Understanding Bankruptcy

I get so many questions about bankruptcy and the different types of bankruptcy that I wanted to explain it a little here for my readers.  There are three types of bankruptcy:

1. Chapter 13 – Wage earners, adjustment of debt or an individual with regular income.

2. Chapter 11 – Business, reorganization

3. Chapter 7 – Total liquidation

On April 20, 2005, President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  The BAPCPA has an impact on all small business owners and there are things you can do to protect your business.

Pay attention to your accounts receivables, you should review all accounts and watch larger accounts regularly.  If you are a very small business and losing one large account due to a bankruptcy filing, this can upset your cash flow and you want to know this is coming before it hits you!  One way to do this is to be aware of the warning signs that someone may file bankruptcy.

Watch slow payers who suddenly place large orders.  When a customer is anticipating financial trouble, they may try to stock up on your goods or services.  Some things you can do if this happens is ask for a portion of the payment up front or ask that their balance be paid in full before another order is processed.

Some ways that the BAPCPA will help you is that you will find it easier to defend against a preference claim.  The BAPCPA requires that any lawsuit to claw back a preference claim that is for less than $10,000 must be filed in the area where your business is located rather than in the city where the bankruptcy case or the customer is located.  This is great news for your business; you will not have to incur any costs by traveling or hiring an attorney in another state to defend the claim.  

The BAPCPA also makes it easier for a business to defend itself against a preference claim by eliminating the need to prove that the alleged preference payment was made in accord with industry standards.  Now the business will only need to prove that the payments were made in the ordinary course of business between the business and the bankrupt consumer or company.

The BAPCPA also gives you and your business 45 days to send a written demand for the return of your shipped goods if the customer files bankruptcy.

Bio

Michelle Dunn is an award winning author and columnist frequently featured in the Wall Street Journal, CNN and Forbes. Look for her newest book being released in May by Wiley Publishing titled, "The Guide to Getting Paid, weed out bad paying customers, collect on past due balances and avoid bad debt, available for pre-order now on Amazon.