Creditors Take Aim at Bankruptcy

It appears that my February article, “Turning Lemons Into Lemonade,” which discussed benefits of bankruptcy from a debtor’s perspective, made some readers’ blood boil. No doubt, those readers were creditors, who likely experienced firsthand how bankruptcy can wipe out any hope of being paid on your accounts receivable. Companies can—and do—use bankruptcy as a means to eviscerate your accounts receivable and walk away owing you nothing.

As I previously explained, debtors also can use bankruptcy to get out of otherwise binding contracts, thereby depriving you—the other party to the contract—of the benefit of your bargain. Bankruptcy is a process that inherently favors the debtor and looks out for its best interest. Folks, that’s reality, so don’t shoot the messenger for delivering this news. But, for this month’s article, here are some pointers to assist creditors in handling deadbeat accounts who are in, or on the verge of, bankruptcy.

If you are a creditor (someone owes you money), and you find out that a debtor (the company who owes you money) has filed for bankruptcy, your initial reaction is probably to feel sucker-punched in the stomach. As we all know, when a company files for bankruptcy, the likelihood of recovering the entire amount owed to you is nil. After all, a primary purpose for debtors in bankruptcy is to have their debt discharged. However, don’t despair. As a creditor, there are a few measures you can take to protect yourself.

• Some of the debt will get paid. If the debtor is seeking to reorganize and remain a growing concern (as opposed to liquidate), some of the outstanding debt owed to you likely will be repaid. Without bankruptcy, the debtor is unlikely to pay you on its own. While you may get repaid pennies on the dollar, some repayment is better than nothing at all. And, if you have a security interest in the debtor’s property (see number 2), you will get more (and maybe all) of your money.