It’s never easy dealing with a customer who has declared Chapter 11 bankruptcy. In contrast to a Chapter 7 bankruptcy, in which the business closes up, assets are liquidated by the bankruptcy trustee, and the proceeds from the business assets are paid out to the business’s creditors, under Chapter 11 the debtor remains “in possession” and may continue to operate its business.
On one hand, if the bankruptcy allows for past debts to be paid under a repayment schedule, the supplier may be a little bit encouraged to keep selling their product to the debtor, albeit most likely on a cash-in-advance basis. On the other hand however, if a large monetary loss has already been sustained and no repayment of the debt is being rescheduled, it really could amount to a situation of throwing good money after bad.
But another thought has to do with the relationship between the supplier and debtor. I’ve seen where a long term relationship gave the supplier a level of sympathy to try and help his customer, from which they profited for many years. In a sense, there might be a feeling that “we’re all in this together.” Conversely, short term relationships that end up with a debtor in bankruptcy usually have very little chance of getting the product from the same supplier. The old adage, “Fool me once it’s your fault, but fool me twice…..”
Nancy Seiverd, President, CMI Credit Mediators, Inc. (nseiverd@cmiweb.com)
