Your Biggest Customer Just Went Bankrupt – Now What?

According to the American Bankruptcy Institute (ABI), 69 percent of the 61,148 business bankruptcies declared during the 12-month period ending in March 2010 were Chapter 7 liquidations.

In most chapter 7 liquidations, unsecured creditors are not made whole. Many don’t receive any part of what they are owed.  If one of your customers enters Chapter 7 bankruptcy, there is a good chance your company won’t recover any part of what it is owed.

So what should you do if your biggest customer declares bankruptcy?

Step 1: Freeze and evaluate current projects and orders

Once it is confirmed that the company has declared bankruptcy, avoid digging yourself further into the hole.  Evaluate all of your current business with the company.  If goods have been shipped to the company after they have declared bankruptcy, your company may be able to reclaim them.  Prepare a binder with all of the documents relating to the customer including signed contracts, pending accounts receivables, pending purchase orders and invoices.  Make sure that your employees that sell to and service the customer are aware of the situation.

Step 2: File a proof of claim

This is the official form which documents what your company is owed.  Download the proof of claim form here. It should be filled out accurately with copies of supporting documents attached.  It should be filed with the court where the customer company filed the petition for bankruptcy.  

A proof of claim should be filed as soon as possible.  The judge presiding over the bankruptcy usually sets a “bar date” which is the last day a creditor is able to file a claim. After that, you are out of luck.  

While the form is simple, as with all legal matters you should consider consulting an attorney before making any decisions.

Step 3: Estimate your actual and future losses and adapt

Using information from step 1, determine what is your financial exposure to the bankrupt company in terms of money owed (accounts receivable) and anticipated future business.  Make a realistic assessment of how much money you can expect to recover.  Adjust your budget accordingly.  If you had human resources or raw material orders in process that can’t be canceled, have your sales team offer specials to other customers to avoid a complete loss.

Step 4: Analyze your customer concentration and make plans to adjust

In order to avoid future scares, it’s important to analyze your accounts receivables, current sales and future pipeline to determine the concentration per customer for each.  If only 1 or 2 companies dominate any or all of these figures, it’s time to diversify.  A management dashboard is a great way to track these statistics.

Step 5: Reassure everyone that this won’t put you out of business

One other factor to consider is how employees, investors, potential customers and existing customers perceive the impact of the bankruptcy on your business.  If it’s well-known that the bankrupt company was an important client, others may fear that this could bring your company down.  If they stop doing business with you because of this fear, it could become a self-fulfilling prophecy.  Get on the phone and reassure your stakeholders that you will survive.  Share with them specific steps taken to address the impact on your company.