At some point, your business may get pulled into a bankruptcy proceeding because a customer, vendor, or other third-party you are doing business with files for bankruptcy protection. If the current increase in filings continues, so will the possibility that business owners and leaders will have to address bankruptcy-related matters. Therefore, it is important to understand the current bankruptcy climate and how to proceed in it to protect your business.

Read beyond the headlines. Headlines are intended to grab attention. We have seen them with large notable bankruptcy filings this year. It is important to read past the headlines and understand the complete picture to inform good decision-making. In the first quarter, bankruptcy filings have shown year-over-year increases across all chapters and a significant increase in commercial Chapter 11 filings (reorganizations). However, filings remain below pre-pandemic levels. Some of the factors contributing to this increase include increased debt obligations, rising interest rates, and a tightening in credit markets. Businesses that are being impacted are engaging in restructuring activities, bankruptcy reorganization among them.

Pay attention to irregularities in your business dealings with third parties. Have third parties you regularly do business with stopped paying you? Are they paying you late, in different intervals, or in different amounts? Are they limiting communications with you? Irregularities in business dealings can be early signs that businesses are experiencing financial distress. Recognizing irregularities early on gives you time to address payment and other concerns and position your business for a potential bankruptcy filing.

Communicate with these third parties but do not be unreasonable or overaggressive. Communicate with customers, vendors, and other third parties about what is going on. Explore opportunities to work out the issues from a business standpoint. If the third party is or may soon become insolvent, be aware of potential claims by the bankruptcy estate such as preferences and fraudulent transfers as you structure a resolution. Certain payments received from the debtor can later be subject to repayment to the estate through these claims. Do not act unreasonably or exert excessive control over the third party in your dealings. Engaging in this type of conduct can lead to potential adverse consequences for and claims against businesses that become creditors in a bankruptcy.

Stop creditor actions immediately when a third-party files for bankruptcy and confirm what actions are permissible. The automatic stay takes effect the moment a party files for bankruptcy. The stay halts a host of actions by creditors involving the now debtor and the bankruptcy estate, such as taking steps to create, perfect, or enforce a lien; taking possession or exercising control over property; and enforcing a judgment obtained before the bankruptcy filing. While the stay does not prohibit all actions, it is advisable to not take any further action until you confirm what is permissible and how you may proceed. Often, you must seek approval from the bankruptcy court. A violation of the automatic stay can have severe consequences.

Consult experienced bankruptcy counsel. Navigating bankruptcy proceedings on your own can be a trap for the unwary creditor. Bankruptcy proceedings have their own procedural rules that must be followed. They are also much different than other civil proceedings. Bankruptcy attorneys know how to navigate these rules and will work with you to develop a strategy that fits your circumstances.