Eleven Tips for Dealing with Bankrupt Clients

InnoVision Health Media, publisher of such titles as Natural Solutions and Alternative Therapies in Health and Medicine, reportedly filed for bankruptcy a few weeks ago. Although I'm no expert in the subject, I did have to deal with the bankruptcy of the parent of Pages Magazine. Here are a few tips I learned in the process:

• Do some research. Go on the web and find information written by lawyers/law firms whose practices are bankruptcy. This is a specific and intricate legal area, and a general business lawyer is not going to have the answers you need. Neither will friends, family, or other writers. Looking for help on some discussion site is a good way to thoroughly screw yourself, because if you don't do what is necessary, you could end up not getting a dime of what you are owed.
• File early. Don't wait until the very end. I know that the courts have to wait until the official filing deadlines, but there's no harm in getting your claim in early. If there are any problems, you'll have beaten the rush and you might have an easier time getting answers. Wiht Pages, I actually filed the minute I heard about it and didn't wait for the official notice.
• Find out what court is handling the bankruptcy. The bankruptcy courts handle specific geographic regions, and the governing factor is the state in which the company is incorporated. For many, that means Delaware. If you've received a notification, it will indicate the proper court. If you haven't, the company (or possibly a quick web search) should be able to tell you.
• Find the trustee. In any bankruptcy, there will be a company that handles the process - a trustee. This company supervises payments and handles the business of bankruptcy. It can give you definitive answers, even if the bankrupt company itself seems confused.
• You are an unsecurted creditor. That means you're lower on the payment priority than copmanies whose debt was secured with some sort of goods or inventory. That's just the way it is. You don't sell a physical product, and so cannot have a legal lien on that property.
• Fill out the paperwork completely. Yes, it's a pain to pull together all outstanding invoices and to fill out forms, but do it. The amount of time it takes is a lot less than you're thinking, and the upside is that you will get at least a portion of the money you're owed.
• Be ready for demands that you return recent payments. Trustees can demand that anyone paid within 90 days before the official bankruptcy filing return what they were paid, because that is considered a "preferred" payment, and the bankruptcy laws are set up to keep one creditor from getting an unfair advantage over another. If you do get such a notice, do not ignore it. You don't want the trustee, who enjoys the support of the court, to come after you. Instead, answer the demand.
• Don't expect to get everything you're owed. You'll only get some fraction of the money you had invoiced, so unleash your cry of outrage and get it over with. You're interested in getting something rather than nothing. It sucks, you're taking it in the wallet, that's life. It happens to many of us.
• Ignore the offers to buy your claim. There are companies that probably make a very nice living taking the public lists of creidtors for companies (including the totals owed) and making offers, starting at probaby 10 to 15 percent and maybe inching up when you don't bite the first time. Realize that they're not being nice and if they offer to give you 25 percent, they're expecting that your claim will be with 35 percent at least. (That would be a 40 percent return on their investment, which isn't bad at all.) Given that the total amount will be low, you're not getting any real advantage, because by the time you're getting the offers, you've already moved on by force of circumstances, because you've long had to make up your cash flow shortage. So let them troll after some other unfortunate and be patient, though getting your money can take months and months and months.
• Payments can come in parts. Depending on the conditions of bankruptcy, the trustees are probably disposing of assets to free up cash. This takes time. For example, the owner of Pages filed for bankruptcy early in January 2007. I received a third payment some time in the summer of 2008, and for all I know, there may be an additional one coming. All in all, I got at least a third of what I was owed. So if you are moving, make sure the court and trustee has your current contact information.
• Ongoing business may be acceptable. Once a client goes bankrupt, you could be reasonably concerned about doing business with it. However, in the case of a Chapter 11 bankruptcy, which means reorganization (unlike Chapter 7, which is a liquidation of assets), the courts have already put the debts to one side and payments for ongoing work are considered separately. So any work done for the company after the filing goes into a separate category and doesn't go into the queue with old debt.