Avoiding the domino effect: the moves to make if your supplier or customer goes bankrupt.

• Author: Spendlove, Gretta
• Position: Legal Brief

It's the classic story of how "they all come tumbling down." In the throws of the economic crisis, auto-part manufacturers couldn't borrow money or buy raw materials in without first being paid for parts they already shipped. The threatened bankruptcies of GM, Chrysler and Ford were driving auto-part makers to their own bankruptcies. "Auto Suppliers Share in the Anxiety," the New York Times reported in December 2008. While GM, Ford and Chrysler employ 239,000 people in the United States, the country's 3,000 or so auto suppliers have more than 600,000 workers, all put at risk by the Big Three automakers.

Utah businesses also run a risk of getting entangled in the bankruptcies of suppliers, customers or other related companies as a result of the tumbling economy. Here are a few ideas for minimizing the loss:

Get good help fast.

Bankruptcy laws are complicated, penalties for making the wrong move can be stiff and deadlines for action are often short. As soon as you learn your customer or supplier is facing bankruptcy, consult a bankruptcy lawyer about your options if the sum at stake is substantial.

Explore reclamation.

You delivered products to your customer on March 10. Your customer files bankruptcy on March 25. You may be able to get the products back if you act quickly. A bankruptcy law provision allows "reclamation" of goods within 45 days after receipt, if the buyer was insolvent when it received the goods. If the buyer goes bankrupt, the written demand for reclamation must be made within 20 days after the bankruptcy filing.

Determine the status of your contracts.

Bankruptcy law gives debtors limited periods to assume or reject "executory contracts." In simple terms, executory contracts are agreements that have not yet been completely performed. For instance, an equipment lease on which the debtor still holds equipment and is making payments is an executory contract, as is a software license that a debtor still uses and for which it owes money. You cannot cancel the equipment lease or software license just because the customer goes bankrupt. You must wait the period specified by the bankruptcy laws or by the court (sometimes 60 days, but usually longer), until the debtor either "assumes" the lease and license or "rejects" it. A debtor must bring leases and licenses current and keep them current, if it assumes them. If it doesn't, you can then cancel the agreement.

Determine whether you are a secured creditor.

Secured creditors are...