A customer in Chapter 11

A small business owner whose customer or client files for Chapter 11 bankruptcy protection likely wonders, will I get paid for what I’ve already sold them, and should I keep on selling?

The second question may be easier to answer. If a company in Chapter 11 obtains what’s called debtor-in possession financing — basically a court-approved credit line — it can keep paying for goods and services it buys after its filing. But having that financing is no guarantee — a company that’s poorly run or whose revenue has dropped precipitously can still default on its obligations even while it’s being reorganized. A vendor must decide whether the risk is worth continuing to do business with a debtor.

Whether outstanding debts will be paid can be trickier. They go on hold after a Chapter 11 filing, and creditors can’t be paid without court approval. Many small vendors find themselves part of the group known as general creditors, who are repaid after secured creditors like mortgage holders. That can take months or years, and creditors will likely get just a fraction of what they’re owed. They may instead want to sell their unpaid invoices to companies that make their money aggregating claims, or try to write off an unpaid bill on their tax returns.

No matter what situation a vendor is in, it’s a good idea to ask an attorney for advice.

A vendor must decide whether the risk is worth continuing to do business with a debtor.