Nothing is more frustrating to a small business owner than not getting paid. Sometimes non-payment is due to a dispute over the product or service, with the customer unwilling to pay. Other times, the non-payment is due to the customer being (temporarily or permanently) financially unable to pay. Customers who are financially unable to pay you may have multiple creditors. If their total debt is overwhelming, your customer may seek protection of the bankruptcy court. What happens next – can you recover bad debt from a customer in bankruptcy?

There are several different types of bankruptcy and they depend on a number of factors: whether the debtor is a business or an individual and whether or not there are assets. The possibility of bad debt recovery is depends on many factors, and there are some important things to keep in mind.

1. Once you are made aware that a customer (whether a company or an individual consumer) has filed for bankruptcy, you must not contact them directly as long as the case is active. If you have placed their file with an attorney or a collection agency, you must let them know immediately, as they too must stop all contact. No contact means no contact – no bills, no phone calls or letters. 
2. Remember that when you are doing business with a company, it is good practice to obtain a personal guarantee, which means that the customer personally will guarantee the debts of the company. If you have a personal guarantee, and the company declares bankruptcy, you may still have the right to pursue the personal guarantor.
3. If you feel that there are assets or if you feel that there is a reason that your debt should be exempted, you will receive notice from the court and will have an opportunity to make a claim with the bankruptcy court. The process is time sensitive, so it is important to take note of all deadlines. 
4. The debtor has responsibilities while in bankruptcy. If they do not perform their duties, their case may be dismissed. If so, you will receive notice. Once again, it is important to get this information to your collection partner immediately. 

It may be that your customer simply has no ability to pay you, and your debt may be discharged and you will not be able to recover anything. Other times, there are some assets and the court will order payment (full or partial) of your debt. In some other cases, the bankruptcy claim will be dismissed. Your best bet is to work closely with your attorney or collection agency. 

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