What Should Vendor Do When Customer Files Bankruptcy

What Should a Vendor do When their Customer Files for Bankruptcy?

It’s an unfortunate part of doing business: customer bankruptcy. As you already know, we strongly encourage you to take steps to ensure you are a secured creditor. Properly executed UCC filings & mechanic’s liens permit you to secure your right to recovery by attaching to collateral – whether it’s consigned goods or the improved property.

So, if you’ve taken precautions to position yourself as a secured creditor and your customer files for bankruptcy, what should you, as the vendor, do? In an article from Jimerson & Cobb P.A., “Vendor’s Checklist When a Customer Files for Bankruptcy,” the author provides a thorough list of actions you should/could take.

In fact, the author provides 51 steps!

He recommends you “review the business relationship,” which would include reviewing contracts, credit applications, open invoices and statement of accounts. Reviewing the relationship will help you determine whether or not you will continue to do business with this customer and what payment terms you will apply to the future relationship.

Next, the author delves into the legal actions you should complete. These are all steps we’ve discussed before in previous posts, but this article provides a thorough examination of each step.

The author recommends you file a notice of appearance, attend the section 341 meeting, stop all collection efforts so as to not violate the automatic stay, proactively deal with potential preference actions, file a proof of claim by the bar date and possibly stop the delivery of goods. He also advises you to consider your reclamation rights, assert 503(b)(9) claims and, if you haven’t already, file a mechanic’s lien.

As an attorney, the author recommends and further explains a few actions we haven’t discussed:

  • Consider serving on the creditors’ committee
  • If appropriate, seek critical vendor treatment
  • Protect your rights under executory contracts
  • Confirm the debtor’s authority to use cash collateral

The author ties up his list with great advice: “Monitor the docket and exercise vigilance….” Let me emphasize “exercise vigilance.” If your customer files for bankruptcy protection, regardless of chapter, you must stay informed and be an active participant. Taking a passive role, even as a secured creditor, can be harmful.

Most Recent Resources


Will Safe Harbor Ever Exist for Florida UCC Filings? Zero Tolerance

Safe Harbor couldn't save this UCC. Florida's 'zero tolerance' policy means you must strictly comply with Article 9-503(a). Learn more here!
Read More
white paper
White Paper

NCS Credit Lien Index 2022 Q3

The Lien Index increased 4 points in Q3 2022, an 11% climb over Q2 2022. As expected, Q3 mechanic's lien activity rose 11% over Q2, and activity remained lower than Q1, which peaked at 43. We anticipate the Index will increase 2%-5% in Q4. Download the full report for details.

Read More
live webinars
Live Webinar

The Basics of the UCC Process

Worried about customers filing bankruptcy? Concerned about extending credit to marginal accounts? UCC filings secure collateral in agreement with your customer’s promise to pay.
Read More