Steps Unsecured Creditors can Take When Customers Face Bankruptcy
By Betsy Weber, DBL Law
Many small businesses will struggle to survive the financial challenges brought on by the pandemic. Historically, Chapter 11 of the Bankruptcy Code was more attractive for large businesses, but recent changes may make it a good option for small businesses. The Small Business Reorganization Act of 2019 added the Subchapter V provision to Chapter 11. To be eligible for relief under Subchapter V, a business could have no more than USD 2,725,625 in non-contingent, liquidated, secured and unsecured debt.
On 27 March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act expanded Subchapter V’s application by raising the debt ceiling of qualifying businesses to USD 7.5 million. While the CARES Act bankruptcy provisions were originally due to sunset on 27 March 2021, the COVID-19 Bankruptcy Relief Extension Act extends those bankruptcy provisions through March 2022.
There are steps that an unsecured creditor can take prior to a customer’s filing for bankruptcy that may significantly reduce the creditor’s ultimate exposure.
Avoid the Preference Claim
Unsecured creditors may be liable to a debtor’s bankruptcy estate when they have received payments within the 90 days before the debtor filed bankruptcy. The creditor is not, however, without defenses to these actions. You should keep accounts current and follow ordinary billing practices. If an invoice is due within 30 days, do not allow the account to slip beyond contractual terms. If you know a filing is imminent, discuss with legal counsel how payments should be applied and against which invoices.
Monitor Customer Solvency
If you extend trade credit to a customer who represents a significant source of your revenue, intermittently request credit opinions from a financial service firm relative to the customer’s ability to meet obligations as they come due.
Establish Protective Payment Requirements
For customers facing imminent potential credit risk, institute payment requirements such as advance payments or cash on delivery of shipments. Such payments will provide insulation from a preference claim. Alternatively, establish an evergreen retainer or cash deposit system or consider conditioning the provision of further goods and services upon the guarantees of the customer’s principals.
Betsy WeberGGI member firm
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Cincinnati (OH), Crestview Hills (KY), Louisville (KY), USA
T: +1 859 341 1881
DBL Law is a full-service law firm providing premier legal services and business advice in a collaborative manner with integrity, professionalism, and respect as a strategic partner with its clients. The firm has 50 attorneys and offices in Cincinnati (OH), Crestview Hills (KY), and Louisville (KY).
Betsy Weber is a Partner in DBL Law’s Business, Bankruptcy, and Commercial Law practice. A fifth-generation lawyer, Betsy earned her law degree from the University of Notre Dame, and her BA from the University of Illinois. She is admitted to practice law in Kentucky and Ohio.
Published: Debt Collection, Restructuring & Insolvency Newsletter, No. 13, Spring 2021 l Photo: hstiver - stock.adobe.com