A clients bankruptcy has great effect on your business whether you are a sole proprietor or a limited company or a partnership. Such incidences results to business struggles and at times you may have to hand in all your business records to the company’s official receiver. Although, if you are a sole proprietor then there is no need to worry as the business and you are the same person. A client’s bankruptcy can have positive, negative or both to your business.
If a client that you have extended your credits to for the bankruptcy protection, then there is a greater possibility for a company losing most of what the client owed. When the clients file for bankruptcy, then, some of the issues your business is likely to face includes:
A potential preference lawsuit:
Your company will be at risk of losing more than what it received. Also, your company may have to return customers payment even before the bankruptcy was filled. Such payments are referred to as preference payments. According to bankruptcy code, a customer is allowed to demand for their payments made within the 90 days’ period before they filed for bankruptcy. But that not being all, the codes also have exceptions to the bankrupt client’s rights while recovering the previous payments.
Get large discounts:
If your client owes money while filing for bankruptcy protection, then your company as a creditor will receive a small portion for what the client owed which is almost 10 percent. From that calculation, the company loses 90 percent of what is owed. Also, there is a higher chance that the company will not receive the 10% until the client’s reorganization is approved. Such conditions will give you a longer waiting period thus, the company will lose more and may not be able to get back to its position, even with the help of a good insolvency practitioners.
Company loses ability to terminate the clients contract:
If the supply agreement between the company and the bankrupt client was a long-term, then, the company will not be able to terminate the client’s contract. The company is placed at a high risk of honoring the contract especially if the customer is current on post-bankruptcy petitions contract.
The results above, are the negative impacts that a client’s bankruptcy have on your business. But, there exist some procedures that a company or business can use before a client files for bankruptcy. The procedure will be able to protect your company when the client files for bankruptcy.
Also, from the result above, a client’s bankruptcy can cause a company to fall back as it will have lost most of its asset. But, if your business is a sole proprietorship business, then when the client files for bankruptcy, your business will still survive as you are the creditor at the same time the manager.