Managing a lending operation means maintaining relationships with dozens of vendors, borrowers, and service providers. When one of those critical partners files for bankruptcy, the ripple effects can threaten your bottom line and disrupt your entire pipeline. In today’s economic climate, where commercial bankruptcies remain elevated, private lenders must be prepared with a clear playbook for protecting their interests.
Below are ten essential strategies that every private lender should implement when a vendor or borrower enters bankruptcy proceedings.
Assess Whether Legal Representation Is Warranted
One of the first decisions a creditor faces in a bankruptcy case is whether to retain counsel. This decision should be driven by the size of your claim relative to potential recovery and attorney fees. If your exposure is relatively small — say, under $10,000 as an unsecured creditor — the cost of active legal participation may exceed any realistic recovery. The creditor hierarchy under the Bankruptcy Code determines priority, and unsecured creditors with modest claims rarely benefit from aggressive litigation.
A brief consultation with a bankruptcy attorney can help you evaluate whether formal representation makes financial sense. The goal is to protect your position without compounding your losses through unnecessary legal expenses.
Perfect Your Security Interests Before Problems Arise
Properly perfecting liens and security interests is one of the most important preventive measures a lender can take. When a borrower or vendor enters bankruptcy, the trustee and debtor’s counsel will examine every lien for defects. Even a minor procedural error in filing a UCC financing statement or recording a deed of trust can render a secured position vulnerable.
Private lenders should conduct regular audits of their lien portfolios to confirm that all security interests are properly perfected under applicable state law. Waiting until a bankruptcy filing to discover a gap in your collateral position is a costly mistake that can be entirely avoided with proactive due diligence.
Monitor All Bankruptcy Notices Carefully
Bankruptcy courts communicate through official notices that may arrive by mail or electronically. These notices contain critical deadlines for filing proofs of claim, objecting to discharge, and responding to motions. Missing a bar date can permanently extinguish your right to participate in distributions from the bankruptcy estate.
Designate a specific team member or department to monitor and track all bankruptcy-related correspondence. Implement a calendaring system for key deadlines and confirm receipt of all court notices. This administrative discipline can mean the difference between recovering a portion of your claim and losing it entirely.
Consider Maintaining the Business Relationship
Continuing to transact with a debtor in bankruptcy may seem counterintuitive, but it can provide strategic advantages. Post-petition transactions may qualify as administrative expense claims under Section 503 of the Bankruptcy Code, which receive priority over most pre-petition unsecured claims.
Additionally, the Bankruptcy Code permits debtors to pay pre-petition debts to “critical vendors” — suppliers and service providers whose continued participation is essential to the debtor’s reorganization. By positioning your lending operation as indispensable to the debtor’s business, you may increase the likelihood of receiving priority treatment.
Scrutinize Pre-Bankruptcy Payment Arrangements
The Bankruptcy Code’s preference and fraudulent transfer provisions allow trustees to recover payments made to creditors within specific lookback periods. If you received unusual or outsized payments from a debtor in the 90 days before the bankruptcy filing (or one year for insiders), those payments may be subject to clawback actions under Section 547.
Maintain standard payment terms with all counterparties and document the commercial reasonableness of your arrangements. Payments received in the ordinary course of business are far more defensible against preference claims than one-off or irregular transactions.
Require Security Deposits in Vendor Agreements
When entering long-term vendor relationships, private lenders should negotiate security deposits or letters of credit as part of the contractual framework. A well-structured security deposit provides a buffer against unpaid obligations and can serve as a setoff against amounts owed in a bankruptcy scenario.
The key is thorough documentation. The security deposit arrangement should be clearly memorialized in the contract, with explicit provisions governing the circumstances under which the deposit may be applied. Without proper documentation, asserting rights to a security deposit in bankruptcy becomes significantly more difficult.
Continue Performing Under Executory Contracts
If you have an executory contract with a debtor — one where both parties still have material obligations to perform — you generally must continue performing your obligations during the bankruptcy case. Walking away from the contract prematurely can expose you to breach of contract claims and may weaken your position in the proceedings.
Maintaining performance under an executory contract also preserves your right to assert an administrative expense claim for post-petition obligations. The debtor must ultimately decide whether to assume or reject the contract, and your continued performance strengthens your negotiating position in that process.
Enforce Cure Requirements When Contracts Are Assumed
Under Section 365 of the Bankruptcy Code, a debtor that wishes to assume an executory contract must cure all existing defaults and provide adequate assurance of future performance. This is a powerful tool for creditors. Do not allow a debtor to assume a contract without fully addressing all outstanding defaults, including monetary obligations, late fees, and any other documented losses.
Prepare a comprehensive accounting of all defaults well in advance so you are ready to present your cure demand when the debtor moves to assume the contract.
Maintain a Long-Term Strategic Perspective
Bankruptcy proceedings often extend for months or even years. Aggressive early litigation can deplete resources without meaningfully improving your recovery. Before committing significant legal fees to contested matters, evaluate whether the expected recovery justifies the expense.
In many cases, a measured approach that focuses on preserving claims, monitoring distributions, and selectively participating in key motions will yield better results than blanket opposition to every debtor action. Allocate your resources to the issues that have the greatest impact on your recovery.
Understand Judicial Preferences for Rehabilitation
The Bankruptcy Code is fundamentally designed to provide debtors with a fresh start and an opportunity for financial rehabilitation. Bankruptcy judges generally favor outcomes that maximize the chances of a successful reorganization, which means that overly aggressive creditor tactics may not always be well-received.
Channel your efforts toward constructive participation in the case. Support reorganization plans that offer reasonable recoveries, object when your rights are genuinely at stake, and recognize that the court’s primary objective is to balance the interests of all stakeholders — not to maximize recovery for any single creditor.
Protect Your Lending Operation Today
Vendor and borrower bankruptcies are an inevitable part of the private lending landscape. The lenders who navigate these situations most effectively are those who prepare in advance, maintain disciplined documentation practices, and approach each case with a clear strategic framework.
Geraci LLP’s litigation and bankruptcy team works exclusively with private lenders and fund managers to protect their interests in bankruptcy proceedings. Whether you are facing an active bankruptcy case or want to strengthen your preventive measures, our attorneys can provide the guidance you need.
Contact Geraci LLP today at (949) 403-3488 or visit us at 90 Discovery, Irvine, CA 92618 to schedule a consultation.
