Chapter 11 Surge Puts More Pressure on A/R

Collections teams are under added pressure to keep after delinquent accounts and press for payments, even if only partial ones. Waiting too long will lower the odds of seeing a dime from a cash-strapped debtor.

Despite positive economic signs popping up here and there, the number of businesses filing for Chapter 11 bankruptcy is getting worse, not better. Chapter 11s skyrocketed 43% from the 1st quarter of 2023 to this year. 2023 saw new highs — or should we say lows — for debt-ridden businesses throwing in the towel to start anew. Now it looks like 2024 could top last year.

Bankruptcy filings across all categories increased over the past year, according to Epiq Bankruptcy. “The 120,094 total bankruptcy filings represented a 14% increase from the 105,497 total filings during the same period last year. … March [2024] marks 20 consecutive months that total, individual and commercial bankruptcy filings have registered monthly year-over-year increases.”

Count on the next three months to get even rockier. Accountants are likely to advise debtors to file for Chapter 11 before it’s too late. “The debt eligibility limit of $7.5 million for small businesses looking to elect subchapter V reorganization under chapter 11 is due to sunset back to $2,725,625 in late June,” warns Epiq.

There’s Still Time to Collect Before They File for Chapter 11

Once a business is behind on a handful of bills and is leaning heavily toward filing for Chapter 11, the likelihood of one its debtors obtaining a payment is slim to nil. Right?

Not necessarily. A business owner may be more likely to pay a partial amount to a loyal vendor despite its economic woes. And there’s no question that the squeaky wheel — the person of a persistent accounts receivable or credit & collections employee — is more likely to get the grease.

A/R and C&C pros may need a reminder on the some of the proven techniques that can lead to success with late payers. Tip: Make the email or phone conversation about the reason for late payment to break the ice. For example, ask “What happened that’s keeping you from paying this invoice now?” instead of “Why aren’t you paying the invoice?” for a less accusatory tone.

Let’s say the worst happens and a customer that owes declares bankruptcy. Keep in mind that courts depend on creditor committees to reorganize companies, in part to see that worthy creditors receive some payment. The trustees that form these committees will often accept creditors owed money by the business filing for Chapter 11 — and not just the biggest creditors. Oftentimes one or two smaller debtees are chosen to sit on a creditor committee.