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When a business that owes you money goes bankrupt

What happens when a company that your enterprise does business with files for bankruptcy protection?

Unfortunately, this is a common problem that almost all business owners face at some time or another if they have any business-to-business dealings. Changes in the market, managerial mistakes and even something that causes a company bad press can throw a once-thriving company into financial chaos. That's why it's important to know how to handle the situation.

Determine the type of bankruptcy being filed

If the other business has filed a Chapter 7, it's seeking to have the majority of its debts discharged. If the company filed for Chapter 11, it's hoping to reorganize its debts and eventually pay the majority off. Knowing which one the other company filed for can help you determine what you should expect in terms of ease of recovery.

Promptly complete your proof of claim

You should, by rights, receive a notice from the bankruptcy court that you have been listed as a creditor. The notice will come along with a proof of claim form that you need to complete and promptly return to the bankruptcy court. This is your notice that you have a debt that is unsecured and looking to be repaid if there is any money available to do so.

Contact the court if you don't receive it

If the turmoil in the other company is bad enough, your business may not be properly listed -- especially if the debt owed to you is small. Contact the clerk of courts and ask for a proof of claim form to file so that you don't get left out.

Show up to the meeting of creditors

When the meeting of creditors happens, it's important to put in an appearance to make the trustee aware of your claim. Even in a Chapter 7 bankruptcy, it is sometimes possible to claim part of the money owed to you if you actively pursue it.

For more advice on how to handle financial situations involving other business entities, consider talking to a business attorney. He or she can explain your choices and help you understand what to expect next.

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