Calfee Connections

Economic uncertainty can place significant pressure on businesses of all sizes. Even long-standing customers, vendors, strategic partners, and borrowers may face liquidity challenges, operational disruptions, or mounting debt obligations.

When a business partner begins experiencing financial difficulty, many companies make the mistake of waiting too long to act. By the time a bankruptcy filing occurs, creditors often discover that many of their options have narrowed considerably.

Recognizing the warning signs of financial distress early can help businesses preserve their rights, protect their interests, and improve the likelihood of recovering monies owed.

Common Warning Signs

While financial distress rarely announces itself openly, several indicators frequently emerge before a bankruptcy filing:

• Chronic late payments
• Requests for extended payment terms
• Increasing disputes over invoices
• Significant workforce reductions
• Closure of facilities or offices
• Key employee departures
• Deteriorating communication from leadership
• Reports of lawsuits, liens, or collection actions
• Requests to restructure existing agreements.

One warning sign alone may not indicate a significant problem. However, multiple indicators occurring simultaneously should prompt closer scrutiny.

Why Early Action Matters

As a company approaches insolvency, the availability of assets often decreases. Secured lenders may improve their positions, competing creditors may become more aggressive, and valuable assets may be liquidated or transferred.

Businesses that proactively evaluate their exposure can often identify opportunities to:

• Strengthen contractual protections
• Secure outstanding obligations
• Negotiate payment arrangements
• Preserve evidence and documentation
• Monitor potentially improper asset transfers.

Questions Every Creditor Should Ask

When concerns arise regarding a business partner's financial condition, management should evaluate:

• How much is currently owed?
• Are obligations secured or unsecured?
• Are personal guarantees available?
• What contractual remedies exist?
• Are other creditors pursuing collections?
• Has the distressed company stopped paying debts generally?

The answers to these questions can significantly affect the available recovery strategies.

Looking Beyond Bankruptcy

Many businesses assume that once a customer or business partner experiences financial hardship, recovery is unlikely. In reality, creditors often have multiple avenues available, both before and after a bankruptcy filing.

Understanding those options can mean the difference between a meaningful recovery and a complete loss.

Conclusion

Identifying financial distress early and acting strategically can help businesses preserve leverage, protect assets, and improve recovery prospects. Waiting until a bankruptcy filing occurs may limit available options and increase losses.

If your organization is concerned about the financial condition of a customer, vendor, borrower, or business partner, experienced legal counsel can help evaluate available remedies before circumstances deteriorate further.

Read the previous blog post in this series: Strategies for Creditors Before and After Bankruptcy. 

Next in the series: When Should Creditors Consider Involuntary Bankruptcy?

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.