Does anyone have a Sample letter changing payment terms on a customer to prepaid/COD due to their current financial position?

When we saw a customer headed the bankruptcy route a few years ago, we changed them to prepay status but the bankruptcy courts considered those payments preferential. Go figure. Even though we were diligent in watching the financial condition of the customer erode and took steps to protect ourselves, the courts made us give back some of the prepayment money to be distributed to other "less diligent" suppliers.

Here is an excerpt of a letter we sent to a different customer in October: 

Dear XYZ:

Due to recently received information regarding _________ financial difficulties, we find ourselves in a difficult position. We greatly value ________ as a dependable customer and prefer to offer credit terms to meet your needs, but risk management weighs heavy in that decision. At this time we find it will be necessary to change your payment terms to a prepayment status.

There is currently no open balance on your account.

We recognize the difficult business environment we are operating in today, and if you can provide reasons that terms should remain open, or would like to propose other options, I'm willing to discuss with you.

 They did call and speak with our regional finance manager in early January, who agreed to terms of N20 days. Twelve days after the order shipped, the customer filed for bankruptcy.

Thanks.

I was under the impression that if terms were changed to prepaid/cod and documented to show they were changed because of their financial position those funds would not be considered preferential. Thanks for the info.

Having dealt with many preference claims, changing terms to CIA (cash-in-advance) within the 90-day period prior to CH filing is considered "contemporaneous exchange" by the bankruptcy courts, and is not considered preference payments. Such terms/payment arrangements protect the creditor 100%. If you paid back monies to a bankruptcy trustee for funds received under CIA terms, you may want to seek legal counsel next time you are confronted with a preference claim, because that should never happen. Regardless, when faced with a preference claim, you should always respond to the claim or summons thru your legal counsel.

Hey,

Prepayments made within the preference period can only be deemed preferential if the invoice and payment date are too far apart as to be considered not contemporaneous exchange. If you accepted prepayments/CIA, and shipped and invoice within a very short time (day or two) these are free of preference claims. If you shipped in advance of the prepayment, that would be at risk as the prepayment applied to a antecedent debt.

Any change of terms to more restrictive or shorter term, or any deemed outside your 'normal course of business' with the debtor, within the potential preference period should be avoided as this is easily deemed creditor pressure and indefensible in a preference claim. A better practice, naturally, is to exit the account before 90 days before a filing (wish we all had that level of clairvoyance!), second is to work out of net exposure thru the normal course of payments.