Can you do business with a company that has/is in the process of filing bankruptcy?

Businesses can file for Chapter 7, Chapter 11, or Chapter 13 bankruptcy, based upon the business’s debt levels and financial situations. We’ll look at the various types of business bankruptcies and if/how you can move forward with this customer in the future.  

The bankruptcy process starts with a petition filed by, or on behalf of, the business. Bankruptcy doesn’t mean they absolutely won’t survive; in fact, some businesses revitalize and save themselves by taking such action. Just ask General Motors, Marvel, Delta, and Starbucks. They all filed bankruptcy previously and are thriving in today’s economy! We recommend educating your management team on the risks vs rewards available in recouping financial losses from companies that have declared bankruptcy. Also, we suggest contacting your attorney to ensure all paperwork is filed on time for the debt owed to you.

Chapter 7: Liquidation Bankruptcy

Chapter 7 bankruptcy will typically end in a complete liquidation of the business and those monies disbursed to the secured creditors. This is the most common type of commercial bankruptcy filing for companies that don’t have any cash to keep their business afloat. Secured debt will always be paid back first, and unsecured priority debts next. In rare instances, the company may be allowed to temporarily remain in business.

Chapter 7 bankruptcy is a viable option for corporations, limited liability companies, and sole proprietorships. Sole proprietorships often file Chapter 7 because once the trustees receive their fee, they are no longer responsible for paying back the business debt, even if they’ve signed a personal guarantee. This isn’t the case for Corporations, LLCs, and partnerships, however. Those parties are still held liable and can actively be pursued for their signed personal guarantees. Otherwise, once the debts are discharged under Chapter 7, you can’t collect them in the future.


  1. If this is an existing customer you should suspend.  You will not be paid and they will dissolve quickly.
  2. If this is a prospective customer, make determinations depending on the opportunity of revenue versus your organization's current tolerance of risk.
  3. Move forward with safety precautions like prepayment, COD (cash on delivery), or very tight automatic terms. Let the customer know that this isn’t necessarily going to be in place forever, and you will do a credit review again in the future. I would recommend that credit reviews be done in accordance with your company’s credit policy.
  4. Your organization has to determine: Is the risk worth the reward on this current or future opportunity.

Chapter 11: Reorganization Bankruptcy

Chapter 11 bankruptcy generally ends in a reorganization of the business, and the company successfully operating out of bankruptcy and into solvency. However, not always, and it’s not guaranteed. The company can and will remain operating during the bankruptcy, but that doesn’t mean the business is viable. The courts will require the business to eliminate debt, sell off non-performing assets, restructure long term debts, and look for new funding. Additionally, the creditors and the courts must approve the restructure proposal in this bankruptcy.


  1. Immediately ask the prospective/existing customer if they excluded your company from the bankruptcy filing. Why? Because the business can petition the courts to exclude vendors from the bankruptcy.
  2. If they tell you that you were excluded, ask for the court issued documentation that supports your exclusion. If they can’t provide this documentation, you weren’t excluded. If they tell you that they didn’t exclude you from the bankruptcy, this means you are at risk of payments being called back.
  3. Contact an attorney to file the paperwork with the courts for the debt owed to you.
  4. Be aware, the courts can request that payments made within the last 90 days of filing be returned to the debtor. Those assets would be used in the repayment and restructure of their debt. If you are an unsecured creditor, you most likely will get paid cents on the dollar.  
  5. This business and debt (even secured) can come back as nonviable and move to a complete liquidation. The Blockbuster story is a great read to learn more.
  6. Request prepayment, COD, personal guarantees, and tight payment terms if you decide to move forward.
  7. Actively keep a watchful eye on the account and also stay up to date with the court on the bankruptcy. If they remain in bankruptcy, then they still are at risk of liquidation and closing the business.
  8. Once the debts are discharged under a Chapter 11 bankruptcy, you can’t collect these debts ever in the future.

Chapter 13: Reorganization Bankruptcy (Sole Proprietors)

Chapter 13 bankruptcy can reorganize the debt and the company can continue operating. This business will also make every effort to come out as viable but can end in complete dissolve. This type of bankruptcy is meant for small businesses with minimal creditors. The business can’t have more than $419,275 of unsecured loans or $1,257,850 of secured loans to qualify. Those are the numbers as of April 1, 2019, but these numbers are fluid to allow for inflation and cost-of-living adjustments. These sole proprietors have to petition the courts for bankruptcy under his/her name but also under the business’s name as well in this option. The trustee here is responsible for both personal and business debt.


  1. If they are a prospective client, refer to your company credit policy and current risk tolerance.
  2. If they just created a new entity after previously being discharged, they could be a professional debtor. Professional debtors are people that know how to scheme the systems and will run up the debt again.
  3. You have to trust in your credit analyst and sales personnel for the warning signs. An example warning sign: how many businesses appear with them listed as the Principal or executive. If it’s a laundry list, chances are you are dealing with a professional debtor.
    1. I would suggest prepayment, COD, personal guarantee, and very tight automatic payment terms if choosing to move forward. Remember, your credit department can review this client in 90-120 days to monitor the payment trends.
    2. It doesn’t have to be a forever requirement, but always better to be safer. In the end, if they refuse all these options, the organization will have to determine the risk versus reward.
  4. If this is an existing customer, I would suspend the services immediately and file paperwork with the courts to see how much you can recoup.

In closing, I would ensure that you have bankruptcy and an action plan in your current credit policy. Don’t ignore a bankruptcy alert or mailing.  Do your research to be educated, and make informed decisions. Bankruptcy doesn’t always mean the business is going to disappear, but even after continuing to operate, it could still dissolve.  I would closely monitor those customers in active bankruptcies. You want to take all the necessary precautions you can so you aren’t left holding the bag.

I hope that you see thoughtful decision-making throughout the steps mentioned above. Feel free to reach out to me via email at I would love to hear your thoughts. 

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