Our Biggest Customer Filed for Bankruptcy: What It Means for Your Receivables, Your Line of Credit, and Your Cash

You find out from a news alert, a call from your sales rep, or an email from a law firm you have never heard of. Your largest customer has filed for bankruptcy. They owe you a meaningful amount of money, you may have trucks on the road headed to their warehouses, and your line of credit was sized on the assumption that those invoices would be paid.

This is one of the most stressful events a supplier can face, but it is also one with a well-worn path. The bankruptcy process has specific rules for suppliers, most of them time-sensitive. Your lender has seen this before and will react in fairly predictable ways. The companies that come through it best move quickly on three fronts at once: protecting their claim, protecting their cash, and protecting their lender relationship.

This guide is general education, not legal advice. The first call after reading it should be to a bankruptcy attorney who represents creditors.

What happens to your receivables the day they file

Collection on old invoices stops

A bankruptcy filing triggers what is called the automatic stay. In plain terms, you generally cannot call, demand payment, or take other action to collect invoices that were owed before the filing date. Those invoices become a claim in the bankruptcy case, and how much you ultimately recover depends on the case, the priority of your claim, and what the customer's estate has to distribute. Recovery can take months or longer.

Those invoices usually leave your borrowing base

Most asset-based credit agreements treat receivables owed by a customer in a bankruptcy or insolvency proceeding as ineligible. That means the availability those invoices supported can disappear from your next borrowing base certificate. If the customer was a large share of your receivables, the drop can be significant, and it lands at the same moment you are dealing with lost sales. Our guide to customer concentration in the borrowing base explains why large single-customer exposure is treated carefully to begin with.

Run the numbers right away

Pull the aging for that customer and separate three things: invoices for goods or services delivered before the filing, goods delivered in the weeks just before the filing, and anything shipped or in transit after the filing. Each category is treated differently. Then recalculate your availability without the pre-filing balance so you know exactly where you stand before your lender asks.

Protections suppliers commonly use

The Bankruptcy Code gives suppliers of goods a few tools that can improve recovery. Each has strict requirements and deadlines, which is why counsel matters.

Goods delivered in the 20 days before the filing

Under Section 503(b)(9), the value of goods the customer received in the ordinary course within 20 days before the filing can qualify as an administrative expense claim. Administrative claims generally rank ahead of ordinary unsecured claims, so this portion of what you are owed may be recovered at a much higher rate than the rest. It applies to goods, not services, so the invoice detail matters.

Reclamation

Section 546(c) preserves a seller's right, subject to conditions, to reclaim goods delivered while the customer was insolvent, within 45 days before the filing. The seller must make a written demand within tight time limits. In practice, reclamation rights often run into the customer's secured lenders, so their value varies widely. The deadline is short, which is why suppliers should raise it with counsel in the first days.

Critical vendor status

Customers in Chapter 11 sometimes ask the court for permission to pay some pre-filing claims of suppliers they consider critical to keeping the business running. Payment is usually conditioned on the supplier continuing to ship on customary terms. If your product is hard to replace, it may be worth asking whether a critical vendor program exists and whether you qualify.

Contracts the customer wants to keep

If you have an ongoing supply agreement, the customer in Chapter 11 will eventually decide whether to keep it or reject it. If they keep it, they generally must cure past-due amounts under that contract. Your attorney can tell you how your contract is likely to be treated.

File your proof of claim on time

The court will set a deadline, often called the bar date, for creditors to file claims. Missing it can forfeit your recovery. Put it on the calendar the day you receive notice.

Should you keep shipping?

Often the hardest decision is not about the old invoices; it is about the next order. A customer in Chapter 11 frequently keeps operating and wants to keep buying. Sales to the customer after the filing are generally entitled to administrative priority, which is better than a pre-filing claim, but priority is not the same as payment. If the case goes badly, even administrative claims can go unpaid.

Suppliers in this position commonly move the customer to shorter terms, cash in advance, or cash on delivery, and cap the open balance they are willing to carry. They also check whether the customer's post-filing financing is in place, since that financing is usually what pays post-filing suppliers. Your lender will also have views on post-filing receivables from this customer, and some lenders treat them as ineligible or reserve against them until a payment track record develops. Ask before you assume new invoices will count.

The preference letter that may come later

Months after the filing, some suppliers receive a demand to return payments they received in the 90 days before the bankruptcy. These are called preference claims. They can feel unfair, because the supplier was paid for real goods, but they are a routine part of many cases.

There are established defenses. The most common are that the payments were made in the ordinary course of business between the parties, that the supplier provided new value (more goods) after being paid, or that the payment was a contemporaneous exchange for new value. Documentation wins these disputes: your normal payment history with the customer, invoice dates, payment dates, and shipment records. Preserve that file now, even if no letter ever arrives.

Talking to your lender

Your lender will learn about the filing quickly, often from the same news alert you saw. Call first. Lenders react much better to a borrower who arrives with facts and a plan than to one who waits for the next borrowing base certificate to tell the story.

Bring the exposure broken out by category, a revised availability calculation without the pre-filing balance, your plan for future shipments to the customer, your trade credit insurance position if you have a policy, and a 13-week cash forecast showing how you get through the gap. If you carry credit insurance, notify the insurer promptly as the policy requires; our guide to trade credit insurance in the borrowing base covers how coverage interacts with your facility.

If the loss pushes you close to a covenant or availability threshold, raise it now. A temporary accommodation discussed early is far easier to get than a waiver requested after the fact. For the bigger picture of replacing lost volume, see our guide to financing when you lose a key customer, and if the gap is short-term, our guide to bridging a financing shortfall.

A first-week checklist

• Engage a creditor-side bankruptcy attorney.
• Stop collection activity on pre-filing invoices.
• Separate the exposure: pre-filing, 20-day window, in transit, post-filing.
• Ask counsel about reclamation and 503(b)(9) deadlines immediately.
• Decide terms for any new orders and set a credit limit.
• Recalculate availability and call your lender.
• Notify your credit insurer if you have a policy.
• Calendar the proof of claim deadline.
• Preserve 90-day payment history in case of a preference demand.

How DCE helps

Don Clarke is a 2021 SFNet Hall of Fame inductee, a Lifetime Achievement Award recipient, and the author of "Asset Based Lending Disciplines," the first textbook on asset-based lending. He has trained more than 5,000 lending professionals at institutions including GE Capital, JP Morgan Chase, Lloyds, and Barclays. That experience is useful when a customer failure hits the borrowing base, because it helps borrowers see the situation the way their lender will.

DCE is an independent advisor and loan placement consultant. We advise borrowers on how a customer loss affects availability, help them prepare the forecast and information a lender will want, and, where the current facility no longer fits, introduce them to lenders whose appetite matches the situation. We do not lend, underwrite, fund, or approve financing, and we do not provide legal advice; every credit decision is made by the lender. See our advisory services and how our process works.

Our sister firm, ABLC (ablc.net), serves lenders with due diligence, field examination, and training services.

Educational only; not legal, tax, or investment advice. Bankruptcy rights and deadlines depend on the facts of each case and applicable law. Consult qualified bankruptcy counsel before taking action on any claim.