The New Bankruptcy Laws: What You Need to Know

If you sell products or services to other businesses on credit, there is good news in the new bankruptcy bill that became effective in October 2005.  Overall, conditions have become a bit friendlier for companies whose customers are declaring bankruptcy:

The new rules of reclamation: The period to make a reclamation demand (recovering goods your company sold) has been expanded from 20 to 45 days.  In other words, if you send goods to a debtor company and it files bankruptcy, you now have 25 more days than you did under the old laws in which to send them a letter saying, “We sent you 100,000 widgets and you failed to pay for them.  Send them back.”

Also, if you ship the goods within 20 days before your customer files bankruptcy, you are now entitled to an administrative claim. (Previously, you were entitled to a general claim, which meant that you might receive pennies on the dollar at some vague time in the future.)  In other words, your claim is viewed as a much higher priority than it was before, which should increase the odds that you will be compensated for the full value of your goods.

More protection from preference claims: A preference claim is the court’s attempt to get back payments that were made to creditors just before the bankruptcy was filed.  The Bankruptcy Code attempts to discourage creditors from pushing a debtor over the edge into bankruptcy and seeks to level the playing  field among creditors by requiring the return of payments $5,000 made within 90 days before the bankruptcy.  This is to avoid giving creditors who receive such payments an advantage over others.  Section 547 was strengthened to limit the right to bring preference claims to those in excess of $5,000. In addition, any claims of more than $5,000 but less than $10,000 must be filed in the court where the creditor is located, rather than where the bankruptcy is.

Finally, remember that while these recent changes favor creditors, bankruptcy policy helps those who help themselves.  Always keep a close eye on customers you suspect might be on the verge of bankruptcy.

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