You’re running a business, you have enough clients and everything is going well. It’s exciting and you love your life. Until one of your clients, maybe even your biggest clients files for bankruptcy. You’re in shock. You don’t know what to do. Well, start reading this. It happened to me thrice (!). Yep, three times. The first time I had only invested time, the second and third time I also invested materials. The third time it was a company abroad… so you understand, I was not only in shock (huuuh, I just emailed them yesterday?!) but also lost – where did I start now they didn’t respond to my emails anymore? This is your guide!
What to do when a client files bankruptcy
You’ll either read about the bankruptcy in the paper, you’ll get an email from the company or you’ll receive a letter from their attorney. The first time it happened I didn’t know what was going on, because I was very green and finally felt a little bit grown up and like a real entrepreneur! How stupid that may sound. But if it happens once, you put your guard up and that’s a good thing. But sometimes you can’t know what’s going on in a business and it’s a complete surprise. This happened to me the last time it happened, because I was on a weekly basis in contact with the company and everything seemed fine. But of course, you can’t know that.
What to do when a client files bankruptcy and how you can protect yourself
I have never filed for bankruptcy myself, so I can only tell you what I know from being the person who wants her money, and as we speak I’m still waiting to get a payment from the third company (it may take a few months). I’ve been waiting for over 6 months now, so I’m not sure if I’ll ever see my money again… I received all of my money back the first two times, so that’s a good thing. Here’s how you do that:
My number #1 tip? If you work with clients on big assignments: never send just one invoice but work with deposits. Have a payment plan available and set yourself a ‘safe amount’. For example, I’d set that amount at $500. If I’m working on a project for a longer period of time, I’d send invoices of $500 (for example 1 of 3, 2 of 3, 3 of 3 total $1500). This way, you’ll notice upfront when it takes too long to get paid or when the client acts weird. It’s safer for you to never receive invoice 3 of 3 than the full amount. One thing I really learned is listening to your gut, and I always learned that if clients want to pay LESS than your fixed price, they have a thousand questions and you just get a bad feeling.. It’s usually a bad match. And most of the time you’ll also feel it when a clients has financial problems, especially if you’ve been working for them for a while. If your invoices are getting paid later and later, they don’t pick up the phone etc… it’s time to listen to your feelings and decide if you want to take the risk or not.
One thing I didn’t know, was that you have to stop communication directly. If you try to contact them to get your money back, you will violate the bankruptcy code and you can be sued. Iek!! I didn’t know this, because it feels SO natural to just send a kind email to your contact person with, hey I just read this, what’s next? But uhm, don’t do this! Contact the attorney or court-appointed trustee to work out an arrangement on how your debt is handled.
Have everything on paper, and organize your communication, contracts and proof like a superstar. When someone that owes you money business wise files for bankruptcy, you need proof that you worked on the project, that you agreed to the price etc. I use an external hard drive, I have my emails in my email program and as a backup in Evernote, and I download all the contract etc. to the cloud, just to be sure!
Pick your battles. Sometimes it’s ‘cheaper’ to not take action. I never did this because I’m like, hey if I have to fill in some papers and create a package with my super organized files, I’ll do it to get paid! But sometimes, it’s not worth it. If you’re a million dollar company, it’s different than when you’re a small business owner. I don’t mind working an evening so I get paid for my work, and I guess you’ll neither!
Know that there is a deadline to file a claim and find out when that date is ASAP!
You can download your claim online: search for a proof of claim form on the company’s country’s government homepage. It’s a one form and you basically have to fill in your information, their information and the amount they owe you. Super easy, and you don’t need a lawyer. Sometimes you have to pay a filing fee (pay no more than $30).
There is a pecking order and where you fall in the order will determine how likely you are to get your money back. Ieek! How the order works? Secured claims, which include mortgage holders, rank higher than unsecured claims, such as goods sold or services rendered. There are also fees that have to be paid to the trustee and administrators. Schedule A and Schedule B of the bankruptcy petition list secured debts while Schedule E or Schedule D lists unsecured debts. If the debt is secured, you have a stronger leg to stand on. But even if there is a chance you will get your money back, it’s typically 10 cents on every dollar owed, Daniel Gershburg says to Inc. Magazine. But so far, I always got ALL of my money back except the money paid for the claim/mail to send the claim.
Remember; it takes AGES to get that money back! The debtor has the right to come up with a reorganization plan and they can take their time: up to 120 days. So that also means that you probably have about 2 months to file the claim, and even more if you’re working with a company abroad, but check your deadlines always immediately!
Good luck if you’re currently dealing with a debtor!
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