How do I collect an unpaid invoice from a customer who filed for bankruptcy?
How to collect an unpaid invoice from a bankrupt customer
Short answer
When a customer files for bankruptcy, an automatic stay immediately halts all collection activity — including calls, emails, and lawsuits. Stop all contact immediately. To recover anything, file a 'proof of claim' with the bankruptcy court by the bar date. In Chapter 7, you may receive cents on the dollar; in Chapter 11, there may be a reorganization plan that pays more. Consult a bankruptcy attorney — this is not legal advice.
The moment a customer files for bankruptcy, an automatic stay goes into effect. This is a federal court order that immediately stops all collection activity against that customer. You cannot call them, send invoices, file lawsuits, or take any other action to collect outside the bankruptcy process. Violating the automatic stay can result in sanctions against you, even if you did not know about the filing when you acted.
Your primary tool for recovery is filing a proof of claim with the bankruptcy court. This is a formal document stating you are a creditor, the amount owed, and the basis for the debt. There is a bar date — a deadline for filing claims — and if you miss it, you may be barred from recovering anything at all. The bar date appears in the bankruptcy notice you receive as a known creditor.
What you actually recover depends on the bankruptcy chapter and where your claim falls in the priority structure. Secured creditors are paid first. Unsecured trade creditors — which is what most unpaid invoices represent — are in a lower priority bucket and often receive partial payment or nothing in Chapter 7 cases. In Chapter 11 reorganizations, the debtor proposes a repayment plan that may include a percentage payment to unsecured creditors over time.
Practically, many small business invoices to bankrupt customers are a loss. The economics of hiring an attorney to pursue a small claim in Chapter 7 rarely make sense. The most useful action for smaller claims is to file a proof of claim yourself (forms available from the bankruptcy court), document it for your tax write-off, and move on. For larger invoices, a bankruptcy attorney can advise on whether grounds exist for priority treatment or fraud-based claims. Not legal advice.