Collection Q&A: What to Do When a Debtor Files for Bankruptcy

Q: Help! I have been trying to collect an outstanding bill, but the customer just filed for bankruptcy. Am I out of luck?

This is a situation we see quite often. Accounts receivable is a challenging part of any business, and things get even more complicated when customers who owe you end up owing all over town. What do you do when a customer who owes your business files for bankruptcy? Are you out of luck?

As in many legal matters, the answer is yes and no. Filing for bankruptcy does not automatically mean that your outstanding invoice will never be paid. It does, however, trigger a new set of rules with regard to collection efforts. This is where an experienced collection attorney can be a huge asset. An attorney will be able to carefully navigate this process without crossing any lines.

In general, the first thing to do is check whether the customer actually did file for bankruptcy. Sometimes, debtors will claim that they filed for bankruptcy in an attempt to halt collection efforts. It is always worth following up on the bankruptcy court website to make sure that the customer followed through.

If the debtor did, in fact, file for bankruptcy, there is often what’s called a stay on collection efforts. This means that, while the bankruptcy is pending, any efforts to collect outstanding debts from the bankruptcy filer should cease. Although, that’s not the end of the story. The bankruptcy may end up being dismissed, or it may be a certain kind of bankruptcy that allows creditors to make claims for any debts they are owed. Again, an experienced collection attorney can monitor bankruptcy proceedings on your behalf and take additional steps if permissible.

If the bankruptcy does end up being dismissed, rather than a discharge of debts being ordered, collection efforts can resume.

We’ve talked about this in depth in another blog post, but Wakefield Law does its collection legal work on a contingency basis. What does this mean? You only pay us if we are successful in collecting funds from a debtor. There is no extra charge to you if, in the process of pursuing an outstanding debt, we discover that a debtor has filed for bankruptcy. Instead, we will simply monitor the bankruptcy for you and take any appropriate next steps to collect. If you have any questions about your outstanding invoices or want to learn more about our collection work, feel free to give us a call at 703-771-9740.