What Happens to Your Receivables if You File Bankruptcy?
- In many cases, business owners know they are heading toward bankruptcy long before they file. If you are in this situation, you may decide to sell your accounts receivable to a debt collection agency that will pay you a certain amount of money on the dollar for the collectible amounts. This common practice provides businesses with much needed cash to deal with current debts. In this case, accounts receivable is rarely an issue during a bankruptcy because any value has already been leveraged for cash.
- A Chapter 7 bankruptcy for business, like the individual version, is a total bankruptcy and completely ends the business. In this case, you lose all business assets to the bankruptcy estate that is created by the court. Accounts receivable, as an asset, belong to this estate. The estate sells off all assets and uses what money is raised to pay back creditors. The court discharges the rest of the debt fully.
- In a Chapter 11 bankruptcy, the business is reorganized so it can continue its operations as best it can. In this case, accounts receivable still belong to you as the owner of the company, but it is not free from problems. Creditors want to make sure they can collect their debts from the failing business, so they place liens on your accounts to try to seize them. This includes accounts receivable, even though it does not have any cash.
- Once a Chapter 11 bankruptcy is begun, the bankruptcy freezes creditor liens against accounts receivable. You will probably enter into negotiations with creditors over accounts receivable. In general, having accounts receivable freed, or unfrozen, is a necessary step in the process, because it gives you access to incoming revenue you need to continue running the business.