Between these trying economic times and the COVID-19 pandemic, many businesses are struggling to keep their bills paid during a time when they may not be able to keep their doors open. The fact of the matter is that a lot of these businesses will be filing for bankruptcy soon, and that will impact everyone that business did business with—including bankers, landlords, and other entities. If you have contracted with one of these businesses, you may now be facing a loss of income from rental or sale properties and may even be forced to repossess certain assets.
With so many businesses filing for bankruptcy, how can you avoid losing significant income or being put in a disadvantageous situation because of these clients?
Watch out for these pitfalls as your client goes through the bankruptcy process in order to protect yourself, your income, and your assets:
Don’t Try To Collect In Full
Once you receive notice of bankruptcy from your client, you must cease all demands for payment in full, and you cannot attempt to immediately repossess any goods that may still be in the client’s possession. This is a good time to approach the client with other payment options, like payment reorganization or other payment plans. At this time, it is wise to speak with your attorney, who can advise you on additional options according to the Bankruptcy Court rules in your district.
Don’t Give Up
Although it may be tempting, when your client files for bankruptcy and stops payments, don’t just write them off as a lost cause and take the financial loss. Instead, reach out to them. Bankruptcy can be difficult, especially for small business owners, and they may be willing to negotiate partial payments for a short time in order to keep their space—and if this keeps your bills paid, or saves you from having an unwanted real estate asset on your hands, this may be a perfectly viable option for all parties.
Don’t Assume All Forms of Bankruptcy are Created Equal
Has your client declared bankruptcy under Chapter 7, 11, or 13? If your client has declared under Chapter 7, their assets will be split and used to pay off their debts fairly quickly. The amount will be split between creditors, assuming that the debts outweigh the value of the assets. If your client has declared under Chapter 11 or 13, however, they will be able to take several months to reassess their business plan and come up with a repayment plan. In a case like this, it may take much longer for you to receive the funds you are due.
Don’t Be Inflexible on Payment Terms
Once your client has declared bankruptcy, reach out to their attorney or other legal representative to begin a conversation around payment options. Again, some money is always better than no money, and a business in a situation like this may be eager to avoid losing their place of business and will jump at any opportunity to reorganize their payment plan or operate with reduced rent for a limited amount of time. While you may not be thrilled by these options, they may save you from having to find a new tenant or losing even more money on the property.
These are just a few of the ways that you can renegotiate contracts with your clients as they go through bankruptcy in order to minimize your losses. It is possible to protect your own income during this time, even if it means adjusting some contract terms or taking a small loss up front. When you work with an experienced commercial real estate attorney, you’ll learn about the best options for your situation, and how to create a win-win scenario for both your needs and the needs of your client.