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What to Do If Your Customer Owes You Money and Files for Bankruptcy

It’s been said that into every life a little rain must fall, and for small business owners, that shower (or storm) can come in the form of a customer or client’s bankruptcy. Here are some tips on what you need to do to improve your odds of getting paid:

Stop contact. Bankruptcy law prohibits creditors from contacting debtors after they have filed bankruptcy, which means you need to halt all collection activity. Contact the debtor’s attorney or court-appointed trustee to see if your debt is listed in the bankruptcy petition and to discuss how it will be handled. If you are not listed as a creditor, then you can pursue collection even after the bankruptcy is over.

Do the math. If your customer or client is deeply in debt, owes many other people and has little resources, chances are you will not be seeing a payday. You may want to just cut your losses and take a bad debt deduction on your taxes.

Discern the bankruptcy type. If your debtor files Chapter 7, all creditors will be part of a fair distribution settlement where assets are liquidated and split among the group. If it’s Chapter 13, there will be a plan approved by the court to pay all or most of the debt back. If it’s a Chapter 11 reorganization, you will probably be waiting awhile but will likely be repaid.

File proof of claim. You can find out the deadline to file a proof of claim on the bankruptcy petition. If you don’t, you won’t get paid.

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