TL;DR
When a customer files for creditor protection, the stay of proceedings means you cannot collect through normal channels, but you can still recover money if you act fast. File your proof of claim before the deadline, contact the trustee, and stop extending credit immediately. Missing the claims window can mean losing everything.
You find out a customer who owes you $40,000 has filed for creditor protection. Your first instinct is to call them. Your second is to panic. Neither of those is the right move. What you do in the first few days after learning about an insolvency filing matters more than most owners realize.
What Creditor Protection Actually Means
In Canada, a company can seek protection under the Creditor Protection Act or the Companies Creditors Arrangement Act (CCAA), depending on the size of the debt. Both create a legal stay of proceedings. That means creditors, including you, cannot continue collection efforts, sue for payment, or enforce security without court approval.
The company is not necessarily gone. Creditor protection is sometimes a restructuring, not a liquidation. The debtor may emerge, pay partial cents on the dollar, or wind down entirely. You will not know which path it takes for weeks or months.
What Owners Get Wrong
The biggest mistake is assuming you have time to figure it out later. Filing deadlines in insolvency proceedings are strict. If you miss a proof-of-claim deadline, you may be barred from recovering anything at all, even if there are assets to distribute.
The second mistake is assuming a verbal promise from the debtor's management team means something. Once a company is under creditor protection, the trustee or monitor has authority over payments. A manager telling you "we will take care of you" carries no legal weight.
The third mistake is continuing to deliver goods or services on credit. Any new exposure you create after the filing date is a new unsecured claim, not better than the old one. Stop extending credit immediately.
The CFO Perspective
When a client of mine learned their largest customer had filed for CCAA protection, the first thing we did was pull the AR aging and confirm the exact amount and invoice dates. Then we contacted the court-appointed monitor to understand the claims process and deadlines.
In that case, the customer was restructuring, not liquidating. My client ultimately recovered about 60 cents on the dollar over 18 months. That is not ideal, but it was far better than the zero they would have received if they had missed the claims filing window.
The lesson: act fast and stay in the process. Creditor protection proceedings reward creditors who pay attention.
What to Do Right Away
- Document your claim immediately. Pull every invoice, contract, purchase order, and delivery confirmation related to this customer. Compile a clean summary of the total amount owed, broken down by invoice date and amount. You will need this for your proof of claim.
- Find the trustee or monitor. The court filing will name the licensed insolvency trustee or monitor overseeing the proceedings. Contact them directly to get the claims process, deadlines, and any creditor meeting dates. This information is often publicly available through the Office of the Superintendent of Bankruptcy (OSB) website.
- File your proof of claim before the deadline. Missing this deadline means losing your right to recover anything, even if assets exist. Do not assume someone will notify you. You are responsible for filing your own claim.
- Assess your priority position. Not all creditors are equal. Secured creditors with registered liens get paid before unsecured creditors. If you delivered goods and the title never transferred, you may have a claim to recover those specific goods. A lawyer can help you assess your position quickly.
- Write down the receivable in your books. Talk to your accountant about recognizing the bad debt. There may be a tax deduction available for the write-off, and your financial statements should reflect the real picture now, not when the proceedings conclude.
- Decide whether legal representation is worth it. For large claims, a lawyer who specializes in insolvency can help you assert your position, challenge the plan if appropriate, and maximize recovery. For smaller claims, the math may not support it. Get a quick assessment before committing to fees.
How to Protect Yourself Going Forward
The best time to manage this risk is before a customer gets into trouble. Watch for warning signs: slow payment that gets slower, requests to extend terms, changes in purchasing patterns, and news about the company or its industry. When something looks off, tighten your credit terms or require deposits before shipping more goods.
If you have one customer representing more than 20 to 25 percent of your AR, you are carrying concentration risk. Diversifying your customer base is not just a growth strategy. It is a credit risk strategy.
If you are dealing with an insolvency situation right now and want to think through your options, book a free call at peterxiacpa.com/book.
Next step: run your numbers through the free CFO scorecard.
Frequently Asked Questions
- Can I still collect money owed to me when a customer files for creditor protection in Canada?
- You cannot pursue collection through normal channels once a stay of proceedings is in place, but you can recover money by filing a proof of claim through the insolvency proceedings. The amount you recover depends on your priority as a creditor and the assets available.
- What is a proof of claim and when do I need to file it?
- A proof of claim is the formal document you submit to the trustee or monitor listing the amount owed to you and the supporting documentation. Deadlines are set by the court and missing them can disqualify you from any recovery. Contact the trustee as soon as you learn of the filing to get the deadline.
- Can I write off the bad debt on my taxes if a customer goes insolvent?
- You may be able to claim a bad debt deduction once the amount is reasonably considered uncollectible. The rules depend on whether you use the accrual or cash method of accounting and when the debt is formally recognized as bad. Ask your accountant to review the timing and documentation requirements.
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