This article, part of our Creditor’s Rights Toolkit series, discusses strategies for businesses to protect themselves when they suspect a customer might file for bankruptcy. These strategies include:

Obtaining a Deposit: This makes the business a secured creditor, which often get paid in full in a bankruptcy case, unlike unsecured creditors.

Establishing Payment in Advance Terms: This eliminates the risk of nonpayment and protects the business from clawbacks as a preference since the payment was not on account of a pre-existing debt.

Requiring COD Payments: This ensures timely payment and creates a defense to a preference claim, as long as the payment is substantially contemporaneous with the provision of goods or services.

Instituting 20 Payment Terms for Goods: By requiring payment within 20 days for goods, businesses increase the likelihood of qualifying as a Section 503(b)(9) administrative expense claim in the event of a bankruptcy filing.

Carefully Documenting Settlement of Outstanding Amounts: Businesses should ensure they have the right to assert the full claim in any bankruptcy if they are required to disgorge any of the settlement payments.

The article emphasizes that all insolvency situations are unique and businesses should consult with legal advisors when dealing with financially distressed customers. Read the full article here.