When Suppliers File For Bankruptcy

Checklist will help minimize losses when a customer or supplier files for bankruptcy.

"Although the number of business bankruptcies has declined in recent years, the next economic downturn will again require businesses to deal with customers or suppliers in bankruptcy, and will force them to contend with recent changes to the bankruptcy laws," according to Timothy McFadden, an associate with the law firm Lord, Bissell & Brook LLP in Chicago.

McFadden, who focuses on commercial bankruptcy law, offers this checklist with steps that companies may take to minimize losses when a customer or supplier files for bankruptcy:

Monitor the Bankruptcy Case. Reviewing the bankruptcy case docket will enable you to understand important information such as the bar date for filing proofs of claim, whether you have been named as a "critical trade vendor," and the debtor's plans for reorganization or liquidation.

File Proof of Claim. Failing to file a proof of claim can result in the claim's disallowance.

Assess Your Security Interests. If you have security interests in the debtor's property, then you will have a greater chance to achieve a full recovery.

Review Shipping Records. Determine if you shipped products to the debtor in the 45 days immediately preceding the debtor's petition date in order to assert a reclamation claim.

Review Contracts with the Debtor. If you have supply agreements or other contracts with the debtor, the debtor may assume or reject such contracts. Creditors may request the court to compel the debtor to assume or reject the contract in a shortened timeframe.

Companies with large claims or complex issues should consult counsel immediately upon a bankruptcy filing in order to understand bankruptcy issues and minimize financial losses, according to McFadden.

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