Learning that a customer or supplier is about to file for bankruptcy gives you an ideal opportunity to protect your business. You cannot stop the bankruptcy, but you can make strategic moves to lessen the damage to your company if the customer or supplier follows through with the bankruptcy petition.

You can make general moves based on your knowledge of the customer’s or supplier’s plans, but you need precise information for an affective strategy. Example: Your biggest customer representing 53 percent of your annual revenue is planning to file for bankruptcy, according to reports you have been hearing. You could immediately close the customer’s credit account and cut off all shipments. But that could backfire in a big way if you learn later that the customer was planning Chapter 11 bankruptcy for purposes of reorganizing debt and had no plans to stop making regular payments to you. On the other hand, if the owner is filing for straight liquidation and going out of business through Chapter 7 you should close credit lines and end shipments.


A valued customer who has paid you well isn’t going to take kindly to being blind-sided by a decision to eliminate his credit line and shipments. It’s better to make a courtesy call to the customer and discuss your concerns about the bankruptcy reports you have been hearing. After the conversation you can decide on restricting credit and shipments. It’s worth noting that many businesses, including some of the largest in the world, file for Chapter 11 bankruptcy and continue business more or less as usual. General Precautions Obviously, your largest customers should be handled carefully, but you should stake swift action against smaller companies that have a slow pay history and are currently two or three months behind on their invoices.


Suppliers entering bankruptcy present a different challenge. You are the customer with the supplier generally providing goods and services on credit. The bankruptcy isn’t a big deal at all if the supplier is a minor vendor and can easily be replaced. However, you should act fast to find other suppliers if the vendor is a major player and has been providing you with critical goods and services at a competitive price. The bankruptcy could prevent the company from delivering as it has in the past, which means you must be ready to move your business elsewhere.

The Automatic Stay

Nothing can legally stop a customer or supplier from filing for bankruptcy. You can write or call demanding that a bill be paid in full, but that is unlikely to be effective if the customer has already decided to file for bankruptcy. Filing a debt lawsuit for a delinquent account won’t help, either. All forms of bankruptcy allow for a provision known as an “automatic stay,” which immediately halts all forms of debt collection after the bankruptcy is filed. The automatic stay is a legal injunction signed by a judge and prohibits lawsuits from continuing or being started while the bankruptcy is in effect.

Final Decision

Once the bankruptcy petition has been filed have your accountant obtain a copy from the federal bankruptcy court to review the filing and offer an opinion about the outlook for the company. Rely on the accountant’s advice as you make a final decision about your relationship with the vendor or supplier.