Checklist · Bankruptcy

When a Customer Files Bankruptcy: A Creditor's Checklist

11 U.S.C. § 362(a)

Type
Checklist
Jurisdiction
National
Date
2024-05-20
Topic
Bankruptcy

When a customer files bankruptcy, the most valuable thing a creditor can do in the first hour is stop — stop the collection calls, stop the credit-hold letters, stop the lawsuit — because the automatic stay of 11 U.S.C. § 362 snaps into place the instant the petition is docketed and a willful violation exposes you to actual damages, fees, and sometimes punitive damages. The next 72 hours are about verification and preservation: confirm the chapter, case number, and exact debtor entity; calendar the bar date; halt goods in transit; and evaluate a written reclamation demand under § 546(c) and a 20-day administrative claim under § 503(b)(9) before those windows close. Then comes the unpleasant part — the money you already collected. Payments received in the 90 days before filing are presumptively recoverable preferences under § 547(b), and your best protection is the evidentiary record supporting the ordinary-course, contemporaneous-exchange, and subsequent-new-value defenses. Finally, you must make forward-looking decisions: whether to keep shipping and on what terms, whether your contract is executory and what rejection would cost you, whether to preserve setoff rather than exercise it, and whether to seek a seat on the creditors' committee. This checklist walks the whole sequence, phase by phase, with the traps that cost trade creditors real money.

When a Customer Files Bankruptcy: A Creditor's Checklist

Bankruptcy > Creditor Rights | Published 20 May 2024 - Updated 3 October 2025 | UpLaw - uplaw.us

The bankruptcy of a customer is not a collection problem. It is a compliance problem, a preservation problem, and — if you handle it badly — a liability problem. The creditor who calls the debtor's accounts-payable department the morning after the petition is filed has just turned a bad receivable into a lawsuit against itself.

Keywords: customer bankruptcy, automatic stay, willful stay violation, preference, ordinary course of business, subsequent new value, reclamation, 503(b)(9) claim, proof of claim, bar date, executory contract, rejection, setoff, creditors' committee, relief from stay

The scenario we will use

Copperline Fasteners, Inc. is a mid-size Ohio manufacturer of industrial fasteners. Its single largest customer, Meridian Outdoor Group, Inc., a national retailer of camping and hunting equipment, owes Copperline $1.8 million on open account. Meridian has been paying — slowly, but paying — and in the last three months wired Copperline roughly $940,000 across a dozen invoices, several of them well past the 30-day terms in the parties' supply agreement.

At 6:14 a.m. on a Tuesday, Copperline's CFO sees a news alert: Meridian filed Chapter 11 overnight in the District of Delaware. Two truckloads of Copperline product are on the road. A third shipment left the dock eleven days ago. Copperline's credit manager is already drafting an email to Meridian's AP department demanding immediate payment.

Stop her.

Everything that follows is what Copperline should do instead — in roughly the order it should happen.

Hour 0 — STOP: the automatic stay and what violating it costs you

  • [ ] Freeze all collection activity company-wide, immediately. No calls, no emails, no dunning letters, no statements, no invoices marked "PAST DUE," no collection-agency referrals.
  • [ ] Send an internal notice to credit, collections, AR, sales, and any outside collection agency or collections counsel: this account is in bankruptcy; all contact stops now.
  • [ ] Pull the account out of any automated dunning or auto-dialer workflow. Automation is not a defense.
  • [ ] If you have a pending state-court collection suit, do not file anything further — no motions, no default judgments, no scheduling stipulations. Notify the court of the bankruptcy and seek a stay notation.
  • [ ] If you have a garnishment, attachment, levy, or writ of execution outstanding, withdraw or suspend it and instruct the sheriff/marshal to hold.
  • [ ] If you are holding funds you seized or a setoff you already exercised, do not spend them — talk to counsel about returning or freezing them (see Phase 9).
  • [ ] Do not repossess goods, enter the debtor's premises, or "self-help" anything.
  • [ ] Preserve documents. Issue a litigation hold covering the account: invoices, purchase orders, remittance advices, emails, credit memos, collection notes, aging reports.

Why it matters, and the traps

The automatic stay of 11 U.S.C. § 362(a) arises by operation of law the instant the petition is filed. No order issues. No one has to serve you. It is the broadest injunction in American law: it stops the commencement or continuation of any action against the debtor, any act to obtain possession of or exercise control over estate property, any act to create/perfect/enforce a lien, any act to collect, assess, or recover a prepetition claim (§ 362(a)(6)), and the setoff of mutual debts (§ 362(a)(7)).

Violations are not forgiven because you did not know. Section 362(k)(1) provides that an individual injured by a willful violation recovers actual damages, including costs and attorney's fees, and in appropriate circumstances punitive damages. "Willful" does not mean malicious — it means you knew of the bankruptcy and intended the act you took. Believing in good faith that the stay did not apply to your conduct is not a defense. And where the debtor is a corporation rather than an "individual," courts generally reach the same place through civil contempt under § 105(a), applying the Taggart standard — no fair ground of doubt that the conduct was prohibited (Taggart v. Lorenzen, 139 S. Ct. 1795 (2019), decided under the discharge injunction but widely applied by analogy).

The expensive traps:

  • The automated invoice. Your ERP mails a statement on the 1st. The debtor's counsel screenshots it. You are now defending a contempt motion over a $12 postage cost.
  • The salesperson's "friendly check-in." A sales rep asking a buyer "any update on that old balance?" is an act to collect. Train sales, not just credit.
  • The "I'm just asking about the new orders" call. Fine — but the moment prepetition dollars come up, you are over the line. Document that boundary.
  • What the stay does NOT prohibit: you may refuse to extend new credit. Section 525's anti-discrimination provisions run against governmental units and employers, not trade vendors. A private supplier may lawfully say "cash in advance going forward." What it may not do is terminate an existing contract because of the bankruptcy filing (see Phase 5, ipso facto).

Copperline: the CFO kills the AP email before it sends, issues a company-wide hold, and tells the outside collection agency to close the file. Total cost of that decision: fifteen minutes. Cost of the alternative: unknowable.

Phase 1 — Verify the filing: chapter, case number, debtor entity, and the deadlines

  • [ ] Confirm the filing on PACER (or through counsel). Do not act on a press report, a customer's email, or a rumor from a competitor.
  • [ ] Identify the chapter: 7 (liquidation), 11 (reorganization), subchapter V (small-business reorganization), 13, 12, or 15 (cross-border).
  • [ ] Record the court, division, case number, judge, and petition date. The petition date anchors every lookback and every deadline.
  • [ ] Identify the exact debtor entity or entities. Corporate families file in pieces. Your contract counterparty may or may not be among the filers.
  • [ ] Determine whether the cases are jointly administered (procedural) or substantively consolidated (rare, and substantive).
  • [ ] Confirm you are on the creditor matrix and the Rule 2002 service list; if not, file a request for notices under Fed. R. Bankr. P. 2002.
  • [ ] Pull the first-day motions: cash collateral/DIP financing, critical vendor, prepetition wages, utilities, cash management. These tell you who is really running the case.
  • [ ] Check the Schedules and Statement of Financial Affairs (SOFA) when filed. SOFA Question 3 lists payments to creditors in the 90 days pre-petition — that is your preference exposure, disclosed by the debtor.
  • [ ] Calendar: § 341 meeting of creditors, claims bar date, governmental bar date, plan/disclosure-statement hearings, administrative claims bar date, § 546(c) reclamation window, § 503(b)(9) deadline.

Why it matters, and the traps

The chapter tells you what kind of case you are in. In a Chapter 7, a trustee liquidates and unsecured creditors usually recover little or nothing — but the trustee is often an aggressive preference plaintiff, so your downside is real even when your upside is not. In Chapter 11, the debtor stays in possession as a fiduciary, and the case is a negotiation; trade creditors have leverage precisely because the debtor needs them. In subchapter V, the case is streamlined, there is ordinarily no creditors' committee (11 U.S.C. § 1181(b)), and the debt-eligibility ceiling has moved: the temporary $7.5 million cap lapsed in June 2024 and eligibility reverted to the lower inflation-adjusted statutory figure — confirm the current number before assuming eligibility.

Traps:

  • Wrong entity. "Meridian Outdoor Group, Inc." files, but your invoices and your PO terms run to "Meridian Retail Operations, LLC," a non-filing affiliate. Your claim, your stay obligations, and your contract rights all differ. Get the entity right before you file anything — and note that the automatic stay generally does not protect non-debtor affiliates absent an extension order.
  • Assuming the bar date will come to you. In Chapter 11, the bar date is set by court order under Fed. R. Bankr. P. 3003(c)(3), and notice goes to the address on the matrix — which may be a lockbox, a dead sales office, or a misspelled entity. Calendar it yourself.
  • Ignoring the first-day docket. The critical-vendor motion filed on day one may be the single most valuable document in your file (Phase 6).

For the wider strategic frame — what chapter means what, who gets paid in what order, and how a case actually moves — read Bankruptcy Law: A Comprehensive Guide to Chapters 7, 11, and 13, and, for a reorganization specifically, Chapter 11 Reorganization: A Comprehensive Guide for Debtors and Creditors. Preserve your record the same way you would in any litigation — see Issuing a Litigation Hold and Preserving ESI: A Practical Checklist.

Phase 2 — Stop shipments and evaluate reclamation under Section 546(c)

  • [ ] Stop goods in transit today. Call the carrier; exercise stoppage-in-transit rights under UCC § 2-705 before the goods are delivered.
  • [ ] Identify every shipment received by the debtor in the last 45 days, with delivery dates and values.
  • [ ] Identify every shipment received by the debtor in the last 20 days — that is your § 503(b)(9) administrative claim.
  • [ ] If you sold goods on credit while the debtor was insolvent, send a written reclamation demand under 11 U.S.C. § 546(c): not later than 45 days after the debtor received the goods, or, if that 45-day period expires after the petition date, not later than 20 days after the petition date.
  • [ ] Send the demand to the debtor, debtor's counsel, and the U.S. Trustee; send it by a method that proves delivery; identify the goods with specificity (invoice, PO, SKU, quantity, delivery date).
  • [ ] Determine whether the goods are still identifiable and in the debtor's possession — reclamation reaches goods, not proceeds.
  • [ ] Check whether an inventory lender holds a floating lien on the goods. Section 546(c)(1) makes the reclamation right expressly "subject to the prior rights of a holder of a security interest in such goods or the proceeds thereof."
  • [ ] File a § 503(b)(9) request (or comply with whatever bar-date procedure the court sets for 20-day claims) even if reclamation fails — § 546(c)(2) preserves that claim.

Why it matters, and the traps

Reclamation is the seller's right to get its goods back when it shipped to a buyer who was already insolvent. It sounds powerful. In practice, in most large cases, it is close to worthless — and understanding why keeps you from spending real money on it.

The killer is the lien. Almost every distressed retailer or manufacturer operates on an asset-based revolver secured by a blanket lien on inventory. That lender's security interest is a "prior right" under § 546(c)(1), and courts routinely hold that where the secured lender is oversecured or the inventory is fully encumbered, the reclamation claim is valueless — the goods are already spoken for.

That is why § 503(b)(9) matters more than reclamation for most trade creditors. It grants an administrative expense priority for the value of goods received by the debtor within 20 days before the petition date, sold to the debtor in the ordinary course of business. Administrative expenses are paid ahead of general unsecured claims and, in a Chapter 11, must ordinarily be paid in full in cash at confirmation. A 20-day claim is real money. A reclamation claim usually is not.

Traps:

  • Missing the 20-day window because you were busy with the 45-day one. The § 503(b)(9) claim is defined by receipt of goods, not invoicing, not shipping. Use the debtor's receiving records.
  • "Goods," not services. Section 503(b)(9) covers goods. Services rendered in the last 20 days are a general unsecured claim. Mixed contracts require allocation — and electricity, natural gas, and software have all been litigated on the goods/services line.
  • An oral demand. Section 546(c) requires a written demand. Say it in writing, date it, and prove delivery.
  • Assuming reclamation is automatic. It is not. It is a demand right with a hard clock, and if the goods have been sold, commingled, or consumed, it evaporates.

Copperline: the two truckloads are turned around at a truck stop outside Columbus — stoppage in transit, no bankruptcy court needed. The shipment delivered eleven days ago (invoice value $210,000) becomes a § 503(b)(9) administrative claim. Copperline's counsel sends a written reclamation demand for the last 45 days of deliveries ($640,000) the same afternoon — knowing it is probably worth nothing behind Meridian's ABL lender, but it costs one letter and preserves the argument.

Phase 3 — Preference exposure: the 90-day lookback on payments you already received

  • [ ] Pull every payment received from the debtor in the 90 days before the petition date — date received, amount, invoice(s) paid, invoice date, invoice due date, method (check, ACH, wire).
  • [ ] For checks, record the date the check was honored by the drawee bank, not the date written or mailed. Barnhill v. Johnson, 503 U.S. 393 (1992), fixes the transfer date at honor for § 547(b) purposes.
  • [ ] Determine whether you are an insider (11 U.S.C. § 101(31)) — officer, director, affiliate, person in control. If so, the lookback is one year, not 90 days.
  • [ ] Build a historical baseline: all payments from this customer over the prior 24–36 months, with days-to-pay for each invoice, so you can compute average days-to-pay before and during the preference period.
  • [ ] Note whether the aggregate transfers fall under the statutory dollar floor for non-consumer-debt cases in § 547(c)(9) — an inflation-adjusted figure recalculated every three years under § 104.
  • [ ] Assume the trustee/debtor has two years from the order for relief to sue (§ 546(a)); the demand letter often lands 18–23 months in.
  • [ ] Do not answer a preference demand letter with a narrative. Answer it with a spreadsheet and documents.

Why it matters, and the traps

This is the phase that surprises businesses most. You are not just a creditor who is owed money — you are a defendant in waiting. Under 11 U.S.C. § 547(b), the trustee (or debtor in possession) may avoid and recover a transfer of the debtor's property that was:

  1. to or for the benefit of a creditor;
  2. for or on account of an antecedent debt (i.e., you shipped first, got paid later);
  3. made while the debtor was insolvent — and § 547(f) presumes insolvency during the 90 days;
  4. made on or within 90 days before the petition (one year for insiders); and
  5. enabled you to receive more than you would have received in a Chapter 7 liquidation.

Element 5 is the quiet one. If unsecured creditors are projected to recover, say, 8 cents on the dollar in a hypothetical Chapter 7, then every dollar you were paid in the 90 days is a dollar you received "more than" your liquidation share. In an insolvent estate, element 5 is almost always satisfied for unsecured trade creditors.

Read that again: ordinary, honest, invoiced payments — made on goods you actually delivered — are recoverable. Preference law is not about fraud. It is about equality of distribution. The policy is that creditors who happened to get paid in the run-up to the filing should not do better than creditors who did not.

Traps:

  • Congratulating your credit team on collecting hard in Q4. Aggressive collection in the run-up to a filing increases preference exposure and destroys your ordinary-course defense (Phase 4). The credit manager who squeezed an extra $300,000 out of a dying customer may have handed the estate a $300,000 lawsuit.
  • Throwing away the aging reports. Your defenses live or die on payment history. If your ERP purges detail after 24 months, fix that now — for every customer.
  • Ignoring the letter. Preference demand letters arrive years later, often from contingency-fee counsel, often as boilerplate to hundreds of vendors. Some defendants pay 40 cents on the dollar to make it go away without ever running the numbers. Run the numbers first — many demands collapse under a competent new-value analysis.
  • Forgetting the due-diligence requirement. The Small Business Reorganization Act amended § 547(b) to require the trustee to act "based on reasonable due diligence in the circumstances of the case and taking into account a party's known or reasonably knowable affirmative defenses." Send your defenses before suit; a documented, timely defense package is now a statutory pressure point.
  • Forgetting venue. For small-dollar avoidance claims, 28 U.S.C. § 1409(b) requires the trustee to sue where the defendant resides rather than in the bankruptcy court's home district. The threshold is a statutory dollar figure (raised by the Small Business Reorganization Act of 2019 and periodically adjusted); confirm the current number rather than relying on a remembered one. Where it applies, it changes the economics of small demands considerably — a trustee who must chase you in your own district is a trustee more willing to settle.

Phase 4 — The preference defenses: ordinary course, contemporaneous exchange, subsequent new value

  • [ ] Subsequent new value (§ 547(c)(4)): total the value of all goods/services you delivered after each alleged preferential payment, unsecured and unpaid by an otherwise unavoidable transfer. This is usually your biggest and cleanest defense.
  • [ ] Ordinary course (§ 547(c)(2)): show either (A) the payment was ordinary between you and this debtor (the subjective test — compare days-to-pay in the preference period to the historical baseline), or (B) the payment was made according to ordinary business terms in the industry (the objective test). The tests are disjunctive — you need only one.
  • [ ] Contemporaneous exchange (§ 547(c)(1)): show the parties intended a contemporaneous exchange for new value and that it was in fact substantially contemporaneous — COD deliveries, cash-in-advance, a check exchanged at the dock.
  • [ ] Purchase-money / statutory lien / § 547(c) other defenses: confirm whether any transfer was a perfection within the § 547(c)(3) grace period or otherwise excepted.
  • [ ] Assemble the defense package: payment ledger, invoice ledger, aging history, dunning notes (or the absence of them), the supply contract, and a new-value waterfall by transfer.
  • [ ] Have counsel or a preference analyst run the waterfall — new value is applied transfer-by-transfer, and the order matters enormously.

Why it matters, and the traps

Subsequent new value is the workhorse. The logic: if the debtor paid you $100,000 and you then shipped another $80,000 of goods that were never paid for, the estate is only $20,000 worse off. Section 547(c)(4) lets you offset the later, unpaid shipments against the earlier payment. For a vendor that kept shipping right up to the petition date, new value can wipe out most or all of the exposure — which is one reason "cut them off completely at the first sign of trouble" is not always the right commercial instinct.

Ordinary course is the most litigated. The subjective prong asks whether this payment looked like your history with this customer. If your customer historically paid at 52 days and paid at 55 days during the preference period, you look ordinary. If it paid at 52 days historically and you dragged payments out of it at 9 days during the preference window after threatening to cut off shipments, you look extraordinary — and the collection pressure itself is evidence against you. The Supreme Court confirmed the defense's breadth in Union Bank v. Wolas, 502 U.S. 151 (1991), holding that § 547(c)(2) is not limited to short-term debt; payments on long-term debt can qualify.

Contemporaneous exchange covers the vendor who converted to COD. If you delivered goods and took a check at the dock, that is new value given at the time, not payment on an antecedent debt — so it fails § 547(b)(2) anyway, and § 547(c)(1) is the belt to that suspenders.

Traps:

  • Changing your billing behavior mid-stream. New terms, new dunning, a sudden switch to wire transfer, a first-ever late fee — every deviation is exhibit A against ordinariness.
  • The "unusual collection activity" file. Preference plaintiffs subpoena collection notes. If your CRM says "told them no more product until they wire," you have created the best evidence against your own defense.
  • Double-counting new value. New value used to defend one transfer generally cannot be reused against another. The waterfall must be run properly, in order.
  • New value that was paid for. Goods shipped after a preferential payment but then paid for by another (avoidable) transfer raise a further layer of analysis. Get help.

Copperline: of the $940,000 Meridian paid in the 90 days, Copperline shipped $610,000 of unpaid goods afterward. Subsequent new value alone cuts exposure to roughly $330,000. Its 30-month payment history shows Meridian averaging 47 days-to-pay historically and 51 days during the preference window — squarely ordinary. Copperline's credit team sent no unusual dunning. Net realistic exposure: close to zero. That result was created by record-keeping, not by lawyering.

Phase 5 — Your contract: is it executory, and what happens if it is rejected?

  • [ ] Locate the governing contract: master supply agreement, requirements contract, purchase-order terms, distribution agreement, license, lease.
  • [ ] Determine whether it is executory — material performance remains due on both sides.
  • [ ] Identify any ipso facto clause (termination on insolvency or bankruptcy filing) and understand it is unenforceable under 11 U.S.C. § 365(e)(1). Do not act on it.
  • [ ] Calculate the cure amount the debtor would owe if it assumes (§ 365(b)(1)): all defaults cured, plus compensation for actual pecuniary loss, plus adequate assurance of future performance.
  • [ ] Assess rejection risk and what rejection costs you (§ 365(g): rejection = breach immediately before the petition date → a prepetition general unsecured claim, allowed under § 502(g)).
  • [ ] Watch the deadlines: Chapter 11 gives the debtor until plan confirmation to assume or reject most contracts (§ 365(d)(2)), but nonresidential real property leases carry the hard § 365(d)(4) clock (120 days, extendable by 90 days, thereafter only with the landlord's consent). In Chapter 7, § 365(d)(1) deems contracts rejected after 60 days.
  • [ ] If you need certainty, move to compel the debtor to assume or reject under § 365(d)(2).
  • [ ] If you are a licensee of the debtor's IP, know your rights: § 365(n) for patents/copyrights/trade secrets, and Mission Product Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652 (2019), for trademarks — rejection is a breach, not a rescission; a licensee may keep using the mark.
  • [ ] Preserve any postpetition performance claims separately — postpetition goods and services delivered at the debtor's request are administrative expenses under § 503(b)(1).

Why it matters, and the traps

Section 365 is a one-way option written for the estate. The debtor gets to keep the contracts that are good for it (assume — but only by curing every default and giving adequate assurance) and shed the ones that are not (reject — leaving you with an unsecured claim worth pennies). You cannot escape that asymmetry by drafting around it: the ipso facto clause your lawyer put in the master agreement is void in bankruptcy, and terminating on the strength of it is itself a stay violation.

Traps:

  • Terminating for the filing. The single most common contract mistake. If the debtor is otherwise current postpetition, § 365(e) forbids termination based on the bankruptcy or the debtor's financial condition. Terminate for independent, postpetition breach only — and get counsel first.
  • Not policing the cure amount. If the debtor assumes, you get paid in full on the cure. Make sure the cure schedule attached to the plan or assumption motion has the right number, and object promptly if it does not. Silence on a cure objection deadline can be treated as consent.
  • Assuming rejection is the end. Rejection creates a claim. File it. And under Fed. R. Bankr. P. 3002(c)(4)/the court's procedures, rejection-damage claims typically have their own deadline running from the rejection order — calendar it.
  • Forgetting mitigation and caps. Landlord claims are capped by § 502(b)(6); employment-contract claims by § 502(b)(7). Trade contracts are not capped, but your damages still must be proved. For how those numbers are built, see Contract Damages: How Courts Make the Injured Party Whole and The Litigation Damages Toolkit: Valuing and Proving Money Awards.

The best time to think about § 365 is before the customer files. Terms that survive bankruptcy — security interests, letters of credit, parent guaranties, cash-in-advance triggers keyed to objective financial covenants rather than "insolvency" — are drafted in peacetime. See The Commercial Contracts Toolkit: Drafting, Reviewing, and Enforcing Business Agreements.

Phase 6 — Keep doing business? Credit terms, COD, and administrative-expense priority

  • [ ] Decide, at the executive level, whether you want to keep supplying this customer at all. Write down the reasoning.
  • [ ] If yes, move to cash in advance, COD, or letter of credit for all postpetition shipments — you are free to demand it.
  • [ ] Confirm that postpetition deliveries at the debtor's request are treated as administrative expenses (§ 503(b)(1)(A)) — but understand that administrative claims are only as good as the estate's solvency.
  • [ ] Read the DIP financing order (§ 364). Look for the budget, the carve-out, and whether the lender's superpriority claim primes administrative expenses. An "administratively insolvent" case pays administrative creditors cents.
  • [ ] Look for a critical-vendor motion. If you are essential and hard to replace, ask to be designated — critical-vendor status can mean payment of prepetition claims in full.
  • [ ] Negotiate, in writing, any trade-terms agreement the debtor proposes (a "vendor agreement" or "trade lien" program). Read the release language carefully — many trade agreements waive reclamation, § 503(b)(9), or preference defenses.
  • [ ] Track postpetition receivables separately in your ERP, with a distinct customer code. Never commingle prepetition and postpetition balances.

Why it matters, and the traps

Whether to keep shipping is a business decision with legal consequences on both sides. Ship, and you may build administrative-expense claims, keep a customer alive, and — helpfully — generate subsequent new value that defends your preference exposure. Refuse, and you protect your balance sheet but forfeit any chance of a going-concern customer on the other side.

The critical-vendor motion is where leverage lives. Courts allow prepetition payments to critical vendors under § 105(a) and the doctrine of necessity, but not universally and not casually — Judge Easterbrook's opinion in In re Kmart Corp., 359 F.3d 866 (7th Cir. 2004), vacated a critical-vendor order for lack of a showing that the disfavored creditors were no worse off. Expect the debtor to demand something in exchange: continued shipment on customary terms, often for the life of the case.

Traps:

  • Commingling. If postpetition payments are applied against prepetition invoices in your ERP, you have created a stay violation and a preference argument in one keystroke.
  • Signing the trade agreement without reading the release. Vendor agreements are drafted by the debtor. Some are fair; some quietly extract a waiver of your 20-day claim and your preference defenses in exchange for terms you would have gotten anyway.
  • Treating an administrative claim as cash. It is a priority claim, not a payment. In an administratively insolvent case, it may pay 30 cents.
  • Extending credit out of hope. If the customer is 20% of your revenue, the temptation to keep the relationship alive is enormous. Structure the exposure so you can survive being wrong. On the broader question of how to concentrate or ring-fence risk across affiliated businesses, see Running Multiple Businesses Under One Structure: A Deep Dive into Holding, Operating, and Parent Companies.

Phase 7 — Secured? Confirm perfection, seek adequate protection, or move for relief from stay

  • [ ] Determine whether you hold a security interest: a PMSI in goods, a consignment (UCC Article 9 treats a true consignment as a security interest for perfection purposes), a mechanic's/materialman's lien, or a blanket lien.
  • [ ] Pull your UCC-1 financing statements. Confirm the exact debtor name matches the debtor's public organic record in its state of organization (for most large corporate debtors, Delaware — but confirm; the organic record of an Ohio corporation is filed in Ohio). A name error is fatal under UCC § 9-506, and unperfected creditors are unsecured creditors.
  • [ ] Confirm you filed in the correct office — for a registered organization, the state of organization (UCC § 9-301, § 9-307), not the state where the goods sit.
  • [ ] Confirm continuation statements were filed (UCC-1s lapse after five years).
  • [ ] If you perfected within the 90 days, analyze preference exposure on the lien itself (a lien perfected on account of antecedent debt is a preferential transfer) and whether the § 547(c)(3) PMSI grace period or § 546(b) relation-back saves it.
  • [ ] Section 362(b)(3) permits postpetition perfection where § 546(b) allows relation-back (e.g., a PMSI perfected within the applicable UCC grace period). Confirm before filing anything postpetition.
  • [ ] If your collateral is depreciating, demand adequate protection (§§ 361, 363(e)) — replacement liens, periodic cash payments, an equity cushion.
  • [ ] If the collateral is not necessary to an effective reorganization and there is no equity, or if there is "cause," move for relief from stay under § 362(d), by motion under Fed. R. Bankr. P. 4001 (a contested matter governed by Rule 9014).
  • [ ] Note the § 362(e) clock: the stay terminates 30 days after the request unless the court, after a preliminary hearing, continues it.

Why it matters, and the traps

Bankruptcy is where you find out whether your paperwork was real. A security interest that was never perfected — or was perfected against "Meridian Outdoor Grp." when the certificate of incorporation says "Meridian Outdoor Group, Inc." — is avoidable by the trustee under the strong-arm power of § 544(a). You will discover this at the worst possible moment, and there will be nothing to do about it.

Traps:

  • The unfiled consignment. Vendors ship on consignment all the time and never file a UCC-1. In bankruptcy, the "consigned" goods become estate property and you become a general unsecured creditor holding a moral argument.
  • Lapsed continuations. A five-year clock nobody diarized.
  • Confusing adequate protection with payment. Adequate protection protects against decline in value, not against nonpayment of the debt.
  • Filing a relief-from-stay motion you cannot win. In a Chapter 11 with a live reorganization and an equity cushion, § 362(d)(2) relief is a long shot; you will spend money and irritate the judge you need later.

Phase 8 — File the proof of claim and calendar the bar date

  • [ ] Calendar the bar date the day you learn of the case, in two systems, with a 30-day and 7-day advance reminder.
  • [ ] Chapter 7/12/13: Fed. R. Bankr. P. 3002(c) generally sets the deadline at 70 days after the petition date (or order for relief) for non-governmental units. Governmental units get 180 days after the order for relief (§ 502(b)(9)).
  • [ ] Chapter 11: the court fixes the bar date by order under Fed. R. Bankr. P. 3003(c)(3). Read the bar-date order, not a treatise summary.
  • [ ] In Chapter 11, check the Schedules: a claim scheduled and not listed as disputed, contingent, or unliquidated is deemed filed under § 1111(a) — but if it is listed in the wrong amount or flagged in any of those three ways, you must file (Rule 3003(c)(2)) or be barred.
  • [ ] Prepare Official Form 410, with supporting documentation attached per Fed. R. Bankr. P. 3001(c).
  • [ ] Assert priority correctly: separate line items for § 503(b)(9) 20-day goods, any secured portion, and the general unsecured balance.
  • [ ] File through the court's claims agent if one is appointed; keep the stamped copy and the confirmation.
  • [ ] Do not attach privileged material, trade secrets, or unredacted personal information.
  • [ ] Understand what filing a claim costs you: it can waive a jury-trial right and submit you to the bankruptcy court's equitable jurisdiction on related claims.

Why it matters, and the traps

A proof of claim is the price of admission. Miss the bar date and, absent excusable neglect, you are out — the strongest claim on the best documents is worth nothing if it is filed a day late. This phase has its own dedicated walkthrough: Filing a Proof of Claim in a Bankruptcy Case: A Practical Checklist.

Traps:

  • Relying on the debtor's schedules in a Chapter 7. Section 1111(a)'s deemed-filed rule is a Chapter 11 rule. It does not save you in Chapter 7.
  • Filing a bare number. A properly documented claim is prima facie valid under Rule 3001(f). An undocumented one invites an objection you will have to litigate.
  • Burying the 20-day claim inside the general unsecured total. If you do not separately assert § 503(b)(9) priority, you will not get it.

Phase 9 — Setoff and recoupment: preserve, do not self-help

  • [ ] Identify any mutual debts: do you owe the debtor money (rebates, credits, co-op advertising, returns, an unrelated payable)?
  • [ ] Confirm mutuality: same parties, same capacity, and — critically — both debts prepetition. You cannot set off a prepetition claim against a postpetition obligation.
  • [ ] Do not exercise setoff. Section 362(a)(7) stays it. Move for relief from stay, or obtain the debtor's/trustee's consent by stipulation and order.
  • [ ] Consider an administrative freeze — temporarily withholding payment while you seek relief — which the Supreme Court held is not itself a stay violation in Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995). Do it with counsel; the line is real but narrow.
  • [ ] Analyze § 553(a)(3) and § 553(b): setoff rights improved within the 90 days while the debtor was insolvent may be reduced or avoided.
  • [ ] Distinguish recoupment — a judicially created doctrine allowing netting of claims arising from the same transaction (e.g., a price adjustment on the very invoice at issue). Most courts hold recoupment is not stayed, but the same-transaction test is applied narrowly, and prudent creditors still seek a comfort order.

Why it matters, and the traps

Section 553 preserves whatever setoff rights nonbankruptcy law gives you. It does not authorize you to exercise them. That distinction is where creditors get hurt: the CFO who nets an $80,000 rebate payable against a $600,000 receivable has, in the estate's eyes, taken $80,000 of estate property without permission. Preserve the right, freeze the funds, and ask the court.

Copperline: it owes Meridian a $47,000 annual volume rebate accrued prepetition. Its instinct is to keep it. Its lawyer instead freezes the payment, files a motion for relief from stay to effect setoff under § 553, and gets an agreed order in six weeks. Same economics; no contempt motion.

Phase 10 — Monitor the docket; consider creditors' committee service

  • [ ] Set up docket monitoring (PACER alerts, a claims-agent mailing list, or counsel's ECF notices). Cases move fast and objections have short fuses.
  • [ ] Read the cash-collateral and DIP orders in full, including the challenge-period deadline for attacking the lender's liens — that deadline binds the committee and, often, all creditors.
  • [ ] Respond to the U.S. Trustee's committee solicitation if you want a seat. Under § 1102, the U.S. Trustee ordinarily appoints a committee of the seven largest unsecured creditors willing to serve.
  • [ ] Weigh committee service honestly: you get information, professionals paid by the estate (§ 1103, § 330), and real influence over the plan — but you take on a fiduciary duty to the entire unsecured class, you cannot use committee information for your own trading or negotiating advantage, and you will spend management time.
  • [ ] If you trade in the debtor's securities, understand the information wall / trading-order obligations before joining.
  • [ ] Review the disclosure statement and plan when filed. Model your recovery. Vote your claim (§ 1126) — and vote it on time.
  • [ ] Preserve claims against non-debtor parties: guarantors, parent entities, principals, insurers, credit-insurance carriers. The stay protects the debtor, not the guarantor.
  • [ ] Object to any third-party release in the plan that would extinguish your claims against non-debtors, if you have not consented.
  • [ ] Watch for the preference demand letter that will arrive 18–23 months later. Keep the Phase 4 defense package on a shelf where you can find it.

Why it matters, and the traps

The docket is where the case actually happens, and most trade creditors never look at it. The plan is confirmed, the third-party releases go in, the claim objection is granted for want of response — and the creditor learns about it from a check that never comes.

Traps:

  • Ignoring the guarantor. If a principal or parent guaranteed the debt, the automatic stay does not stay your suit against them (absent an extraordinary § 105 extension). That may be your best recovery. See Writing an Effective Demand Letter: A Practical Checklist and Assessing a Civil Lawsuit: A Comprehensive Early-Case Framework.
  • Missing a claim objection. Omnibus claim objections are served by mail and grant by default.
  • Joining the committee for the wrong reason. You cannot use the seat to advance your own claim. If your goal is a critical-vendor deal, committee service may actually constrain you.

Common mistakes to avoid

  1. Calling the customer. The most natural, most human, most expensive first move. Sanctions under § 362(k) plus fees dwarf the receivable.
  2. Letting the ERP violate the stay for you. Automated statements, late-fee accruals, and dunning workflows must be affirmatively switched off. "The system did it" is not a defense.
  3. Treating this as a collection matter. It is not. Your recovery on the prepetition debt will mostly be determined by things you did before the filing — perfection, credit terms, guaranties, letters of credit.
  4. Blowing the 20-day § 503(b)(9) window while chasing a worthless reclamation claim. Behind a blanket inventory lien, reclamation is usually theater. The 20-day administrative claim is money.
  5. Purging payment history. Your preference defense is an exhibit, not an argument. If your system does not retain 36 months of invoice-level payment detail, fix that today, for every customer.
  6. Squeezing a dying customer. Aggressive, out-of-pattern collection in the final 90 days maximizes preference exposure and destroys the ordinary-course defense. It is the worst of both worlds.
  7. Cutting off all shipments the moment the customer wobbles. Sometimes right — but understand that continued shipment generates subsequent new value, which is often the strongest preference defense you will have.
  8. Terminating the contract on the ipso facto clause. Void under § 365(e). Terminating on it is a stay violation.
  9. Netting a payable against a receivable without a court order. Section 553 preserves setoff; § 362(a)(7) stays its exercise.
  10. Missing the bar date, or filing a bare claim with no documentation.
  11. Paying a preference demand without running the numbers. Contingency-fee preference counsel send hundreds of identical letters. Many exposures collapse entirely under a new-value waterfall.
  12. Assuming the stay protects the guarantor. It does not.

The consolidated creditor checklist

Hour 0

  • [ ] Stop all collection activity — people, letters, systems, agencies, lawsuits, levies.
  • [ ] Issue an internal freeze notice and a litigation hold.

Day 1

  • [ ] Verify the filing on PACER: chapter, court, case number, exact debtor entity, petition date.
  • [ ] Confirm you are on the creditor matrix; file a Rule 2002 notice request if not.
  • [ ] Pull the first-day motions (DIP, cash collateral, critical vendor).
  • [ ] Stop goods in transit (UCC § 2-705).

Days 1–20

  • [ ] Send a written § 546(c) reclamation demand (45 days from receipt / 20 days from petition).
  • [ ] Identify and assert the § 503(b)(9) 20-day administrative claim.
  • [ ] Decide on postpetition terms: COD, CIA, letter of credit.
  • [ ] Read the DIP order for the administrative-solvency picture.
  • [ ] Respond to the U.S. Trustee's committee solicitation if you want a seat.

Days 1–45

  • [ ] Build the 90-day payment ledger and the 24–36 month historical baseline.
  • [ ] Run the subsequent-new-value waterfall; assemble the ordinary-course record.
  • [ ] Verify UCC-1 perfection: exact debtor name, continuations, collateral description.
  • [ ] Analyze the contract: executory? cure amount? rejection exposure? § 365(n)?
  • [ ] Identify mutual prepetition debts; freeze, do not set off.
  • [ ] Identify guarantors and non-debtor targets; pursue them separately.

By the bar date

  • [ ] File Official Form 410 with documentation; break out secured, § 503(b)(9), and general unsecured.
  • [ ] Object to any inaccurate cure amount; object to any nonconsensual third-party release.

Ongoing

  • [ ] Monitor the docket; respond to claim objections; vote the plan on time.
  • [ ] Shelve the preference defense package where you will find it in two years.

Primary Authority

Statutes (Title 11, U.S. Bankruptcy Code — federal law)

  • 11 U.S.C. § 101(31) — definition of "insider" (one-year preference reachback)
  • 11 U.S.C. § 105(a) — equitable powers; civil contempt; critical-vendor and doctrine-of-necessity orders
  • 11 U.S.C. § 108(c) — extension of nonbankruptcy limitations periods
  • 11 U.S.C. § 361; § 363(e) — adequate protection
  • 11 U.S.C. § 362(a) — the automatic stay; § 362(b) — exceptions; § 362(d)–(e) — relief from stay; § 362(k) — damages for willful violation
  • 11 U.S.C. § 364 — postpetition financing; superpriority and priming liens
  • 11 U.S.C. § 365 — executory contracts and unexpired leases; § 365(b) (cure and adequate assurance); § 365(d) (deadlines); § 365(e) (ipso facto clauses unenforceable); § 365(g) (rejection as prepetition breach); § 365(n) (IP licensees)
  • 11 U.S.C. § 501; § 502 — filing and allowance of claims; § 502(b)(6)–(7) (landlord/employee caps); § 502(b)(9) (governmental bar date); § 502(g) (rejection claims)
  • 11 U.S.C. § 503(b)(1) — administrative expenses; § 503(b)(9) — 20-day goods priority
  • 11 U.S.C. § 506 — determination of secured status
  • 11 U.S.C. § 544(a) — trustee's strong-arm power
  • 11 U.S.C. § 546(a) — two-year limitations period for avoidance actions; § 546(b) — relation-back perfection; § 546(c) — reclamation
  • 11 U.S.C. § 547 — preferences; § 547(b) (elements and the reasonable-due-diligence requirement added by the Small Business Reorganization Act of 2019); § 547(c)(1) (contemporaneous exchange); § 547(c)(2) (ordinary course — disjunctive subjective/objective tests); § 547(c)(3) (enabling loans/PMSI); § 547(c)(4) (subsequent new value); § 547(c)(9) (dollar floor in non-consumer cases); § 547(f) (presumption of insolvency); § 547(g) (burdens of proof)
  • 11 U.S.C. § 553 — setoff preserved; § 553(a)(3) and § 553(b) (improvement-in-position limits)
  • 11 U.S.C. § 1102; § 1103 — creditors' committees and their powers
  • 11 U.S.C. § 1111(a) — scheduled claims deemed filed in Chapter 11
  • 11 U.S.C. § 1126 — acceptance of a plan
  • 11 U.S.C. § 1181(b) — no committee ordinarily in subchapter V
  • 28 U.S.C. § 1409(b) — venue for small-dollar avoidance actions (under $25,000, defendant's district)

Rules

Cases

Secondary Sources

  • Collier on Bankruptcy (LexisNexis) — the standard treatise; Chapters 362, 365, 503, 546, 547, and 553 are the relevant volumes for a trade creditor
  • Norton, Bankruptcy Law and Practice
  • Uniform Commercial Code Article 2 (§ 2-702, § 2-705 — seller's remedies on insolvency and stoppage in transit) and Article 9 (perfection, consignments, PMSI grace periods) — state law, adopted with variations in every state; check your state's enactment

A note on which law governs: bankruptcy is federal, arising under Title 11 and the Federal Rules of Bankruptcy Procedure, and applies uniformly nationwide (subject to local rules and judge-specific practice, which are real and worth learning). Every § 362, § 365, § 503, § 546, § 547, and § 553 proposition in this checklist is a federal one, and you can rely on it in any district in the country.

The underlying rights, however — your contract, your security interest, your lien, your setoff right, your guaranty — are creatures of state law, and bankruptcy takes them as it finds them. Three cautions follow, and they matter because this is exactly where a national-sounding rule quietly stops being national:

  • Commercial law is state law. Article 2 (stoppage in transit, the seller's insolvency remedies) and Article 9 (perfection, consignments, PMSI grace periods) of the UCC are uniform acts adopted state by state, with variations and non-uniform amendments. The section numbers in this checklist are the uniform ones. Check your state's enactment before you rely on a grace period or a filing rule.
  • Corporate law is state law, and Delaware is the reference point — not a national rule. When this checklist talks about the debtor's "exact legal name" on its public organic record, or about a parent guaranty, or about which entity in a corporate family is actually your counterparty, the answer comes from the law of the state of organization. Delaware is the reference point in this document because a large majority of public and venture-backed companies (and most of the large Chapter 11 debtors that file in the District of Delaware) are Delaware corporations or LLCs, and Delaware's statutes and Court of Chancery generate the case law everyone else reasons from. That is a convention, not a supremacy: if your customer is a New York LLC, an Ohio corporation, or a Texas LP, that state's entity statute governs its name, its authority, and its internal affairs, and you must confirm the rule there.
  • Insurance, UDAP/consumer-protection, and debt-collection rules are predominantly state law. If a credit-insurance policy, a trade-credit insurer, or a state unfair-and-deceptive-practices statute is in your picture, do not assume the federal-bankruptcy uniformity you enjoy elsewhere in this document. Those regimes vary substantially by state — including on who may sue, what counts as an unfair practice, and what remedies exist. See Consumer Protection Law: A Comprehensive Guide to the FDCPA, FCRA, TCPA, and State UDAP Statutes and, if your customer is a consumer rather than a business, FDCPA Debt Collection Compliance: A Practical Checklist.

Perfect your rights under state law before the filing. The Bankruptcy Code will not create rights you did not have — it will only sort, delay, and sometimes destroy the ones you did.

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This checklist is general legal information from UpLaw (uplaw.us), not legal advice, and does not create an attorney-client relationship. Bankruptcy deadlines are short and unforgiving, dollar thresholds in the Bankruptcy Code are adjusted for inflation on a three-year cycle, and local rules and judge-specific practices vary; verify current requirements and consult qualified bankruptcy counsel before acting.