What Happens When a Customer Files for Bankruptcy?

When a customer files for bankruptcy, suppliers often feel helpless. But understanding the process and acting quickly can mean the difference between recovering pennies on the dollar and losing significant revenue.

The First 72 Hours: What You Need to Know

Once a bankruptcy petition is filed, an automatic stay goes into effect immediately. This federal injunction stops all collection efforts, lawsuits, and even phone calls from creditors. Violating the stay—even accidentally—can result in serious legal consequences including contempt of court.

Key immediate actions:

• Stop all collection attempts immediately
• Preserve all invoices, delivery receipts, and correspondence
• File a proof of claim with the bankruptcy court before the deadline
• Document the total outstanding balance owed

Chapter 7 vs. Chapter 11: What It Means for You

Chapter 7 (Liquidation): The company ceases operations and assets are sold to pay creditors. As a supplier, you'll likely receive a pro-rated distribution from the remaining assets—but often this is only a small percentage of what you're owed.

Chapter 11 (Reorganization): The company continues operating while restructuring its debts. This can be better for suppliers if the business survives, but you'll likely face reduced payment terms and potentially discounted claim values.

Where Most Companies Lose Money

Our experience shows there are three critical mistakes suppliers make:

Protecting Your Business Going Forward

While bankruptcies are never fully preventable, there are steps you can take to minimize exposure:

• Monitor customer financial health regularly
• Set credit limits based on current risk assessment
• Consider credit insurance to transfer the risk
• Maintain diversified customer base to avoid concentration risk
• Document everything—tight records help in recovery efforts