Business insolvency is on the rise, enhancing the threat that some of your current clients could declare bankruptcy this year. In fact, in 2020, business failures are set to rise for the fourth consecutive year.
Under Chapter 11 bankruptcy, a company can reorganize and create a plan to repay creditors over time. The company can continue to operate, but financial decisions (like paying off creditors) must be approved by a bankruptcy court. That means that your cash flow can be seriously impacted: that client’s past-due invoices may eventually be paid, may eventually be paid but not paid-in-full, or may never be paid. Trade credit insurance can help you avert that cash-flow problem.
In a Chapter 11 bankruptcy, the company that has filed Chapter 11 is allowed to continue to operate under the supervision of the bankruptcy court and pursuant to an approved plan of reorganization. Unless you have a contract with the client that states otherwise, you can still choose to do business with a company in Chapter 11 bankruptcy.
Conducting Business Post Filing
You may be wondering,”if a client files for Chapter 11, will I get paid?” Once a company files for Chapter 11 bankruptcy, it may still continue to operate in the ordinary course of business. That means, it can still purchase essential goods or services necessary for the business to run. These purchases (made after Chapter 11 has been filed) typically get administrative claim status and the company must pay for them even though debts accumulated prior to the Chapter 11 filing are held until the restructuring plan or liquidation plan are confirmed and the bankruptcy court approves payment.
Before you conduct business transactions with a company in Chapter 11, you should first be sure a transaction will receive administrative claim status. Seek approval for the transaction from the bankruptcy court or the trustee. If you choose to do new business with a client in Chapter 11, you should consider certain protections, such as:
- shortening trade credit terms;
- requiring cash on delivery; and
- requiring a deposit or letter of credit before delivery.
Understanding Cash Collateral Orders
As a company that has filed Chapter 11 bankruptcy continues to do business, it will likely bring in money from accounts receivable and/or sale of inventory or property. That income is placed in a cash collateral account. This cash cannot be used without court order.
If you choose to do business with a company in Chapter 11 bankruptcy, verify that the company has the authority to spend cash collateral. Often, cash collateral is subject to a creditor’s lien. So, if you conduct a business transaction with a company after it has filed Chapter 11, and the company pays you from cash collateral it was unauthorized to spend, that transaction can be challenged in court and you may be ordered to pay back all the money you received for that transaction.
Asset Sales
Chapter 11 is an opportunity for a business to pause in paying creditors while coordinating a plan to reorganize and become profitable. Doing so can maximize value for creditors. However, it may be determined that assets of the business or the business itself must be sold. Once this occurs, the company or the creditor’s committee will organize how the proceeds will pay creditors. There is no guarantee that all creditors will be paid or paid in full. If the company is sold, the new owner is not responsible for previously owed debt.
Assessing Creditworthiness
A company that files Chapter 11 bankruptcy can continue to do business and its previous debts are paused for payment. This gives the business an opportunity to reorganize. During this period, the company’s cash flow will change on a regular basis. Companies in Chapter 11 must provide monthly reports and summaries to the bankruptcy court of its business operations, including statements of receipts and disbursem*nts, balance sheets, cash-flow statements, schedules of accounts receivable, tangible assets (like inventory), and post-petition debts.
If you are doing business with a company in Chapter 11 bankruptcy, you should carefully review your client’s monthly operating reports to understand its creditworthiness. Understanding the creditworthiness of any customer is important in guarding your own business’s cash flow. Consider the value that the Allianz Trade's trade credit risk mitigation services can provide. Our trade credit insurance policyholders are able toevaluate credit risks and receive an expert assessment of customers' creditworthiness so they can make better decisions about extending trade credit.
Manage Risk With Trade Credit Insurance
If a client files Chapter 11 bankruptcy, that action can pose a risk to your business. Your past-due invoices may or may not get paid-in-full over time, or you may not get paid at all. If you choose to continue doing business with a company in Chapter 11, you may or may not receive administrative claim status, which could allow you to be paid for goods or services you provide. Doing business with a company in Chapter 11 can greatly affect your cash flow.
When you insure your accounts receivable with trade credit insurance from Allianz Trade, you can count on being paid, even if one of your accounts is unable to pay. In addition, trade credit insurance from Allianz Trade comes with the added benefit of the support necessary to make data-informed decisions about extending credit to clients in Chapter 11 bankruptcy.
