When a Customer Becomes Insolvent: Recognizing and Limiting the Risk

Why a customer's insolvency is your problem too

A long-standing customer has been paying slowly for a few weeks, then a letter arrives: the local court has appointed a preliminary insolvency administrator. Three invoices totaling 45,000 euros are open, and a delivery is on its way. At this moment, several questions arise at once: is the money lost? May I stop the delivery? Should I keep delivering? And what happens to the money the customer paid me last quarter?

The situation is not an isolated case. Germany's Federal Statistical Office counted 24,064 corporate insolvency filings in 2025, 10.3 percent more than in 2024, with creditor claims of around 47.9 billion euros. In the first half of 2026, the number rose to 12,812, an increase of 6.7 percent. Claims, by contrast, fell from 28.2 to 18.5 billion euros, because fewer large companies were affected.

The guiding question is therefore: How does an insolvent customer endanger its supplier, and what can a small business do before and after to limit the damage? To answer it, we first clarify the terms and the process, look at how defaults spread, and present a thinking model that separates protection before and after the event. Then we weigh whether to keep supplying a customer in crisis.

What happens in an insolvency?

Insolvency proceedings are opened when a company is illiquid, i.e., can no longer pay its due invoices, or when a corporation is over-indebted, i.e., its assets no longer cover its debts and there is no positive outlook for continuation. The debtor can also file itself in case of impending illiquidity. The aim of the proceedings is to satisfy creditors jointly and equally, not some first.

1. Filing

   The debtor or a creditor files for insolvency with the local court. The filing is published on the portal insolvenzbekanntmachungen.de as soon as the court orders protective measures.

2. Preliminary proceedings

   The court usually appoints a preliminary insolvency administrator, who checks whether there are enough assets for proceedings and often continues the business. Frequently, a consent requirement applies: the debtor's payments need the administrator's approval.

3. Opening

   The court opens the proceedings, appoints the insolvency administrator, and sets a deadline for filing claims.

4. Filing claims

   Creditors file their claims in writing with the administrator, with supporting documents. They are entered in a schedule and examined.

5. Realization and distribution

   The administrator sells assets or the business, examines clawback claims, and distributes the proceeds. Ordinary creditors ultimately receive a dividend that is often only a small part of the claim.

In addition, there is debtor-in-possession management, in which the existing management continues under the supervision of a custodian, and since 2021 a restructuring outside insolvency under Germany's Corporate Stabilization and Restructuring Act (StaRUG). For suppliers, these routes change a lot about the contact persons, but little about the basic question: open claims from the period before the filing are usually not paid in full.

How defaults spread through the supply chain

A supplier who delivers on account grants its customer trade credit. In a chain of businesses that extend credit to each other in this way, a difficulty can spread. Berloco, De Francisci Morales, and Frassineti (2021) analyzed the payment flows between corporate clients of a major Italian bank from October 2016 to March 2018. A model that knew only the network of business partners predicted a large share of the defaults. Combined with data on the individual firm, it improved the hit rate by almost 20 percentage points.

The authors also summarize earlier studies that are revealing for small businesses. Data from France show that a liquidity shock is passed along the chain until it hits a creditor with enough own funds or access to financing. Data from Sweden show that suppliers who suffer losses from failing customers fail more often themselves. Contagion therefore runs mainly upstream, from the paying customer to the waiting supplier.

In the supply chain, a payment default ends where someone has enough reserves to absorb it. The question is whether that should be your business.

In a simulation model of production networks in which small and medium-sized enterprises recover less well than large ones, Shuai and Qian (2026) show that preventive and curative support together create more resilience than either alone. This is a model, not a measurement, but it fits the thinking model we look at next.

The thinking model: the bow tie from risk management

In industrial and aviation risk management, a diagram has become established that is called a bow tie because of its shape. In the middle is the undesired event, here a customer's insolvency. On the left are the causes and the preventive barriers that stop a cause from turning into damage. On the right are the consequences and the mitigating barriers that reduce the damage if the event does occur.

An analogy from fire protection makes the model tangible. A smoking ban, maintained wiring, and smoke detectors prevent a fire from starting or spreading unnoticed. Fire extinguishers, fire doors, and building insurance limit the damage if it does burn. Nobody would rely on just one of the two sides.

The model's benefit lies in this separation. Many businesses have a retention-of-title clause in their terms and conditions on the right side and nothing else. Others check customers carefully but have no reserve in case the check is wrong. Reading a customer's balance sheet and Business partner due diligence describe the preventive barriers in detail.

Before the filing: warning signs and preventive barriers

Insolvencies rarely come out of the blue. Typical warning signs show up in payment behavior and in how a customer communicates. Drawing on case law, German chambers of commerce name, among others, considerable arrears on ongoing, operationally necessary bills and social security contributions that have been outstanding for more than six months.

• The customer pays much later than before or only in partial amounts.
• Commitments on payment dates are repeatedly broken.
• Contacts are hard to reach, and management or banks change.
• The customer asks for longer terms although orders remain the same.
• Other suppliers deliver only against prepayment, and the industry is talking about it.
• The current financial statements are missing from the company register, or equity has been used up.

If you see such signs, you should not wait. Lower the credit limit, require down payments or prepayment for new orders, and clarify whether your retention of title has been validly agreed. Late payment and receivables management describes how to pursue open receivables with fixed steps. If a single customer accounts for a large share of your revenue, the risk is twice as large, as Customer concentration risk shows.

Keep delivering or withdraw? Two perspectives

The decisive point is insolvency clawback (Insolvenzanfechtung). Under certain conditions, the insolvency administrator can reclaim payments the customer made before the filing, so that all creditors are treated equally. Since the reform of April 2017, the following periods apply, in simplified form.

This leads to a trade-off that I consider sound: keep delivering, yes, but cash on delivery. Delivery against immediate payment falls under the cash transaction rule and is largely protected. Delivery on account to a customer whose crisis you know about is doubly risky: the new receivable can default, and earlier payments can be clawed back. Incidentally, after the reform an installment agreement alone does not create a presumption that you knew of the illiquidity. Correspondence in which the customer openly describes its situation, however, can.

After the filing: what you should do immediately

1. Review deliveries

   Stop deliveries on account. New deliveries only after consultation with the preliminary administrator and against prepayment or the administrator's express commitment.

2. Assert retention of title

   Inform the administrator in writing which goods are subject to retention of title, with delivery notes and invoices. The faster you do this, the more likely the goods are still identifiable.

3. File your claim

   After the opening, file all open claims with the administrator on time, with reason, amount, and documents. State interest and costs separately.

4. Clarify taxes and accounts

   If a receivable is uncollectible, the VAT already paid can usually be corrected. Clarify write-downs and timing with your tax advisor.

5. Secure your own liquidity

   Calculate what the default means for the next three months, and talk to your bank early, before things get tight. Growth and cash flow explains why liquidity can become scarce even in good times.

6. Prepare for clawback

   Collect the documents on payments over the last months and on your knowledge of the situation. If a letter from the administrator arrives, have it reviewed professionally before you pay or reply.

What holds in general and where it stops

Customer insolvencies are part of a business's resilience. A business with a spread of customers, a liquidity reserve, and clear rules for credit limits survives a default that drags another business down with it. That is the right side of the bow tie, and it is often forgotten. Entrepreneurial resilience discusses how businesses get through crises overall.

The limits of this analysis are clear. The studies on contagion come from Italy, France, and Sweden and show statistical correlations. The model by Shuai and Qian is a simulation. Insolvency law is complex, and case law on clawback has changed several times. The table above simplifies a great deal and does not replace advice in an emergency.

Conclusion: how suppliers limit the damage of a customer insolvency

To the guiding question: an insolvent customer endangers its supplier in two ways, through the default on open receivables and through the possible clawback of earlier payments. Research shows that defaults spread upstream in the supply chain until they hit a business with enough reserves. The bow-tie model organizes protection: preventively, checks, limits, down payments, and monitoring; mitigating, retention of title, insurance, prompt filing, and your own reserves.

For a small business, the sober conclusion is: you cannot always prevent a customer's default, but you can decide how much of it hits you.

• Set a credit limit for every customer with payment terms.
• Have it checked whether your retention of title is validly agreed in quotations and terms and conditions.
• Give sales and accounting a list of the warning signs.
• For customers in crisis, decide: deliveries only on a cash-on-delivery basis.
• Keep a short file with limit, collateral, and payment history for your largest customers.
• Check whether trade credit insurance or a larger liquidity reserve makes sense.