The Federal Courts of the United States recently reported that total bankruptcy filings rose 14.2%, with increases in both business and non-business bankruptcies in the 12-month period ending December 31, 2024. This continues an ongoing rebound in filings after more than a decade of sharply dropping totals. According to statistics released by the Administrative Office of the U.S. Courts, business filings rose 22.1%, from 18,926 to 23,107, in the year ending Dec. 31, 2024 with non-business bankruptcy filings rising 13.9%.

What you should do when a customer files for bankruptcy can be a complicated situation for any business. Here are some steps to consider:

<ol><li><b>Verify the Bankruptcy Filing:</b><ul><li>Confirm the bankruptcy filing by checking court records. You will often receive a formal notice about the filing and the specific type of bankruptcy (e.g., Chapter 7, Chapter 11, or Chapter 13).</li></ul></li><li><b>Stop Collection Activities:</b><ul><li>Once you are notified of a bankruptcy filing, you are legally required to cease all collection activities. This means halting any calls, letters, lawsuits or other actions to collect debt, since it could violate the automatic stay imposed by the bankruptcy court.</li></ul></li><li><b>Understand the Type of Bankruptcy:</b><ul><li><b>Chapter 7 (Liquidation):</b> The company’s assets are liquidated, and creditors are paid from the proceeds. In many cases, commercial creditors may not recover much or anything if assets are insufficient.</li><li><b>Chapter 11 (Reorganization):</b> This is most common for businesses that intend to continue operating. The company will submit a reorganization plan to pay debts over time, and creditors will typically be asked to approve or object to the plan.</li><li><b>Chapter 13: </b> Not common for businesses, as this is typically for individuals. However, if your commercial customer has filed Chapter 13 (in cases where it's a sole proprietorship or similar setup), they will propose a repayment plan, and some debts may be discharged.</li></ul></li><li><b>File a Proof of Claim:</b><ul><li>In most cases, you’ll need to file a proof of claim with the bankruptcy court to state that the customer owes you money. This ensures your business is included in any potential repayment plan or distribution of liquidated assets. The deadline for filing a proof of claim is typically provided in the bankruptcy notice.</li></ul></li><li><b>Consult with Your Attorney:</b><ul><li>It’s wise to consult your attorney to help navigate the process and understand the best course of action and whether, how, and when you should object to the bankruptcy plan.</li></ul></li><li><b>Monitor the Process:</b><ul><li>Stay informed about the bankruptcy case by attending creditors' meetings (if applicable) and following any updates from the court. It’s essential to ensure that you’re not missing any important deadlines or developments.</li></ul></li><li><b>Adjust Your Financial Strategy:</b><ul><li>Assess how the bankruptcy impacts your business’s cash flow and adjust your financial strategy accordingly. You may want to reevaluate your risk management practices and how you extend credit in the future.</li><li>As a precaution for future dealings with commercial clients, you may want to review and tighten your credit policies to mitigate risks from similar situations in the future.</li><li>Consider requiring personal guarantees, security interests, or other forms of collateral to reduce the potential for non-payment in case of bankruptcy.</li></ul></li></ol>

By following these steps, you can protect your rights and interests while adhering to the legal process when your commercial customer files for bankruptcy. Consulting with legal and financial professionals is often key to ensuring the best outcome for your business in this challenging situation.