Running a medium-sized business is a bit like juggling flaming swords. You must keep expenses in check while dodging rising costs and wages. But what happens when a major borrower or key vendor suddenly files for bankruptcy? Every dollar truly needs to count—sometimes by meticulously accounting for every single one with the precision of a medieval monk.
Bankruptcies can stretch finances thinner than a piece of Dollar Tree aluminum foil. While the financial health of business partners can’t be controlled (sadly, there’s no vitamin supplement for that), the right strategies can help minimize the damage to your business.
Here’s a lighthearted guide to surviving vendor bankruptcies with sanity—and bank account—intact.
1. Know Your Role and Shut Your Mouth!
A creditor in a bankruptcy case is sometimes eager to attend every hearing and creditor meeting like it’s the new season of their favorite reality show. The claim is for a modest $7,000. Even the most budget-friendly attorney fees could quickly outweigh any potential recovery.
The key here is to understand your priority in the creditor hierarchy under the Bankruptcy Code. If secured with significant money on the line, it makes sense to bring in legal representation. But for an unsecured creditor with a modest claim, going all-in would be like hiring a gourmet chef to cook a Hot Pocket.
A quick consultation with legal counsel can determine whether hiring help is worth it. And remember, protecting the wallet should be the top priority. Don’t aggravate your losses.
2. Perfect Your Liens—Don’t Leave Money on the Table
Liens should be thought of like the “Save Game” button in a video game—if it’s not done right, all progress could be lost when things go south. Before bankruptcy drama even begins, ensure liens are properly perfected. A desperate debtor (or the bankruptcy trustee) will scrutinize everything, and a minor slip-up could cost big time.
Take the example of a floorplan lender who lost a fortune because a simple step in perfecting a lien was skipped. It’s like building a fortress and forgetting to lock the gate—don’t be that guy.
3. Don’t Let Important Mail Become Origami
If legal representation isn’t part of the plan, it’s time to take mail more seriously than the spam folder does. Bankruptcy notices often look like junk mail but can contain critical information affecting creditor rights. Tossing it out could mean missing important deadlines—turning “ignorance is bliss” into “ignorance is busted.”
Ensure someone on your team is on high alert for these communications. Turning bankruptcy mail into paper airplanes is not an advisable business strategy.
4. Keep Doing Business with the Debtor—No, Seriously!
Continuing to do business with a bankrupt debtor might sound about as appealing as buying a used car from a junkyard. But, by doing so, it might be possible to secure an administrative expense claim that ensures payment if the debtor’s reorganization succeeds.
Here’s a tip: some debtors are allowed to pay pre-bankruptcy debts to vendors considered critical. Making your business indispensable can increase the chances of being prioritized for payment.
5. Avoid Weird Payment Deals
Weird payment arrangements with struggling partners tempt fate—and should be avoided. Consider the case of a creditor owed $10,000, who was later hit with a demand to return an additional $20,000 to settle an “avoidance” action. That’s a bad day at the office.
Make sure payment terms are well-documented and within industry norms. It’s like following a recipe—stick to the tried-and-true and a financial disaster can be avoided.
6. Security Deposits: The Business Equivalent of a Safety Net
When entering a long-term relationship with a business partner (the non-romantic kind), consider requesting a security deposit to protect against unpaid invoices. It’s like insisting on a prenup—it’s just good sense. Make sure the arrangement is well-documented because a security deposit without proper paperwork is like a parachute without a ripcord—useless when needed most.
7. Keep Performing Under Executory Contracts—No, You Can’t Just Quit
With an executory contract, where both sides still have obligations, performance must continue even if the debtor files for bankruptcy. This isn’t the time to ghost the other party. Keeping the contract alive might secure a higher priority for payment. Walking away could result in legal challenges, potentially harming recovery prospects.
8. Don’t Let the Debtor Get Off Easy—Make Sure Defaults Are Cured
If the debtor wants to assume a contract, they must cure all prior defaults. Don’t let them slip by with the bare minimum—document every loss and be prepared to prove it. If they want to keep doing business, make them pay up for their past mistakes. No free passes!
9. Think Big Picture—Don’t Get Lost in the Legal Weeds
Sometimes a strong case doesn’t mean going in guns blazing. Bankruptcy is often a long game, and dismissing the case might lead to more headaches and costs down the road. Focus on the big picture and use resources wisely—after all, no one wants to win the battle but lose the war.
10. Remember, Bankruptcy Judges Like a Good Comeback Story
The Bankruptcy Code and most judges favor giving debtors a chance to rehabilitate. This reality means that aggressive legal strategies may not always be the best use of resources. Save efforts for battles that truly matter, ensuring that the business is protected from becoming collateral damage in someone else’s financial disaster.
By following these strategies, navigating the murky bankruptcy waters can be done with business and sanity intact.
