Companies are declaring bankruptcy at a rate not seen since the 2010 recession. And it’s bad news for credit and accounts receivables departments attempting to collect debts.
Compared to a year ago, total commercial bankruptcy filings increased 12% year-over-year in January. Subchapter V filings are up 49% and commercial Chapter 11 filings increased a whopping 70%, according to the National Association of Credit Management (NACM).
Three troubled sectors to watch for: retail, healthcare services and financial services.
As we warned you a couple of months back, once companies file under Subchapter V (which went into effect in February 2020), your odds of collecting most or some of an unpaid debt go down significantly.
Your best bet: Huddle frequently with your A/R and credit managers if they’re concerned about extending credit to certain customers who are stretching payments or late to pay back an order.
Now for some good news: There are a couple of proactive steps you can take to increase your chances of getting paid even after a customer’s filed for bankruptcy.
2 steps your peers in credit & collections often overlook
Once a company files for Chapter 11, a court-appointed trustee forms a creditors’ committee to reorganize the company and see, in part, that worthy creditors receive some payment. In many recent cases, trustees are struggling to find creditors willing to sit on committees, according to a recent NACM “Extra Credit” podcast.
“Even if you don’t think your claim is large enough, we’ve seen cases delayed for months [because of a lack of participants on the creditors’ committee],” says Brian Jackiw, a bankruptcy attorney at Tucker Ellis. “A trustee doesn’t have to pick only the largest creditors. If they get two of the largest creditors, and then a smaller one, they’ll form the committee that way. Anyone who’s interested should reach out to the trustee’s office and say, ‘I want to be on that committee.'”
The creditor’s choice of attorney is another key to securing a larger repayment, according to Bruce Nathan, partner at Lowenstein Sandler. The key question to ask an attorney or law firm: “Do you specialize in creditors’ rights in bankruptcy proceedings?”
Seek details on recent wins for creditors and how many cases a firm handles. Bankruptcy cases are litigated according to state law. Attorneys often tend to specialize in one or two areas but lack the experience a creditor needs in a bankruptcy matter.