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Can you let a business associate “settle up” before bankruptcy?

On Behalf of | Jan 5, 2023 | Collection

Your company has had a long relationship with another business – and you’re pretty friendly, at this point, with the owner.

When the company had a few rough months, you were more than willing to cut them some slack on their payments. Now, however, it seems like their “slump” was more than temporary. They’re filing for bankruptcy — but the owner has approached you and offered to settle their bill before they do.

Your debtor cannot make preferential payments

Bankruptcy rules exist to make things fair for everybody – including creditors. You have to put your debts in line with all the other debts the business owes, and let the bankruptcy trustee decide how much (if any) you can recover.

If your business associate pays you in full, that’s considered a preferential payment. As such, the trustee can (and probably will) use their authority to reclaim the payment. That could be a much bigger strain on your company’s financials than not getting paid in the first place.

It’s important to note that regular payments that your business associate is making for ongoing services or products aren’t the same as a past-due debt. You may still be able to accept payment on those as long they are in the normal course of business.

The owner is probably hoping that they can resume their normal business relationship with you once their bankruptcy is over. If you’re amenable to that idea, simply reassure them that you will be glad to work with them again in the future and handle the debt according to the bankruptcy court’s rules.

Debt collection processes can get tricky for businesses, but there is legal help available to make sure that you stay on the right side of the law.