10.06.07
When Clients Go Bankrupt
Sometimes, we are faced with the difficult situation of dealing with a client who enters bankruptcy while owing us money. If its a small amount, we tend to take it on the chin and write it off. However if a large sum of money is involved, what can you do to collect?
When a client files bankruptcy, you must stop all collection efforts. If you don’t you potentially violate the court’s automatic stay on debt collection and could find yourself in court trying to explain what you were doing.
You can go through the court to try and collect once they have filed bankruptcy. Be warned though, the process is costly so it’s not for those who are owed a small sum of money.
Consult with an attorney to see if you should pursue the matter. If they suggest you should, you would take the following actions:
- File a Proof of Claim – this tells the court that you have either a secured or unsecured interest in the outcome of the bankruptcy.
- Sue the debtor inside the bankruptcy.
- Ask the court for a Lift of Stay – this allows continuance of a lawsuit filed against the debtor before the bankruptcy was filed. Permission is often granted.
- Join in a creditors’ meeting.
- Join other unsecured creditors – this may effective reduce your attorney fees and provide you with a larger voice than if you acted alone.
At the first sign of potential bankruptcy, it is important to gather all your client records. Keep documents in hard copy and save them for at least two years. Even though most bankruptcy threats are just that, once you believe its a possibility, seek out legal advice immediately.
