Bankruptcy Law Abuses

Filing bankruptcy is the last resort when you’re facing a mountain of debt. Previously, bankruptcy law abuses happened by both businesses and consumers who opted to bail out of the sinking debt ships they recklessly created, leaving small business owner-creditors holding the bag. Because of these abuses and because the Bush administration hopes to stem the spiraling tide of consumer credit debt, bankruptcy law changes will go into effect on October 17, 2005.

The new law is called the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Bankruptcy Filings Small Business Impact

Despite the negative impact of a bankruptcy filing destroying a consumer’s or small business owner’s credit rating, this hasn’t stopped the filings flow or the bankruptcy law abuses. In fact, because the new bankruptcy law has been well publicized, you can expect the normal flow to increase to a flood the nearer we come to the deadline. Will this deadline stop bankruptcy law abuses of the system? No. It will increase them in the short term. It’s up to you to protect yourself during this time and after when the law’s effects provide clearer shake-out information.

The Skinny On Pre-bankruptcy Scams

Between now and Oct 17, keep a sharp eye on your receivables and customer behavior. If you have a customer with a lower credit rating who suddenly makes a large order, this may be a red flag that he intends to stiff you for the items shipped, paying (maybe), pennies on the dollar once his bankruptcy goes into effect. Ditto for a new customer who wants to try you out for “future orders.”

Also be wary of sudden, large payments from customers to clear their accounts now due or overdue. The current bankruptcy law has a nasty “preference” clauses which allows the customer, once his bankruptcy is filed, to pull back this payment from you anytime during 90 days of his filing.

How To Protect Yourself From Bankruptcy Law Abuses

One protection against these sudden, large orders is to schedule delayed product or services deliveries over a longer time. Another is to require bigger deposits or full payment for large orders before they ship, or you perform the services ordered. You can also require prepays for scheduled delayed deliveries or services.

And make sure that you do a detailed credit check on any customer with a sudden change of buying behavior before you approve any large order. Don’t rely on verbal commitments. Don’t accept righteous anger from any customer you consider to be a risk, but calmly explain that your actions reflect changes in your operations and are not meant to be personal. You may find that those who cry the loudest will be the first to disappear into the black bankruptcy pit where you can’t reach them, with you stuck with a large order you cannot reclaim. This can put the hurt on your business in short order. Those that go bankrupt won’t care about your employees and the status of your business. But you will and so will your employees.

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