In 2005, a record number of debtors filed bankruptcy prior to the effective date of the amendments to avoid the amendments to the bankruptcy code that made it more difficult for debtors to file bankruptcy. After the amendments took effect, the number of bankruptcies being filed nosedived. Many people attributed the lower number of filings to the new amendments. Those “in the know” realized that the shortage in bankrutpcy filings was a result of the high number of bankruptcies filed just before the amendments took effect. We all believed that the new amendments, while more budensome for debtors, would not significantly lower the number of bankruptcy filings in the long term.
Not surprisingly, according to the United States Trustee’s office, bankruptcies are once again on the rise at near record levels. See http://www.uscourts.gov/statistics-reports/caseload-statistics-data-tables. Of course, with the economy in a deep recession, this news is not unexpected. With the rise in bankruptcies, here are a few things to keep in mind as a creditor:
First, debtors are finding themselves overextended with credit cards, lines of credit and other unsecured loans. If a debtor comes to you asking for credit, it is extremely important in these times to do your homework to make sure that the debtor is able to repay any credit you extend. That means more than just asking for paystubs or bank account information. Often, Debtors with high income levels have high expenses. It’s important to check both before extending credit.
Second, now more than ever, cash up front is a creditor’s best friend. If you don’t extend credit, or only extend minimum credit amounts, you’re less likely to get burned by a debtor filing bankruptcy. Right now, it may be better to turn down a sale than to sell product that ultimately is never paid for.
Finally, preference actions are on the rise. In the past few months, our office has seen a significant increase in the number of preference actions being filed against creditors. As a creditor, its important to know that you may have valid expenses that can reduce or even eliminate your preference exposure. If you find yourself on the wrong end of a preference action, experienced bankruptcy counsel might be able to help.
Bob Bernstein’s Get P.A.I.D. book has a lot of helpful tips for managing your business in a struggling economy. The economy is something that we all have to deal with and it appears that only the strong will survive. Have a plan, be prepared, and you too can survive these trying times.