A Credit Manager's Guide to Current Bankruptcy Trends and Protections

Customer bankruptcies test how well your credit practices hold up under pressure. The difference between partial recovery and near-full recovery often comes down to decisions made in the first days after filing — and whether you spotted the warning signs before it happened.

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Key Protections for Post-Bankruptcy Shipments

The DIP Financing Myth

DIP (Debtor-in-Possession) financing doesn't guarantee payment for post-petition shipments. It's a common misconception — and a costly one. Before continuing shipments:

• Review the DIP financing or cash collateral order carefully
• Check the budget to verify your customer can pay you
• Confirm which budget line item covers your shipments
• Verify the term of DIP financing matches your invoice terms

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Best Practices for Post-Petition Sales

When shipping to a bankrupt customer, remember:

1. Cash in advance is king

• Require payment by wire transfer, not check
• This eliminates risk of non-payment
• Provides immediate access to funds

2. If cash in advance isn't possible, consider:

• Reduced credit terms with strict credit limits
• Letters of credit from creditworthy third parties
• Personal guarantees from principals (especially valuable in closely-held companies)

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Maximizing Your Recovery: The Power of 503(b)(9) Claims

The “20-day” administrative claim under Section 503(b)(9) is one of your most powerful tools.

• Qualification Requirements:
  • Goods (not services) delivered within 20 days before bankruptcy
  • Sold in the ordinary course of business
  • Goods must be received by the debtor
• Important Recent Developments:
  • Courts now generally allow 503(b)(9) claims even when goods are part of a service contract
  • Physical possession, not shipping terms, determines receipt
  • Drop shipments may be covered (though courts are split)
• Strategic Tips:
  • File your claim promptly, even though it's self-perfecting
  • Watch for local rules about filing procedures
  • Document delivery dates carefully
  • Separate goods from services in your invoicing

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Red Flags: Spotting Pre-Bankruptcy Warning Signs

Watch for these warning signs that may indicate an impending bankruptcy:

• Unusual Ordering Patterns:
  • Sudden large orders beyond normal volumes
  • Customer “bulking up” on inventory
  • Compare notes with other vendors if possible
• Payment Behavior Changes:
  • Irregular payment patterns
  • Requests for extended terms
  • Unusual financing proposals

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Critical Vendor Status: A Double-Edged Sword

Critical vendor designation can improve your recovery, but it comes with obligations:

• Benefits:
  • Potential full payment of pre-petition claims
  • Continued business relationship
  • Possible preference claim protection
• Considerations:
  • Usually requires continued credit extensions
  • May need to sign a critical vendor agreement
  • Risk of clawback if terms aren't met

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Protection Tip: Obtain personal guarantees when signing new customers. This provides leverage for critical vendor status later, as the decision-maker may be personally liable.

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Practical Action Steps

• When Bankruptcy is Filed:
  • Immediately review your exposure
  • Document all goods shipped within 20 days
  • Consider reclamation demands
  • Evaluate critical vendor potential
• For Ongoing Business:
  • Review and possibly modify credit terms
  • Document all communications
  • Monitor payment compliance
  • Keep shipping and payment records organized
• If Payments Are Late:
  • Consider stopping shipments immediately
  • File administrative expense claim promptly
  • Request shortened terms for future shipments

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Looking Ahead

Recent court decisions show a trend toward protecting creditor rights while maintaining the integrity of the bankruptcy process.

Stay informed about:

• Local bankruptcy court rules and procedures
• Industry-specific bankruptcy trends
• Changes in preference defense strategies
• Updates to administrative claim requirements

Bankruptcy doesn't have to mean losing your entire claim. Act promptly, document everything, and assert your rights under the Bankruptcy Code. When in doubt, consult bankruptcy counsel to make sure you're taking advantage of all available protections.

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