Almost every company faces this scenario at some point: A small to midsize business customer is late making payment for a product or service. Phone calls, emails and letters to the client reminding it of the debt and the terms of the contract go unheeded.
Accounts Receivable is stymied. The account is then sent to collections but cash still isn’t forthcoming. Then the news comes: the customer is filing for Chapter 11, Subchapter V.
Say goodbye to collecting the debt in full. Your only hope is a partial repayment if the customer has assets to sell and the bankruptcy court can extract some restitution for you and any other creditors the customer owes.
The risk for companies that extend credit is even greater now thanks to Subchapter V, which went into effect in February 2020. Subchapter V makes it easier for small businesses to reorganize and helps reduces the debtor’s legal costs, among other advantages.
For creditors, Subchapter V is making it even harder to collect a debt than before. The National Association of Credit Management’s Extra Credit podcast suggests creditors consider placing newer and smaller customers in a higher credit risk category. Another option may be calling for partial or full payment upfront.
Payment almost due? Be ready to ramp up collection efforts
Fact: About 40% of creditors don’t know if any of their customers have filed or are planning to file for Subchapter V, according to an NACM survey. Only 31% of creditors say they’re up to speed on impending Subchapter V filings by one or more customers.
There’s only so much creditors can do to minimize the risk. While there are signs a customer may be struggling – such as routinely paying its bill the day it’s due – it’s not easy to predict which customers may be ticking time bombs that won’t ever pay up.
One thing’s for certain though: The quicker your A/R or collections step up collection efforts once a bill is past due, the better your chances of collecting.
Commercial Collection Agencies of America data shows your chances of getting paid are:
- 90% if a debt is one month late
- 70% once the debt hits the three-month mark
- 51% at six months, and
- 20% after a year.