Bad Debt Collection and Bankruptcy: What Business Owners Need to Know

Posted by Marilyn Miller on June 23, 2015  /   Posted in Uncategorized

The US Bankruptcy Courts exist to help people and businesses, who, for some reason cannot pay back debts. Some bankruptcies will totally erase, or “discharge” the debts, while other types of bankruptcy filings exist to help the individual or business come up with a plan to pay back their debts over time.

Small business owners should have a good working knowledge of bankruptcy laws and how it will impact their ability to recover bad debt. 


 Individuals with no assets who want to discharge their debts will file a Chapter 7 bankruptcy. As a creditor, you should receive notice of the initial filings and all subsequent notices. If a delinquent customer tells you they have filed a Chapter 7 bankruptcy, and you have not received a notice, ask the customer for the case number or the name of their attorney. You can and should contact the attorney or the Court and be added as a creditor, as you will want to stay informed as the case progresses. 

Once you are aware that a customer has a pending bankruptcy, remember that they are under the protection of the court, and you should not be billing them or contacting them for payment. If you have placed their file with a collection agency or attorney, you must inform them immediately, as by law, all communication with a debtor must stop. 

While the Court protects a debtor in bankruptcy, it also demands certain responsibilities of the debtor. If the debtor does not comply with deadlines and obligations, the case could be dismissed. In short, just filing the case does not make the debt go away, so watch the cases carefully until you receive notice that the debts have been discharged (you cannot recover) or dismissed (you can recover).

You also have the right, if you think the debtor is hiding assets or engaging in some sort of bad behavior to attend a hearing and state your case. Years ago, one of our clients attended a hearing of a man who had over $12,000 in dental work done just before he filed bankruptcy. The dentist claimed successfully that the man had the work done knowing he was never going to pay for it, and the Court would not allow the debt to be discharged, that is, the man still legally owed the dentist. In another case, a woman had received nearly $10,000 directly from her insurance company, had spent the money on personal items rather than paying her doctor, and claimed that she was unable to pay back the debt. The Court also did not allow that debt to be discharged, since she had essentially profited by using the insurance money for her own use.

Such cases are difficult to prove, but if you have information you want the Court to see, you do have the right to a hearing, and depending on the size of the debt and the number of creditors owed, it may be worth your time and effort.

An individual who own a home who wants the Court to “reorganize”, or pay back their debts, will file a Chapter 13 bankruptcy. If you receive notice of this type of bankruptcy it is very important that you file a claim as soon as possible. The job of the Court in this case is to approve the plan presented by the Chapter 13 debtor. Sometimes, claims will be ordered to be fully paid, while others will be discounted. Once again, the debtor is responsible has the responsibility of following the plan as approved by the Court. So, if a Chapter 13 bankrupt debt is not paid to you as ordered by the Court, you have the right to go back to the Court for assistance. 

Corporate bankruptcies are almost always Chapter 11. If a business owes you money, and claim that the business does not have cash or assets to pay you, you may still be recover something if you have a personal guarantee, and if you know that the business owner has not has personal assets and has not filed a personal bankruptcy.

In summary, all is not lost simply because someone files bankruptcy. Follow the process through and you may find that you are still able to recover the money owed to you. 

Want tips on how to minimize bad debt in your business? We have them!

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