What Happens When a Customer Files for Bankruptcy? A Guide for Business Owners and Creditors

What Happens When a Customer Files for Bankruptcy? Steps for Creditors

What happens when a customer files for bankruptcy is a question every business owner or service provider may face at some point. When a client enters bankruptcy, the legal process changes how, when, and sometimes even if you can collect the money you’re owed. While the situation can be frustrating for creditors, there are important steps you can take to protect your interests and potentially recover part of the debt. In this article, we’ll explain your rights, outline the process, and highlight what actions to take—and avoid.

Immediate Effect: The Automatic Stay

As soon as a customer files for bankruptcy, the court issues an automatic stay—a powerful legal protection that stops most collection actions immediately.

What the Automatic Stay Does:

• Halts collection calls, letters, and emails
• Prevents lawsuits, wage garnishments, and repossessions
• Freezes enforcement of judgments already obtained
• Prohibits most creditors from contacting the debtor

For you, the creditor, this means you must stop trying to collect payment on your own—even if the debt is valid and overdue.

Violating the automatic stay can result in legal penalties, so it’s important to stop any collection activity as soon as you learn about the bankruptcy filing.

Understanding the Type of Bankruptcy Filed

The next step in understanding what happens when a customer files for bankruptcy is identifying the type of bankruptcy they’ve filed.

Common Bankruptcy Types:

• Chapter 7 (Liquidation – Individual or Business): Assets are sold, and proceeds are distributed to creditors in order of priority. Many unsecured debts are discharged.
• Chapter 13 (Reorganization – Individual): The customer proposes a 3–5 year repayment plan to pay back part or all of their debt.
• Chapter 11 (Reorganization – Business or High-Debt Individuals): The business remains open and restructures debt under court supervision.

Knowing the chapter is important because it tells you:

• How likely you are to receive payment
• When and how to file a claim
• Whether the customer will remain in business

Filing a Proof of Claim

To receive any possible payment, you’ll likely need to submit a proof of claim—a legal document that tells the bankruptcy court how much you’re owed and for what reason.

How to File a Proof of Claim:

1. Get a copy of the bankruptcy notice (you should receive one by mail if you’re listed as a creditor).
2. File the claim with the appropriate bankruptcy court, using Official Form 410.
3. Include documentation such as invoices, contracts, or court judgments.
4. Submit before the claims deadline (called the “bar date”).

If you don’t file on time, you may lose your right to recover anything.

Claim Categories:

• Secured claims: Backed by collateral (e.g., equipment, property)
• Unsecured claims: Not tied to an asset (e.g., service fees, credit card debt)
• Priority claims: Certain taxes, wages, or child support (often paid before others)

Can You Still Get Paid?

Whether or not you’ll be paid depends on the customer’s assets, the type of bankruptcy, and where your claim ranks among others.

In Chapter 7:

• The trustee liquidates non-exempt assets
• Funds are distributed to creditors in order of priority
• Many unsecured creditors receive only partial payment—or nothing at all

In Chapter 13 or 11:

• You may receive regular payments as part of the reorganization plan
• The repayment amount depends on the debtor’s income and total debt
• If the debtor fails to complete the plan, you may recover less or nothing

Keep your expectations realistic—even a partial payment is common in bankruptcy cases.

Final Thoughts: What Happens When a Customer Files for Bankruptcy?

So, what happens when a customer files for bankruptcy? First, your ability to collect is immediately halted by the automatic stay, and your role shifts from active collector to participating creditor in a court-led process. While it may feel discouraging, acting quickly—by identifying the type of bankruptcy, filing a proof of claim on time, and monitoring the case—can help you recover part or all of what you’re owed. If the debt is significant, getting legal advice can help maximize your position in the case.

Need Help Navigating a Customer Bankruptcy? Get Legal Guidance Today

Still unsure what happens when a customer files for bankruptcy and how to protect your business? Legal Brand Marketing connects you with experienced bankruptcy attorneys who can guide you through filing claims, understanding creditor rights, and recovering what’s possible. Don’t let the process overwhelm you—reach out today to get strategic advice and protect your bottom line.