A Guide to What to do When You've Been Stiffed
By Jonathan Weber, Founder, publisher, and CEO of New West
With the economy in the tank, it's no surprise that the number of bankruptcies-both personal and business-is soaring. As a small-business owner, even assuming you're not in danger of going bankrupt yourself, you can end up with some tricky decisions to make if your customers, suppliers, or other business counterparts go under.
The first thing to keep in mind if a business relation goes out of business is that there are a lot of different ways it can happen. A small business might simply close its doors; in that case, if you are owed money, you'll have to file your own court action against the business and its owner.
If it's a small amount, small-claims court can be quite efficient-we have in fact used this with some success in collecting overdue bills from companies that are still in business. But if the amount is larger than the small-claims limit-usually a few thousand dollars, depending on where you are-you'll have to carefully weigh whether going to court is likely to be worth the money and the trouble.
In my experience, legal action is always more expensive, more time-consuming, and more emotionally draining than you expect.
If a company that owes you money files for bankruptcy in federal court, the good news is that there is a highly structured process for adjudicating claims and getting creditors paid off. (Indeed, the purpose of the bankruptcy laws is to bring order to the chaotic process of going out of business or, in the case of a Chapter 11 filing to give the company a chance to come up with a plan to pay its debts and stay alive.) If you are owed a lot of money by a company that you think won't be able to pay, you can even initiate an "involuntary" bankruptcy and try to force the entity into bankruptcy court-though that's definitely something you wouldn't want to do without a significant investment in legal help.
The bad news is that the bankruptcy process can be very slow and, for an outsider, very confusing; bankruptcies where there is significant money at stake are effectively run by a specialized group of bankruptcy lawyers, and unless you're ready to hire one of those lawyers yourself, it can sometimes be difficult to fully protect your interests. When my previous company, the Industry Standard, went bankrupt, it took several years for claims to get paid, and the ultimate recovery was just a fraction of what was promised at the beginning.
On the other hand, even without a lawyer, it's often possible to get at least a sense of whether you're likely to get paid and when. If a company is in Chapter 11, it will file a reorganization plan, which will detail what types of creditors will get paid in what order of priority. Employees are always at the top of the list, and contractors who have placed construction liens on properties (often called "mechanics liens" in bankruptcy parlance) are usually near the front of the line as well.
I'm currently covering a bankruptcy case involving the Yellowstone Club (a private ski resort for the rich), and while the legal proceedings are exceptionally complex, it does appear likely that employees and trade creditors will ultimately get most or all of their money. As is often the case in a bankruptcy like this, there are dozens, if not hundreds, of small businesses whose solvency is at stake.
One indication of the likelihood of a decent payout is that many creditors have been offered money for their claims; bankruptcy claims are transferable, and there are companies that make a business of buying them for less then they think will ultimately be recovered.
In the Yellowstone Club case, I've heard of several people being offered 28 cents on the dollar. It can obviously be tempting to take a sure thing now over the possibility of something larger later-and I suspect that in some cases people who have sold their claims simply could not hold out financially any longer.
But in a case like this, you should hang in there if you can. Bankruptcy court is always unpredictable to some degree, but on the other hand, if a reorganization plan calls for a company to remain in business, it's likely that they will regard it as important to pay off trade creditors (as distinct from, say, landlords or bank lenders).
If a company is involved in some other kind of liquidation-a foreclosure or a receivership, for example-the process can be even more obscure and varies from state to state. In many cases there will simply be no money, but in other cases there might be. While one's first instinct is often to write it off, it's worth the time to investigate the process and try to make your own judgment about the chances of getting paid.
The key thing to remember in these kinds of situations is that there are usually a lot of emotional issues at play-you're furious that you got stiffed and think someone should pay the price for it, the failed business owner is probably ashamed and humiliated-but bankruptcy proceedings are not ultimately about justice. They're about distribution of assets. So take a cold look at the situation, decide whether a lawyer is likely to be worth the money, take the basic steps like making sure you file your claim on time, assume the worst, and hope for the best.
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