If an aggregate producer, dealer or manufacturer is aware of a customer’s bankruptcy – even informally – it must act to preserve the operation’s rights. All too often, when a bankruptcy notice is received, the assumption is made that there are neither rights nor alternatives when it comes to the claim of the crushed stone or sand and gravel business. Fortunately, creditors do have rights.
Most courts hold that a debtor with actual knowledge of the case – however obtained – is bound by the deadlines for filing objections to debt discharges and for filing claims. For example, creditors in a bankruptcy are entitled to share in any distribution from the bankruptcy estate, usually depending on the priority of their claim.
Naturally, when a notice of the bankruptcy is received, a proof of claim should be filed promptly with the court. And keep in mind that deadlines are strictly enforced in bankruptcy cases.
When it comes to dealing with a customer or supplier after discovering that they are bankrupt, all collection efforts should cease. This automatic stay is designed to protect the debtor and their property from all forms of collection during the bankruptcy.
Under bankruptcy laws, creditors usually have the right to be heard in court regarding a payment plan, liquidation of the debtor’s non-exempt assets and payments from the assets of the debtor’s “estate.”
In other words, creditors can voice their opinions about debts that might or might not be forgiven. They can also argue about assets that, perhaps, should have been included in the bankruptcy estate yet weren’t.
So-called “secured creditors” are at the top of the payback list and have specific rights to the property, which is the collateral for their claim. Secured creditors also have the best chance of getting relief from the automatic stay or “adequate protection payments” to prevent a decline in the equity available to secure their claim.
Whether the aggregate operation is a secured or unsecured creditor, the best deterrent to abuse of the bankruptcy system is creditor vigilance. Creditors are entitled to question the debtor under oath about assets, liabilities and financial history at the first meeting of the creditors.
Some bankruptcies are dismissed because of the debtor’s failure to comply with the requirements of the bankruptcy law. When that happens, creditors are free to pursue collection according to state law. Be vigilant.
Fighting the good fight
While requesting a customer to pay in advance of delivery may provide a temporary solution, it is unlikely to address the underlying issues of a troubled customer.
And, although most aggregate producers, equipment dealers and manufacturers are aware that contracts and payment terms should always be put in writing, few troubled customers are likely to begin paying simply because there is a contract.
Even a business whose plate is full might be well advised to continuously look for new customers, because depending on one or two can put any business at risk. Ensuring there is a constant inflow of customers so, if one fails or is unable to pay on time, potential problems are avoided. It also provides more time – and a financial cushion – to work things out with a troubled customer.
Slashing unprofitable customers
Often ignored by producers, dealers and manufacturers is whether the best business decision may actually involve firing some of their worst customers.
While this may seem like an illogical suggestion –particularly in a bad economy –having the wrong customers can cost the business in unexpected ways and hold it back from real success despite the temptation of short-term profits.
Worried about the customer going elsewhere? Sometimes, that’s a good thing. Troubled or problem customers become problems for competitors.
Business woes
Unfortunately, wringing money out of deadbeat customers has become a common event in today’s slow-growing economy.
In some cases, the only option may be to hire a collection agency or go to court to collect. But many small business owners don’t like to go those routes.
Often, it’s easier to take a proactive approach by avoiding the types of customers who might spell trouble, staying alert to signs that longtime customers are having financial problems and taking quick action when their payments are slowing.
Tax deductions for debts
When all else fails and further collection efforts are fruitless, Uncle Sam – in the form of our tax laws – may have a solution: the bad debt deduction.
Under our tax rules, a business’s bad debt is defined as an account or note receivable that proves to be entirely or partially uncollectible despite collection efforts. Bad debts are written off as soon as they are determined to be uncollectible because the aggregate producer does not expect future economic benefits, and it no longer remains an asset.
Of course, just because something may be labeled as a bad debt doesn’t necessarily make it tax deductible. A bad debt deduction can be claimed only if the amount owed was included in the operation’s gross income. This is almost never the case for cash method businesses.
Accrual method businesses, however, report income as it’s earned. If receivables have already been claimed as income, a bad debt deduction for uncollectible receivables is appropriate.
To ensure the aggregate operation doesn’t miss out on a bad debt deduction, it must be able to show the debt is partially or totally worthless. What’s more, the tax law doesn’t allow a deduction for any part of a debt after the year in which it becomes totally worthless.
Avoiding trouble
Dealing with financially troubled customers requires early detection of distress signals – including delayed payments and requests for extended terms.
Minimizing an operation’s exposure to financial risks – and bad debts – can be achieved by using various strategies ranging from initial credit checks to well-thought-out collection steps and parting ways with troubled customers.
In the end, there is always that limited tax deduction for the business’s bad debts.
Mark Battersby is a freelance writer who has specialized in taxes and finance for more than 25 years.
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