When a Customer Files Bankruptcy: A Texas Business Guide

If you learn that a customer has filed for bankruptcy, it can be unsettling—especially if they owe your Texas business money or are in the middle of an ongoing contract. Understanding how bankruptcy works from a creditor’s perspective helps you protect your rights and avoid costly missteps.

This guide walks Texas business owners and managers through the key concepts, timelines, and decisions you are likely to face when a customer seeks bankruptcy protection in federal court.

Overview

• Bankruptcy is a federal court process that immediately limits what you can do to collect from your customer.
• The automatic stay stops most collection efforts as soon as the case is filed.
• You may need to file a proof of claim to have a chance of being paid.
• The type of bankruptcy (Chapter 7 vs. Chapter 11 or 13) affects how much, if anything, you recover.
• You must be careful about using setoff, repossessing goods, or terminating contracts after the filing.
• Early legal advice often saves money by avoiding violations of court orders and preserving your rights.

(This article provides general information for Texas businesses and is not legal advice.)

Quick Answer

• Stop all collection activity immediately—no more calls, emails, lawsuits, or repossessions without court permission.
• Confirm the filing (chapter, court, case number) and calendar deadlines.
• Gather your documents: contracts, invoices, security agreements, emails, delivery receipts.
• Determine if you’re secured or unsecured and whether you have personal guarantees.
• Consider filing a proof of claim by the court’s deadline.
• Evaluate ongoing contracts to decide whether to push for assumption, negotiate, or prepare for rejection.
• Talk to a business attorney experienced in creditor and bankruptcy issues to set a strategy.

If your exposure is significant or the customer is key to your business, you may also want ongoing guidance similar to outside general counsel, so you have a consistent strategy across multiple customers and contracts.

Step 1: Confirm What Was Filed and Where

Bankruptcy is governed primarily by federal law (Title 11 of the U.S. Code), and cases are filed in U.S. Bankruptcy Courts. The first thing you should do is confirm:

• Which chapter the customer filed under (most often Chapter 7, 11, or 13).
• Which court and which division (for Texas customers, usually in one of the four Texas federal districts).
• The case number and filing date.

You will usually learn about the filing from:

• A formal notice of bankruptcy from the court,
• A letter or email from the customer’s attorney, or
• A returned check or bounced payment followed by word of the filing.

You can look up details via the federal courts’ PACER system or work with counsel to obtain the docket and key orders.

Step 2: Understand the Immediate Impact of the Automatic Stay

The most important immediate effect of a customer’s bankruptcy is the automatic stay. Under the Bankruptcy Code (11 U.S.C. § 362), an automatic stay goes into effect the moment the petition is filed. In practical terms, that means:

• You must stop all collection activity on pre-bankruptcy debts:
  • No demand letters, collection calls, or dunning emails.
  • No new lawsuits to collect old invoices.
  • No garnishments or post-judgment collection activity.
• Any pending lawsuits to collect the debt are generally frozen.
• Repossessions, foreclosures, or lien enforcements must stop unless and until the bankruptcy court grants relief from the stay.

Violating the automatic stay can lead to sanctions, including damages and attorney’s fees, especially if the debtor is an individual consumer. For a Texas business, the safest move is to stop all collection efforts and consult a lawyer before taking further action.

Step 3: Identify Your Status as a Creditor

Not all creditors stand in the same position in bankruptcy. Your rights and likely recovery depend on what type of claim you hold.

Secured vs. Unsecured Creditors

• Secured creditor: You have a valid, properly perfected security interest or lien in specific collateral (equipment, vehicles, inventory, accounts receivable, etc.). This often comes from:
  • A signed security agreement,
  • A UCC-1 financing statement filed with the Texas Secretary of State,
  • A recorded deed of trust or mortgage on real property.
• Unsecured creditor: You simply delivered goods or services on credit and do not have collateral securing the debt.

Secured creditors generally have better leverage and may:

• Seek relief from the automatic stay to repossess or foreclose on collateral.
• Receive adequate protection payments or replacement liens in reorganization cases.

Unsecured creditors are often paid last, if at all, especially in liquidations.

Priority vs. General Unsecured Claims

Some unsecured claims receive priority under 11 U.S.C. § 507—for example, certain wages, taxes, and employee benefit contributions. Most trade creditors are general unsecured creditors, which typically recover a smaller percentage.

Your attorney can help you determine:

• Whether your claim is secured, priority, or general unsecured;
• Whether your security interest was properly perfected under applicable law (for example, the Texas Uniform Commercial Code in the Business & Commerce Code);
• What that likely means in terms of recovery.

If your business often extends credit or takes collateral, you may want to revisit your standard contract drafting & review practices and security agreements going forward.

Step 4: Gather and Organize Your Documentation

To protect your position, start collecting:

• Contracts and amendments with the customer.
• Purchase orders, invoices, and statements showing what is owed.
• Security agreements, guarantees, and financing statements.
• Proof of delivery or performance (bills of lading, delivery receipts, time sheets, emails).
• Payment history (check copies, bank records, payment application details).
• Communications about payment disputes, returns, or chargebacks.

Having this information organized makes it easier to:

• File an accurate proof of claim.
• Respond to any challenges or objections.
• Evaluate defenses if the bankruptcy trustee seeks to claw back payments.

Step 5: Proofs of Claim – Should You File?

In most bankruptcy cases, unsecured and some secured creditors must file a proof of claim to share in any distribution.

What Is a Proof of Claim?

A proof of claim is a standardized court form that:

• Identifies you and your business.
• States how much you are owed as of the petition date.
• Indicates whether the claim is secured or unsecured.
• Attaches supporting documentation.

The court’s notice will list a claims bar date—the deadline by which most creditors must file. Missing this deadline can severely limit or eliminate your ability to receive payment.

Do You Always Need to File?

In some bankruptcy chapters, certain creditors may not need to file a proof of claim if the debtor schedules the claim accurately and indicates it as undisputed and noncontingent. However:

• If the amount listed is wrong,
• If your claim is omitted entirely, or
• If you believe you are secured or have a priority claim,

it is usually wise to file a claim.

Because errors in a proof of claim can lead to objections or reduced recovery, many Texas businesses ask their counsel to prepare or review the filing.

Step 6: Understand the Bankruptcy Chapter and What It Means

The chapter of bankruptcy your customer filed under will shape what happens next.

Chapter 7 – Liquidation

• In a Chapter 7 case:
  • A trustee is appointed to gather and sell non-exempt assets.
  • Proceeds are distributed to creditors based on legal priority.
  • Most unsecured creditors receive only a fraction of what they are owed, if anything.
  • The business debtor may cease operations or sell substantially all assets.
• If you are a secured creditor, you may have the right to repossess collateral or receive payment from its sale, subject to the court’s approval. If you are unsecured, your focus will be on filing a proof of claim and monitoring whether there are any assets to distribute.

Chapter 11 – Reorganization (Usually Businesses)

• In Chapter 11:
  • The debtor usually remains in control as a debtor-in-possession (DIP).
  • The business continues operating while it negotiates with creditors.
  • The debtor files a plan of reorganization setting out how creditors will be treated and paid.
  • Creditors may vote on the plan.
• For a Texas supplier or vendor, this chapter presents both risks and opportunities:
• You might receive more over time than in a liquidation.
• You may continue a profitable relationship if the business successfully reorganizes.
• You must be careful about extending additional credit post-petition.

Chapter 13 – Individual Wage-Earner Plans

• If your customer is an individual (for example, a sole proprietor) filing Chapter 13:
  • They propose a repayment plan over three to five years.
  • Business-related debts may be included with their personal finances.
  • You may receive partial payment through the plan, depending on their income and assets.

Step 7: Dealing with Ongoing Contracts and Leases

Bankruptcy changes how the law treats ongoing or executory contracts—agreements where both sides still have significant performance obligations (for example, multi-year supply contracts, service agreements, or commercial leases).

Assumption, Assignment, or Rejection

The debtor (with court approval) can usually choose to:

• Assume the contract: continue it, often after curing past defaults.
• Assign the contract: transfer it to another party, under certain conditions.
• Reject the contract: treat it as breached as of a specific date.

If your customer wants to assume your contract:

They generally must cure past due amounts and provide adequate assurance of future performance.

If they reject the contract:

You typically have a pre-petition claim for damages, which is usually treated as a general unsecured claim.

Before you take any action to terminate a contract after a bankruptcy filing, you should:

• Review the contract’s bankruptcy and default clauses.
• Understand that many “ipso facto” clauses (automatic termination on bankruptcy) are limited or unenforceable under federal law.
• Get legal advice to ensure you are not violating the automatic stay.

Given the complexity, many Texas businesses coordinate this work with their existing business law services counsel so that decisions about terminating, renegotiating, or continuing contracts align with broader business goals.

Step 8: Setoff, Recoupment, and Credit Balances

If your business both owes money to and is owed money by the customer (for example, overpayments, deposits, or rebate programs), you might consider setting off these mutual obligations.

The Bankruptcy Code recognizes a creditor’s right of setoff in many circumstances (11 U.S.C. § 553), but:

• The debts must usually be mutual and pre-petition.
• There are limits on improving your position just before bankruptcy.
• Exercising setoff without court approval can violate the automatic stay.

Recoupment—netting obligations arising out of the same transaction—may sometimes be treated differently, but it is a nuanced area of law.

Because setoff and recoupment are technical and fact-specific, you should:

• Identify any credits, deposits, or refunds you hold,
• Avoid unilaterally applying them post-petition without advice, and
• Work with counsel to seek appropriate relief if needed.

Step 9: Preference and Fraudulent Transfer Risk

Another surprise many creditors face is a preference or fraudulent transfer demand from a bankruptcy trustee or debtor-in-possession.

What Is a Preference?

A preference (11 U.S.C. § 547) is generally a payment or transfer made to a creditor:

• On account of an existing debt (not a contemporaneous exchange),
• Within a certain period before the bankruptcy filing (commonly 90 days for non-insiders),
• That allows the creditor to receive more than it would have in a Chapter 7 liquidation.

The trustee may sue to claw back such payments. However, there are defenses, including:

• Ordinary course of business: payments consistent with the parties’ historical pattern;
• Contemporaneous exchange for new value;
• Subsequent new value: goods or services delivered after the payment.

Fraudulent Transfers

Transfers made with actual intent to hinder, delay, or defraud creditors, or for less than reasonably equivalent value while the debtor is financially distressed, may be avoidable as fraudulent transfers (11 U.S.C. § 548 and applicable state law).

For most trade creditors acting in good faith, the bigger risk is a preference claim rather than fraudulent transfer liability. Still, it is wise to:

• Preserve records showing the business reason for payments,
• Maintain consistent credit and collection practices, and
• Consult counsel promptly if you receive a demand letter seeking repayment.

Step 10: Continuing to Do Business with the Debtor

If your customer is reorganizing under Chapter 11 (or in some Chapter 13 situations), you may be asked to keep supplying goods or services after the bankruptcy filing.

Key considerations:

• Post-petition obligations (after the filing date) are generally treated as administrative expenses, which can have higher priority than pre-petition unsecured claims.
• You still face risk if the case fails or converts to Chapter 7.
• You can often negotiate tighter terms:
  • COD (cash on delivery),
  • Shorter payment cycles,
  • Personal guarantees from insiders (where appropriate and lawful),
  • Deposits or other security.

Before agreeing to extend new credit, you should:

• Review the debtor’s filings and projections.
• Consider the impact on your own cash flow and risk tolerance.
• Coordinate your approach with your broader buy-sell agreements or succession planning if the relationship is central to your business model.

Strategic Considerations for Texas Businesses

Evaluate Your Overall Exposure

Ask:

• How much does this single customer represent in total receivables?
• Is this customer critical to your revenue or supply chain?
• Do you have multiple contracts or locations impacted (for example, several Texas outlets)?

This helps you decide whether to:

• Actively participate in the bankruptcy case (for example, through a creditors’ committee),
• Simply file a proof of claim and monitor,
• Rework your credit policies with other customers to reduce future risk.

Improve Your Contracts and Credit Policies Going Forward

A customer’s bankruptcy is often a wake-up call that credit and contract practices need updating. You may want to:

• Tighten credit approval and limits.
• Use personal guarantees where appropriate.
• Take security interests in key equipment or inventory when feasible.
• Clarify default, repossession, and dispute resolution terms in your contracts.

Working with counsel on operating agreements, vendor contracts, and customer terms can significantly reduce the damage from future bankruptcies by major accounts.

When to Involve Legal Counsel

You should strongly consider involving a business and bankruptcy-savvy attorney when:

• The amount owed is significant for your business.
• You are a secured creditor or think you may be.
• You hold or manage large customer portfolios with multiple potential bankruptcies.
• You receive a preference demand or lawsuit.
• You are party to important long-term contracts or leases with the debtor.

Legal guidance often pays for itself by:

• Avoiding stay violations and sanctions.
• Maximizing secured and priority claims.
• Reducing or defeating clawback claims.
• Improving your negotiating position on ongoing contracts.

Common Questions

What happens to my lawsuit if I already sued the customer?

Most collection lawsuits are automatically stayed. You typically cannot:

• Continue discovery,
• Seek a judgment, or
• Enforce an existing judgment,

without bankruptcy court permission. Your claim is usually addressed through the bankruptcy process instead.

If I have a personal guarantee from the owner, can I still pursue them?

A personal guarantee may allow you to pursue the guarantor even if the company files bankruptcy. However:

• If the guarantor also files bankruptcy, the automatic stay will protect them too.
• Even where no stay exists, practical and strategic considerations may affect whether and when to pursue the guarantor.

You should review your guarantee language and overall strategy with counsel.

Will I ever get paid the full amount I am owed?

It depends on:

• Whether your claim is secured or unsecured.
• The debtor’s assets and cash flow.
• The chapter filed and whether the debtor successfully reorganizes.

Unsecured creditors in Chapter 7 may receive only a small percentage of their claims, or nothing at all. In Chapter 11, unsecured creditors sometimes receive more, but often over time and at a discount. Even in Chapter 11, unsecured creditors frequently receive nothing.

Do I have to keep doing business with a bankrupt customer?

Generally, you cannot be forced to extend new credit, but your obligations under existing contracts are more complex. The debtor may seek to assume and enforce ongoing contracts. Whether you must continue performance—and on what terms—depends on federal bankruptcy law, your contract, and any court orders. This is a key area where specific legal advice is important.

Sources

• 11 U.S.C. Ch. 3 – Case Administration (includes § 362 automatic stay)
• 11 U.S.C. Ch. 5 – Creditors, the Debtor, and the Estate
• 11 U.S.C. Ch. 7 – Liquidation
• 11 U.S.C. Ch. 11 – Reorganization

This article provides general information and is not legal advice. Consult a qualified attorney for advice about your situation.

Legal content authored and reviewed by Andrew Talley, Attorney at Law, licensed in Texas. Published by The Talley Law Firm, PLLC, Friendswood, Texas. Last updated January 29, 2026. This page provides general legal information about Texas law and does not constitute legal advice or create an attorney-client relationship. For advice specific to your situation, please schedule a consultation.