If your business needs to apply for bankruptcy, you may aim to try to maintain a type of asset called accounts receivable. In this article, we’ll define accounts receivable and explain how they may be preserved through a bankruptcy filing.

Key Takeaways

• Accounts receivable (AR) is the money a business’s customers owe them for goods and services delivered but not yet paid for.
• Because they are expected to be paid within a year or less, accounts receivable are recorded as a current asset on balance sheets.
• Chapter 11 bankruptcy allows businesses to continue operating while they repay as much debt as possible
• A business is allowed to keep its accounts receivable with Chapter 11 bankruptcy

What Are Accounts Receivable?

Accounts receivable (AR) is the balance of money owed to an organization for goods or services they’ve already delivered but that their customers have not yet paid for. It is called accounts receivable because it refers to accounts that a business has a right to receive. 

Accounts receivable essentially represent a line of credit a company has extended or a short-term IOU, usually with payments required in a time period ranging from a few days to a year. 

Because there is a legal obligation for the customer to pay their debt, companies record accounts receivable as assets on their balance sheets. AR is classified as current assets, meaning the account balance is due from the debtor in one year or less. 

Accounts receivable are opposed to accounts payable, which are when a company owes a debt to its suppliers or other parties. 

Accounts Receivable in Bankruptcy Cases

Bankruptcy is a process that allows companies who cannot meet their financial obligations to dissolve or reorganize and start anew. A bankruptcy filing halts a company’s creditors from debt collection efforts, which can resume only when the bankruptcy court allows them to.

Chapter 11 bankruptcy is a type of bankruptcy that allows the business to continue operating while it resolves the financial and operational issues that led to its bankruptcy filing. With Chapter 11 bankruptcy, a company repays as much debt as possible under the plan accepted by the bankruptcy court. When they resume normal business operations, their bankruptcy debts are considered to be fully discharged.

Most bankruptcy courts allow a company to keep its accounts receivable as long as they properly justify it in its reorganization plan. This allows the company to retain as many of its clients as possible. When ​​a company files a disclosure statement and reorganization plan with the bankruptcy court, it must fully disclose all of its accounts receivable and the likelihood of collectability.

Chapter 11 bankruptcy is opposed to Chapter 7 bankruptcy, in which nearly all of a business’s assets are liquidated in order to settle its debts, including accounts receivable. 

A bankruptcy attorney will be able to help you determine which type of bankruptcy is appropriate for your organization and how to retain your accounts receivable if possible.