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When a customer or business partner begins experiencing financial difficulties, the most important decisions are often made before any bankruptcy filing occurs. Proactive planning can significantly improve a creditor's position.

Review Existing Agreements

Start by examining relevant contracts. Important provisions include:

• Security interests
• Personal guarantees
• Default provisions
• Acceleration rights
• Venue and jurisdiction clauses
• Financial reporting requirements.

Many businesses discover valuable protections hidden within agreements that have not been revisited for years.

Confirm Security Interests

A security agreement provides little protection if perfection requirements have not been satisfied. Creditors should determine:

• Whether UCC filings are current
• Whether collateral descriptions remain accurate
• Whether liens are properly perfected.

Increase Monitoring

When warning signs emerge, greater visibility becomes critical. Consider requesting:

• Updated financial statements
• Accounts receivable aging reports
• Inventory reports
• Borrowing base certificates.

Increased transparency may reveal developing risks.

Document Everything

Detailed documentation often becomes invaluable during litigation or bankruptcy proceedings. Maintain records concerning:

• Payment requests
• Communications
• Amendments
• Financial disclosures
• Collection efforts.

Evaluate Alternative Resolutions

In some situations, formal collection efforts may not maximize recovery. Alternative approaches include:

• Workout agreements
• Structured payment plans
• Additional collateral arrangements
• Forbearance agreements.

Avoid Emotional Decisions

Financial distress often creates frustration, particularly when relationships have existed for years.

Business decisions should remain focused on maximizing recovery and minimizing future exposure.

Conclusion

The strongest creditor positions are often established before bankruptcy becomes inevitable. Taking proactive measures today can help preserve rights and improve outcomes tomorrow.

Read the previous blog post in this series: When Should Creditors Consider Involuntary Bankruptcy?

Next in the series: Directors and Officers of Distressed Companies – When Can They Be Held Liable?

Read the comprehensive article: “Potential Avenues of Recovery Against an Economically Distressed Business” by Andrew W. Owen, Partner.

Andy Owen is an experienced business litigator who represents clients in the commercial mortgage-backed securities industry and both large and small corporate entities in a wide variety of complex business-related disputes. Andy focuses his commercial mortgage-backed securities litigation practice on the default administration on behalf of corporate trustees and master and special servicers of commercial mortgage-backed securitized trusts. He has significant experience in all aspects of workouts, foreclosures, deeds-in-lieu, bankruptcy proceedings, and receiverships involving multimillion-dollar commercial properties such as hotels, office buildings, shopping centers, and apartments. You can contact Andy via email at aowen@calfee.com or by phone at 614.621.7751.

Calfee, Halter & Griswold LLP is a full-service corporate law firm with 170 attorneys and professionals in Cleveland, Columbus, Cincinnati, and Indianapolis. Calfee serves clients in the Midwest, nationally and globally in the areas of Corporate and Finance, Employee Benefits and Executive Compensation, Energy and Utilities, Estate and Succession Planning and Administration, Government Relations and Legislation, Intellectual Property, Labor and Employment, Litigation, and Real Estate Law. Calfee has been recognized as a leading law firm by Chambers USA 2026 in Antitrust, Banking & Finance, Construction, Corporate/M&A, Employee Benefits & Executive Compensation, Energy & Natural Resources, Environment, Government Relations, Insurance, Intellectual Property, Labor & Employment, Litigation: General Commercial, Litigation: White-Collar Crime & Government Investigations, Public Finance, and Real Estate, and by Chambers HNW 2026 in Private Wealth Law. A founding member of Lex Mundi, Calfee offers international representation through a network of independent law firms with access to 22,000 attorneys located in more than 125 countries. Additional information is available at Calfee.com.