You have just shipped an order on credit to your customer and all of a sudden you discover he is insolvent (without funds to pay for your order). He may have even filed bankruptcy. Now what?

1-If the goods haven’t been delivered, you can stop delivery; however, proper notice to the carrier or consignee to return the goods to you. You may also be liable for any damages in the return of goods to you from a result of the return. And of course notice must be given to the buyer.

 

2-If the goods have already been delivered; you may have the right to reclaim those goods if the buyer is in fact solvent at that time the goods are delivered. By insolvency we mean that that the buyer does not have the ability to pay debts as they become due or a more technical “balance sheet test” meaning that their liabilities far exceed their assets. You must give proper notice of your intent to reclaim your goods. Such notice varies state by state, and are usually regulated per the UCC. Changes to per the 2005 Bankruptcy Act have changed the time frame for reclamation. You should always consult with your attorney for the correct time frame in which to exercise your reclamation rights.

 

3-If you give timely proper notice to reclaim your goods and your customer refuses, your remedy lies in the Courts…seeking an Order directing your customer to return the goods.

 

4-If you customer has filed bankruptcy shortly (see the Bankruptcy Act for time frame), can you do anything without violating the automatic stay (which prevents most creditors from pursing their rights to collect outside the purview of the Bankruptcy Court’s jurisdiction)? In general the answer is yes! The Bankruptcy Code provides you the right to reclaim goods from the bankruptcy estate…and such right has priority over claims that may be asserted by general unsecured creditors or by the Trustee in Bankruptcy. (Once again, legal advice should be sought for further information on this topic).

 

Although extremely time constrained, a creditor’s right to reclamation is one of the many tools available to a creditor to prevail.

 

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