Are you wondering What happens to the debt after Bankruptcy?

The risk of having a client declare bankruptcy is a possibility all businesses face, and when you find yourself in this situation what are your rights regarding the debt owed? Is it possible to recover the outstanding amount owed to you?

If an individual is no longer able to pay their creditors, they can seek relief from their debts by filing for bankruptcy to discharge their debts, through the court.   When the bankruptcy is granted, the Government or Court will appoint a trustee, as the trustee it is their job to manage the bankrupt estate, working out how to distribute any assets after establishing what priority to give the creditors.

The trustee will notify you, if you are one of the listed creditors to advise the possibility of you receiving any funds from any liquidation of the debtors’ assets.   In order for you to recover your outstanding debt, proof of the debt detailing what you are owed and the circumstances, needs to be lodged with the trustee.

The probability of recovering your money back is dependent on the number of creditors involved, the more creditors there are the less chance you will have in payment, and the client’s likelihood to have any available tangible assets in which the trustee can liquidate.  If the client is a small business, it is often the case, they will have no assets that can be liquidated for cash.

What happens to the debt after Bankruptcy?

In order to avoid violating the Bankruptcy Act 1966 (Cth) and possibly being sued you should immediately cease any debt collection processes.  You can however contact the trustee, or solicitor who notified you of the bankruptcy to find out further details and ask any questions that you might have.

Seeking professional debt collection advise is highly recommended at this point as a precaution to yourself to ensure you are following the correct steps in the proceedings.

As a business owner you should always take a proactive approach in avoiding bad debts, to save your self the difficult and long process of trying to obtain payment when a client becomes bankrupt. 

Preventative measures including completing credit checks on new clients and checking trade references these things can help you determine a clients business history and the risk they could be of becoming bad debtors.

Once these initial checks are done and the client checks out it is vital to communicate your businesses terms of trade, clearly pointing out failure to stick to the terms will make them liable for collections costs including any fees associated with engaging a professional debt collection agency.

In the situation where you have doubts about the potential client, but are considering their business anyway it would be wise to ask for deposits, or upfront payments perhaps put retainers in place prior to any goods or services being done.

Don’t forget your existing client’s payment behaviours too, if a good paying client is taking longer and longer to pay this could be a warning sign of trouble.  If after sending out three payment reminders the client has still not made payment, we strong suggest you seek help form a debt collection agency.

When all is said and done, completing your due diligence prior to considering giving credit to anyone is your best defence is to protecting your business against bankrupt clients.