial health so the old debt can be repaid. IF YOUR CUSTOMER FILES CHAPTER 7 When a company files Chapter 7, they are out of business. There is no option to continue doing business with the customer—you just hope to recover as much of the debt as possible.
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THE ACCOUNTS RECEIVABLE SPECIALIST CERTIFICATION PROGRAM E-TEXTBOOK
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