Small businesses facing a bankrupt client have few options to protect themselves. If the debtor is engaged in questionable or fraudulent business activities, the small business may use legal actions beyond simply waiting patiently for a bankruptcy court to act.
In situations where the debtor has incurred debt only a short time before filing before bankruptcy, creditors can sometimes obtain judgments that put added pressure on the debtor to make good on that liability. In addition, the law provides for a '60-day preference' rule. This rule is designed to prevent debtors from paying off their friends right before they file bankruptcy while leaving others unpaid. The 60-day rule allows the court to set aside any payments made up to 60 days before the actual filing of bankruptcy.
Creditors who have been paid must return the money to the bankruptcy court for it to be placed in the pot. Business owners should keep in close contact with their ongoing customers so that they will have a good enough relationship to know far in advance to avoid being caught up in this rule. Indeed, small business owners in particular should always be watching for clients/customers who show signs of being in financial distress. If a bankruptcy declaration from that client/customer would be a significant blow, then the business owner should weigh various alternatives to protect his/her business, such as cutting back on business dealings or tightening up credit arrangements with the client/customer.
Finally, advisors typically counsel small business creditors to file confirmations of debt with the court even if it seems highly unlikely that they will ever be compensated. This filing allows creditors to write off bad debts on their taxes.
For further information or to discuss getting help with bankruptcy, short sales, or foreclosures we invite you to schedule a free confidential consultation with our experienced northern and southern California bankruptcy attorneys by calling us at 916.983.2941, or filling out our contact us form on our website. The confidential consultation is free.