Cash flow is tight, and you are exploring all options, including bankruptcy. A significant portion of your operating capital comes from customer deposits for future goods or services.
What rights do these customers have, and how will courts treat their deposits in bankruptcy? This is a critical question for business owners in distress.
Customer deposits and bankruptcy
When a business takes a customer deposit, it usually means the business will provide goods or services later. In bankruptcy, these deposits can become a point of contention.
Suppose a customer paid a deposit for a service contract. However, you filed for bankruptcy before you rendered the services.
Courts often consider these deposits as unsecured debt. This means customers join other general creditors in line to get paid. They do not have special priority over other creditors.
Impact of the bankruptcy chapter
The chapter of bankruptcy you file affects how customer deposits are handled.
Under Chapter 7 bankruptcy, a trustee liquidates the business’s assets and distributes the money to creditors according to the law. Customer deposits are part of the pool of funds available to creditors. In many cases, customers might only recover a small part of their deposit or nothing at all.
Under Chapter 11 bankruptcy, the business proposes a plan to repay its debts over time. The plan will determine how customer deposits are treated. The business can negotiate with creditors, including customers with deposits, to reach an agreement on repayment terms.
Keep in mind that Chapter 11 is usually for businesses that want to continue operating, so you must show a feasible plan for profitability.
Florida law considerations
Florida does not have specific laws that prioritize customer deposits in bankruptcy. Like other states, Florida follows federal bankruptcy law. Florida law may affect certain exemptions or other aspects of the bankruptcy case, which could indirectly affect how customer deposits are handled.
It is crucial to work with an experienced attorney when dealing with bankruptcy. A lawyer can advise you on how this legal process can impact your specific financial situation.