My Customer Went Bankrupt. Now What?

You pulled the credit report, reviewed the financials, and got customer updates. Everything looked solid. Then the filing notice arrived.

Now you have unpaid invoices and a court case you didn't plan for. What happens next depends almost entirely on how quickly and carefully you move.

This guide covers each step: understanding the automatic stay, filing a proof of claim, defending against preference payment clawbacks, and when selling your claim makes financial sense.

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Step 1: Take Action, Fast

The moment a customer files for bankruptcy, an automatic stay takes effect. The automatic stay legally prohibits you from contacting the customer for payment, pursuing collections, or repossessing goods. Your claim is now part of a court-supervised process with strict deadlines.

Miss those deadlines and you may recover nothing, regardless of how clean your invoices are.

What to do:

• Retain legal counsel with commercial bankruptcy experience, if needed
• Gather all relevant documents: contracts, invoices, credit applications, and payment history
• Register on PACER (Public Access to Court Electronic Records) and track filings directly

Creditors who move in the first week consistently do better than those who wait.

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Step 2: Understand Your Priority Position

Bankruptcy distributes money in priority order. Your position determines what recovery is realistic.

‍Secured creditors hold collateral, liens, or a valid UCC filing against specific assets. They are paid first from those assets.

Unsecured creditors have no collateral. They fall behind secured parties, tax authorities, and employees. Trade creditors almost always land here. In Chapter 7 liquidations, unsecured claims frequently receive nothing. In Chapter 11 reorganizations, recovery varies widely by case.

Knowing your position determines how aggressively to pursue the claim, what legal fees make sense, and whether selling the claim is worth exploring.

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Step 3: File a Proof of Claim

A proof of claim is the formal document that tells the court you are owed money and how much. If you do not file one, the court has no record of your claim and will not include you in any distributions. The bar date is the court-set deadline for filing. Late claims are rejected without exception.

What to include in your proof of claim:

• The exact dollar amount owed
• The legal basis for the claim (unpaid invoices, breach of contract, etc.)
• Supporting documents: contracts, invoices, signed credit applications, and payment terms

Keep amounts precise. Vague or incomplete filings get challenged, and challenged claims slow down or eliminate recovery.

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Step 4: Audit for Preference Payments

Payments you received in the 90 days before the filing date can be reversed by the bankruptcy trustee. These are called preference payments. The trustee has legal authority to demand repayment, even if the payments were routine and you had no knowledge of an impending filing.

What to do:

• Audit all payments in the 90 days leading up to the filing
• Be prepared for the court to request repayment even if the payments were legitimate
• Consult your attorney to see if defenses apply, such as proving the payments were made in the ordinary course of business

Preference rules exist to prevent customers from quietly paying favored vendors before cutting off the rest. Understanding them in advance means you can prepare rather than scramble.

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Step 5: Set Realistic Recovery Expectations

Unsecured recovery in Chapter 7 bankruptcies averages a few cents on the dollar. Chapter 11 outcomes vary more, but full recovery is rare and often takes years. Reset expectations now rather than after months of waiting. That changes how you account for the loss, whether aggressive legal pursuit is financially justified, and what you communicate internally. It also surfaces the more useful question: what would have reduced your exposure here, and can that be addressed before the next filing?

What to do:

• Adjust your expectations early so you can make better financial decisions
• Treat this as a lesson to refine your credit policies and monitoring
• Use the experience to strengthen how you vet customers before extending terms

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Step 6: Build a Bankruptcy Response Playbook

Bankruptcy filings create chaos when there is no procedure. With one, they are manageable.

Document the following before a filing happens:

• Who owns the first call when a notice comes in
• Which internal systems to flag immediately
• Which documents to pull and where they are stored
• How Legal, Credit, AR, and Sales coordinate across the response

Run the process as a tabletop exercise at least once. Most teams discover gaps they did not know existed. A documented process reduces the risk of missed deadlines and mishandled claims.

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Should You Sell Your Bankruptcy Claim?

You are not required to wait out the court process. A secondary market exists where distressed debt buyers purchase bankruptcy claims at a discount in exchange for taking on the recovery risk.

How the process works:

1. File a clean, complete proof of claim. Buyers will not purchase incomplete filings.
2. Find buyers through platforms like Xclaim or ClaimTrader, or through distressed debt firms.
3. Expect offers between 10 and 60 cents on the dollar, depending on claim size, priority position, and estimated recovery odds.
4. Sign a transfer agreement. The buyer files the transfer with the court. You receive cash and exit the case.

For large unsecured claims with uncertain or distant recovery timelines, selling is often worth more than waiting for a distribution that may never arrive.

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The Best Defense Is Prevention

Every bankruptcy that comes as a surprise left signals beforehand: slow payments, new liens, deteriorating financials, management turnover. The information existed. The monitoring did not catch it in time.

With AI-driven credit risk tools like Credit Pulse, you can:

• Monitor customer financial health in real time
• Spot early warning signs such as slow payments, liens, or leadership changes
• Adjust terms before trouble escalates
• Rely on fraud-resistant credit applications to block risky accounts at the start

Prevention reduces exposure and turns credit from reactive firefighting into strategic risk management.

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Final Thoughts

Bankruptcy is one of the hardest scenarios in credit, but it does not have to wipe you out. By moving quickly, filing claims properly, preparing for clawbacks, and considering claim sales, you can preserve your position.

Even more importantly, every bankruptcy is a reminder to strengthen your credit process. With fraud-resistant credit applications and AI-powered monitoring from Credit Pulse, you can stay ahead of risk and avoid being blindsided again.

Bottom line: Bankruptcy will happen in B2B. The only question is whether you are prepared.

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FAQ: Bankruptcy in B2B Credit

What is an automatic stay in bankruptcy?
An automatic stay is a federal court order that takes effect the moment a customer files for bankruptcy. It immediately stops all collection activity, lawsuits, repossessions, and direct contact for payment.

What is a proof of claim and when is it due?
‍A proof of claim is a formal document filed with the bankruptcy court stating the amount owed and the basis for the claim. It must be filed before the bar date, which the court sets for each case. Late filings are rejected.

What are preference payments in bankruptcy?
‍Preference payments are payments received from a customer in the 90 days before their bankruptcy filing. The bankruptcy trustee can legally reverse these payments and demand repayment, even if they were routine transactions.

Can I sell my bankruptcy claim?
Yes. Distressed debt buyers purchase bankruptcy claims on the secondary market, typically for 10 to 60 cents on the dollar. This provides immediate cash rather than waiting years for court distributions.

How can I reduce bankruptcy risk in my customer portfolio?
Real-time credit monitoring tools like Credit Pulse track early warning signs including payment slowdowns, liens, and public filings, allowing you to act before a customer reaches insolvency.

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