Things You Can Do as a Seller Before Your Customer Goes Bankrupt:
Your risk as a seller of goods goes far beyond not collecting your outstanding receivables when your customer files for bankruptcy. But you have some protections.
Reclamation: If you have shipped goods to your customer within 45 days before it files, you can reclaim goods by properly filing a reclamation notice. There are pitfalls and you have to do it exactly right, but it may save you a loss on these shipments.
Avoid Avoidance Actions “Preference” is a dirty word in bankruptcies. Obviously contemporaneous exchange (COD, cash with order, taking a security interest, perfected consignment) eliminates the risk that a debtor in possession or trustee will make a preference claim, but all is not over when a preference claim is made. There are many defenses to preference claims. DON’T cave in! Consult your LNL lawyer who can advise you on whether, when and for how much to settle your preference claims.
The lesson here is to monitor your customer’s “slide” into insolvency and react appropriately. If its payment habits begin to change, evaluate immediately and act. When the bankruptcy is filed, it may be too late.