Senior Credit Exec Forum: Boss wants to change terms on a customer slated for bankruptcy– any suggestions?

Editor’s note: The following article originally appeared in Credit Today, the leading publication for the credit professional, a CMA Partner. Click here for Special CMA Member $10 Trial!

Question: My boss wants to change terms on a customer that is slated for bankruptcy in the next few months. Other than stopping shipment, any suggestions?

Thanks,

Credit Manager, Game Manufacturer

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Credit card, C.O.D or prepayment are just few of the terms you can change the customer to.

Regards,

Credit Manager; Industrial manufacturer

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Put them on 100% pre-pay. There’s no guarantee that the courts won’t consider it preferential payment, meaning you’d eventually have to pay a small amount back, but that only happened to us once.

Credit & Collections Associate; Industrial manufacturer

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Prepay should never be considered a “preference payment” since by definition, preference has to be a payment on antecedent debt. Prepay is your safest option.

If you don’t choose prepay/COD and instead you change terms to something shorter, you will set yourself up for a preference suit and you will lose your ordinary course defense. You would still have New Value defense if your boss insists on offering shorter terms.

Director-North America Credit Operations; Consumer products manufacturer

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If you’re sure that bankruptcy is imminent, our policy is to change the account terms to prepay and only accept credit card or certified funds/wire transfers for new orders. This is not considered preference. Once the bankruptcy is received; as long as its not a Chapter 7, we suspend the current account. We will open a new account again on a prepay basis once we receive notification from the court that the bankruptcy workout is accepted. It remains prepay terms until we’re able to assess the performance of the company. DIP checks are accepted and we continue to sell as long as the comfort zone isn’t ruffled. If suspicion of a change to Chapter 7 is in the horizon we do take precautions on sizeable orders.

Credit Manager, Household products manufacturer

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Further to the below point, if you offer Net 20 day terms (or less) and they file, you may be protected by the administrative claim provision 503(b)9 of the bankruptcy code (assuming it’s a Chapter 11 reorganization).
Each case is different, but Admin Claims receive a higher priority and are often paid 100% for any shipments made within 20 days of the bankruptcy filing.

Regards,
– Manager, Credit & Receivables; Industrial manufacturer

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You can also work out percentage payment at the time of the order and full payment before shipment.

Credit Manager; Manufacturer

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Prepayment is the safest option as it wouldn’t be considered a preference payment.

Credit & Collections; Medical equipment maker

 

This article originally appeared in Credit Today, the leading publication for the credit professional.
Click here for Special CMA Member $10 Trial!