The short answer
When a client fails, the invoice stops being a collection problem and becomes a legal process you are a participant in rather than a driver of. The order of operations changes completely:
Stop collecting immediately. Continuing can itself be a violation.
Find out which procedure they are in, because liquidation and reorganisation lead to different places.
File your claim, on time and with the evidence attached.
Expect little. Unsecured suppliers sit near the back of the queue.
Check whether payments you already received are at risk of being reclaimed.
That last point catches people badly. Money already in your account can be taken back, and the shock of it lands months after you had written the client off.
Stop collecting the moment you hear
In the US, filing a bankruptcy petition triggers an automatic stay under 11 U.S.C. section 362. It halts, among other things, any act to collect, assess or recover a claim that arose before the case began, along with lawsuits, judgment enforcement and lien enforcement.
In practice that means the reminder sequence stops, the demand letter stops, the phone calls stop, and any claim you have filed is paused. This applies even where you are plainly owed the money and even where you are angry about it. Violating the stay can expose you to sanctions, which turns a bad debt into a worse one.
The instinct to send one more message before the shutters come down is the thing to resist. Note the date you were notified, stop, and move to the process below.
Find out what has actually happened
The word insolvent covers several outcomes that behave differently. Establish which one you are in:
Procedure | What it means | What it means for you |
|---|---|---|
Chapter 7 (US) | Liquidation and sale of assets | A distribution, if there are assets at all |
Chapter 11 (US) | Reorganisation, the business continues | Possible partial payment over time, or a rejected contract |
Administration (UK) | An administrator tries to rescue the business | Trading may continue, with new terms |
Liquidation (UK) | The company is wound up | A claim in the queue, usually paid little |
Chapter 11 matters more than people assume, because the business keeps trading and may want to keep working with you. Supplying a company in reorganisation is a different negotiation, often on prepayment terms, and work done after the filing generally sits in a better position than the invoices from before it. Get advice before agreeing anything.
File the claim
You have to put your hand up. The court will not track you down because you are owed money.
In a US Chapter 7 case, the proof of claim is the document that asserts what you are owed, and the court's own guidance puts the deadline at 90 days after the first date set for the meeting of creditors. Attach the contract, the invoices and the delivery evidence. This is the same bundle that would have supported a claim in court, which is 1 more reason to keep it as you go.
Then temper the expectation. The same guidance notes that most Chapter 7 cases involving individual filers are no-asset cases, where the trustee reports that nothing is available and unsecured creditors receive nothing. Corporate cases vary, but secured lenders, employees and tax authorities are generally ahead of you, and a supplier invoice is near the back.
The money you already have may not be yours to keep
This is the part almost nobody sees coming. Under 11 U.S.C. section 547, a trustee can avoid, meaning reclaim, payments a failing company made to a creditor shortly before filing, where the payment let that creditor do better than they would have done in a liquidation.
The window is 90 days before the filing for ordinary suppliers, extending to 1 year for insiders such as affiliates and relatives.
Insolvency is presumed during those 90 days, so the trustee does not have to prove it.
The ordinary course defence in 547(c)(2) protects payments made in the ordinary course of business between you and the client, or on ordinary terms for your industry.
There is a floor. Section 547(c)(9) protects transfers where the aggregate value is less than $5,000 in cases where the debts are primarily non-consumer.
So the client who suddenly settled 3 old invoices 2 months before collapsing may have handed you money the trustee later asks for back. The ordinary course defence is often available, and the sub-$5,000 floor covers a lot of agency work, but neither is automatic. If a demand arrives, it is a lawyer question rather than a blog question.
A sour irony sits in here worth naming: the harder you pushed for payment in the final months, the more your payment looks unusual against the earlier pattern, and the weaker the ordinary course defence becomes.
What you can still do
A few things remain within your control, and they are worth checking quickly:
Stop work. Continuing to deliver into an insolvency adds to the loss. The mechanics are in the piece on pausing work, though the stay changes how you communicate it.
Look at what you still hold. Unreleased files and unassigned rights may be yours, depending on the contract, which the ownership piece covers.
Check for a personal guarantee. Where a director guaranteed the debt, the company's insolvency does not automatically end that.
Check for set-off. Where you also owe them money, the 2 amounts may be capable of being netted.
Register for updates in the case, so you hear about distributions rather than finding out later.
Then, when the process concludes or stalls, treat the remainder as a write-off decision, with the bookkeeping and tax treatment that goes with it.
If the client is in the EU
Cross-border cases inside the EU run under Regulation 2015/848. The European e-Justice portal sets out the framework and provides a standard lodgement of claims form for creditors, with national insolvency registers reachable country by country.
The practical value is that a supplier in one member state can lodge a claim in proceedings opened in another without reconstructing the process from scratch. The detail of the procedure still follows the law of the country where proceedings were opened, so the timetable and the priority order are national.
In the UK, the equivalent procedures are administration and liquidation, overseen in part by the Insolvency Service. An appointed administrator or liquidator will normally write to known creditors, though registering your interest rather than waiting is the safer course.
What it changes for next time
Insolvency is the failure mode that deposits and credit limits exist for, and it is the one that makes both arguments concrete:
Take a deposit. Money received early and in the ordinary course is the money most likely to survive. How to introduce one without unsettling good clients.
Set a credit limit per client, and treat crossing it as a stop signal rather than a worry.
Watch the warning signs. Sudden silence from a previously reliable payer, part payments, a change of finance contact, or a request to extend terms are worth taking seriously.
Check before you sign. Public registers carry more than people use, as the piece on checking a client's payment record sets out.
A client entering insolvency rarely does it without a run-up. The signals are usually visible for months in how they pay, which is the argument for watching the pattern across invoices rather than reacting to each one.
FAQ
What happens to my unpaid invoice if a client goes bankrupt?
It becomes a claim in the insolvency rather than a debt you can pursue. You stop collection activity, file a proof of claim with your evidence by the deadline, and wait. Unsecured suppliers sit behind secured lenders, employees and tax authorities, and often receive little or nothing.
Can I keep contacting the client for payment?
No. In the US the automatic stay under section 362 halts acts to collect a claim that arose before the filing, and breaching it can expose you to sanctions. Direct any questions to the trustee or administrator instead.
Can a trustee take back money a client already paid me?
Potentially. Section 547 lets a trustee reclaim payments made in the 90 days before filing where they gave you more than a liquidation would have. The ordinary course of business defence often applies, and there is a floor of less than $5,000 in primarily non-consumer cases. Take advice if you receive a demand.
Should I still file a claim if I expect nothing?
Usually yes, where filing is straightforward, because the cost is low and distributions occasionally happen. It also fixes your position in the record, which matters if the case turns out to have more assets than first thought.
What if the client keeps trading in Chapter 11?
Then there may still be a relationship worth having, usually on prepayment or tighter terms. Work done after the filing generally sits in a better position than work done before it, so agree the basis in writing before you resume.
Does a director's personal guarantee survive the company's insolvency?
Often, because it is a separate promise from a different party. If you hold one, that is the first document to re-read, and worth a legal view before acting on it.
Not legal, accounting or tax advice. Insolvency procedure, creditor priority, deadlines and clawback rules differ by country and change over time. Speak to an insolvency lawyer promptly, particularly if you receive a demand to repay money.