I started to get suspicious when a reliable freelance client still hadn’t paid their invoice after 60 days and several follow-ups. My left eye started to twitch when I discovered both of my main contacts had been let go. Yesterday, after several voicemails and emails of second and third notices, I got my answer: They’re filing for bankruptcy. It wasn’t a huge invoice, a couple hundred dollars, but it was a reminder from the universe that there’s no such thing as risk-free freelancing.
Businesses fail, often without much notice. Although a chronically slow-paying freelance client can be an early indicator of financial troubles, that wasn’t the situation I was in. The first slow payment was the sound of a canary, croaking off its perch and hitting the floor of the coal mine.
Steps to Take When a Freelance Client Files Bankruptcy
If you find out a freelance client has filed bankruptcy, your chances of being paid in full are, unfortunately, quite low. The process for dealing with bankrupt businesses differs depending on the type of bankruptcy. USCourts.gov offers lots of information on the topic.
The basics include the following:
- Cease all collection activity once you’ve been informed of the bankruptcy.
- Find out what the process is and file a proof-of-claim form with the court-appointed trustee who’s mopping up the mess.
- Get in line and sit tight.
- Recognize that bankruptcy can be a drawn-out process, and that you’re just one of many people in the same situation. As service providers, unfortunately, we’re classified as unsecured claims, which are paid after secured debts, such as mortgages.
- If and when you get paid, pay the taxes even if it’s not the full amount due. It’s still income, even if only a fraction of the bill.
That’s pretty much my course of action. I contacted the trustee, who promptly sent me the so-called workout document, which explained the process, including the reasons for the action they’re taking. (They made an acquisition that was a financial disaster.) From reading the workout doc, the best-case scenario is that I’ll get 20 cents on the dollar. I am not holding my breath.
Could I Have Done Anything Different?
In the wake of this incident, I went through my actions and really don’t see that there’s anything I could or would have done to prevent it. They’d been a client for about 2 years, and had promptly paid on a half-dozen other projects. There was no mention of their financial troubles in the local media, and I still can’t find anything about the bankruptcy.
What are my takeaways?
- I basically feel fortunate that I wasn’t on the hook for more money, which is attributable to good luck above all. Clearly, not all of their vendors were so fortunate. And I have empathy for the large number of employees who got laid off.
- In addition, I still stand by my contrarian position on #freelanceisntfree. Bankruptcy is part of the business process, and there are no additional laws, rules, or regulations that would have prevented this situation. Which brings me to…
- When you lose a client, it’s reminder of the importance of diversity in your freelance client base and the industries you work in. This loss is a bump in the road, and doesn’t endanger my ability to pay the bills or feed the dogs. (My wife won’t even know about it unless she reads this post.) I’ll take up this topic in further detail in a post next week, so stay tuned!
In the comments: Have you ever had a freelance client file for bankruptcy? What was the outcome?