What to Do When a Client Files for Bankruptcy Mid-Project

Picture this: You are halfway through a project, hoping to close the deal with an attractive profit margin, and your invoices go outstanding. It hits you even harder when you know your client has filed for bankruptcy. 

A client's bankruptcy is a gut-wrenching moment that many Houston and Dallas businesses know all too well. Fortunately, you aren't always out of options, provided you move quickly and smartly from this situation.

Here is what you can do when a client files for bankruptcy:

Step 1: Stop All Work and Communication Immediately

The moment your client files for bankruptcy, an automatic stay goes into effect. This federal code order halts all collection efforts, including calls, emails, lawsuits, and even informal pressure. It is best to stop the project right away and document your logged hours, completed deliverables, and outstanding invoices so they can be used in future proceedings.

Step 2: File a Proof of Claim Within the Deadline

Once your client files for bankruptcy, all creditors will be given a window to file a proof of claim with the court. This is a formal declaration of how much you are owed and should be filed within the set deadline; otherwise, you will walk away with nothing. However, it is important to know which chapter of bankruptcy was filed to shape the recovery strategy. Chapter 7 liquidates a client's assets to pay all creditors, whereas Chapter 11 restructures the business, with creditors receiving payments over time.

Step 3: Understand Where You Stand in the Creditor Line

In bankruptcy, not all creditors are treated equally. Secured creditors with collateral backing get paid first. Unsecured creditors are further down the line. If you have a signed contract, a security in place, or a lien, surface that document immediately. Besides, always have solid contract terms before beginning a project, or the situation can worsen in no time.

Step 4: Recover Whatever You Can

Bankruptcy proceedings can last for months, with no guarantee of a full recovery. Many businesses also recoup just a fraction or nothing at all if they keep waiting or do not engage the right assistant on time. So, it is best to recover what you can and then protect your future receivables with tighter intake processes, deposit requirements, and a clear Houston debt collection strategy, so things do not reach this point in the future.

Step 5: Partner With Collection Professionals 

Dealing with financial distress, especially client bankruptcy, can be stressful to navigate alone. If you have multiple outstanding commercial debts or non-responsive clients, it is best to engage a reputable local commercial debt collection agency to improve your recovery outcomes. Reliable agencies will understand local laws, move quickly, and handle the process in compliance so you can focus on running your core operations without interruption. Contact a positive debt collection agency in Houston, TX, today to learn more. 

Key Takeaways

  • An automatic stay comes into effect the moment bankruptcy is filed. 
  • A bankruptcy immediately ceases all collection activities.
  • File a proof of claim with the bankruptcy court before the deadline to stay in the game.
  • Your position as a secured vs. unsecured creditor will directly impact how much you recover.
  • Partnering with a Houston debt collection agency early to improve recoveries on non-bankruptcy delinquencies.
Location: Texas, USA

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