Practical Strategies for Creditors

For many businesses, late payments are the first sign that a customer is slipping into financial distress. What starts as slow pay can quickly snowball into a serious cash-flow problem, especially for vendors, landlords, and service providers who depend on steady receivables.

Recognizing the Early Warning Signs

Most distressed situations do not arrive without notice. Accounts receivable aging beyond normal terms is often the first red flag. That issue is usually accompanied by others, including requests for extensions, partial payments, unexplained changes in ordering patterns, or sudden management turnover.

Richard Corbi of the Law Offices of Richard J. Corbi PLLC emphasizes the importance of paying attention to these signals: “If a company that has always paid you on time suddenly needs more runway, that’s your cue to start asking questions.”

For public companies, those questions can be answered by reviewing SEC filings, earnings calls, and public disclosures. Private companies require more intuition, but broken promises and repeated excuses tend to tell the same story.

Credit reports, UCC filings, and conversations with others in the same industry can also provide valuable context. None of these tools is perfect on its own, but together they often reveal whether a customer is facing temporary strain or something more serious.

Why Prevention Is Easier Than Recovery

Once a customer is clearly in distress, options narrow quickly. That is why preventative measures, even if uncomfortable to raise, are often the most effective way to manage credit risk.

Common tools include personal or corporate guarantees, security deposits, collateral, letters of credit, and credit insurance. Each comes with trade-offs. Personal guarantees can look reassuring, but often provide little real protection if the guarantor has most of their assets tied up in the business. Collateral can help, but only if it has real value and the lien is properly perfected.

Jonathan Friedland of Much Shelist, P.C., points to letters of credit as one of the strongest protections available: “With a letter of credit, the obligation to pay you is not your customer’s but, rather, the provider of the letter of credit, which is usually a bank. So, when you draw on a letter of credit, it’s the bank’s funds you are getting, not your customer’s. For this reason, if your customer files for bankruptcy protection you do not need court authority to make the draw; it’s not property of your customer’s bankruptcy estate.” This in stark contrast to how security deposits work.

Cash as Risk Prevention

When risk increases, cash terms become harder to avoid. Cash in advance and cash on delivery are direct tools, but they are effective. They eliminate credit exposure altogether and prevent a creditor from having to chase payment later.

“I’m a big believer in money in hand,” notes Laura Davis Jones of Pachulski Stang Ziehl & Jones LLP. “It’s better to have the cash and deal with the consequences later than never have it at all.” Friedland agrees, putting it more colloquially, “You always want to be the guy with the money that someone else wants to try to get, as opposed to the guy trying to get the money.”

In industries like retail and manufacturing, cash terms have become increasingly common as vendors try to avoid being pulled into costly insolvencies.

What To Do When Payments Stop

If preventative measures fail and payments stop, creditors still have options outside bankruptcy. These include sending accounts to collections, filing lawsuits, stopping performance, seeking the appointment of a receiver, or, in extreme cases, pursuing an involuntary bankruptcy.

Each option has downsides:

• Litigation is slow and expensive.
• Receiverships can preserve value but require court involvement.
• Involuntary bankruptcy is powerful but carries legal risk if not handled correctly.

Timing matters. Acting too late often leaves creditors with little leverage, while acting too aggressively can damage relationships unnecessarily.

How Bankruptcy Changes the Rules

Once a customer files for bankruptcy, the landscape shifts immediately. The automatic stay goes into effect, halting most collection efforts and enforcement actions. Creditors cannot sue, seize assets, or even demand payment for pre-bankruptcy debts without court permission.

“The automatic stay is designed to give the debtor breathing room, but it also freezes creditors in place whether they like it or not,” explains Thaddeus D. Wilson of King & Spalding LLP.

Violating the stay can result in real penalties, making it essential for creditors to understand when to pause and when to seek relief. Relief from the stay is sometimes available, particularly for secured creditors whose collateral is declining in value. Courts are cautious, especially early in a case, but filing a motion can preserve rights and position a creditor better later on.

Understanding Creditor Claim Hierarchy

Not all creditors are treated equally in bankruptcy. Secured creditors generally sit at the top of the payment hierarchy, followed by administrative claims and priority unsecured claims such as wages and certain taxes. General unsecured creditors, which include most trade vendors, are usually last in line.

The Bankruptcy Code provides certain protections for trade creditors, including claims for goods delivered shortly before bankruptcy, reclamation rights, and critical vendor status. When used correctly, these tools can improve recoveries or provide negotiating leverage. These rights are technical and time-sensitive. Missing deadlines or failing to follow required procedures can eliminate them entirely. Early advice from professionals familiar with distressed situations can make a significant difference.

In larger cases, unsecured creditors may be represented by an official committee. Committees play a central role in overseeing the case, negotiating with the debtor, and pursuing claims on behalf of unsecured creditors as a group. Whether or not a committee is formed, filing a proper proof of claim is essential. Creditors who fail to file when required may lose the right to receive distributions or vote on a plan. Even small errors or missing documentation can have serious consequences.

Ultimately, understanding where a claim fits in the hierarchy helps creditors decide whether it makes sense to fight, negotiate, or focus on minimizing future exposure.

Don’t Panic About Preference Risk

Many creditors hesitate to pursue payment when a customer is struggling because they fear being sued later for receiving a preference. While preference actions are real, they are not the end of the story. Defenses such as ordinary course of business, new value, and contemporaneous exchange often apply.

Laura Davis Jones cautions against letting fear dictate strategy. “Don’t hold back from getting paid just because you’re afraid of a preference,” she advises. “You may have strong defenses, and settlements are rarely dollar for dollar.” In many cases, having the money now is still better than hoping for a recovery later.

Key Takeaways for Creditors

When a customer stops paying on time, it can be an early warning sign that something deeper is going wrong. The challenge for creditors is knowing when to trust the relationship and when to protect themselves before the window closes.

The earlier a creditor recognizes distress, the more options remain on the table. Whether that means tightening payment terms, asking for additional protection, or simply pushing harder to get paid, those steps are far more effective before a bankruptcy filing locks everyone into place.

Once bankruptcy begins, the rules change quickly. The automatic stay limits what creditors can do, priorities determine who gets paid, and unsecured creditors often find themselves at the back of the line. That reality makes pre-bankruptcy decisions especially important.

In the end, acting early, documenting decisions, and knowing when to seek help are often what separate manageable losses from catastrophic ones.