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When a Vendor Files for Bankruptcy

How to handle business with the company going under BY ROBERT KURTZ


rganizations often use bankruptcy as a financial tool to upright

their financial stability, says Timothy Walsh, JD, international head of the restructuring and insolvency practice in the law firm of McDermott Will & Emery, who practices out of the firm’s New York office. “All bankruptcy means is your inability to pay your debts as they become due. That is the only requirement you need to be able to file.”

Aaron Casagrande, JD, a partner

for the law firm of Whiteford, Taylor & Preston, who practices out of the firm’s Baltimore, Maryland, office, adds, “Bankruptcy is a legitimate business decision to help a company refinance or reorganize its debt in order to con- tinue its business or to liquidate.”


Understanding Bankruptcy Typically, businesses file for one of two types of bankruptcies, Walsh explains. “Chapter 7 is a cessation of the business, marshalling of the assets and distributing the proceeds to credi- tors in the order of their priority. The business is closed. With Chapter 11, the business stays open, the debtor and its management remains in possession of the company, and they operate the business in an attempt to reorganize its debts and emerge from bankruptcy.” Businesses themselves will usu-

ally file for bankruptcy, but there are instances when a business can be “forced” into bankruptcy, Casagrande says. “While infrequent, creditors can put a company into an involuntary bankruptcy. This may happen if credi- tors believe they are not being treated

fairly by the company and would be better off putting the company in bankruptcy in an attempt to receive payments they are owed.” There is another instance when creditors may put a company into bankruptcy, he says. “If they suspect the company is engaged in wrongdo- ing, they may believe that by putting the company into bankruptcy, they can stop the wrongdoing and effectu- ate a recovery.”

Responding to Bankruptcy Walsh recommends that all ASCs monitor the financial vitals of their key suppliers regularly. If an ASC learns that one of its vendors is struggling financially and might be considering bankruptcy, or if

it hears noise about

instability, he recommends putting that supplier on ‘credit watch,’ meaning that the ASC’s credit department would begin to keep an eye on them. “If the vendor is rated,” he adds, “watch its ratings.”

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