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Before September 11, Le Gourmet Gift Basket Inc. was growing at a healthy clip. But in the months that followed the attacks, with steep drops in the stock market and mounting layoffs, many of its would-be customers began welshing on their contracts and bouncing checks. Five of them went bankrupt in a 10-month period. "I've never seen anything like it," says Cynthia McKay, 47, president and CEO of the Denver-based franchise.

McKay stood in line with the other creditors but was mostly unsuccessful in her efforts to recoup her investments. Although there might be some indication of a problem beforehand, she says, often "you don't know 'til you get that little postcard [from bankruptcy court]."

Thanks to the continuing dismal economic climate, bankruptcy announcements have been darkening the mailboxes of more and more entrepreneurs. So what do you do if you find one in yours? After reading the carefully underlined dates and deadlines for claims filings, consult a bankruptcy attorney. One of the many ways a lawyer can help is advising whether you should continue supplying the customer. If losing the account could bankrupt you, it might not be a bad idea to continue, at least temporarily, says Howard Ehrenberg, a bankruptcy specialist and partner with Sulmeyer, Kupetz, Baumann & Rothman, based in Los Angeles. "The bankruptcy code protects vendors who continue to provide goods and services after the bankruptcy is filed by giving them the highest priority," says Ehrenberg.

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Ehrenberg also advises participating in the unsecured creditors' committee, which is usually formed after a company files for bankruptcy. It won't put you ahead of other unsecured creditors, but the committee has the inside track on the company's financial status and is empowered to appoint a trustee if current management is deemed wrong for the job. "The committee helps ensure that the unsecured creditors are treated fairly," says Ehrenberg. "Without a voice, the debtor will not likely be able to negotiate a better result."

Business owners like McKay have found that smaller shops get short shrift when looking to recoup debt. When she learned recently that one of her customers, a large investment company, was not only bankrupt but also facing criminal charges, she realized she wasn't getting paid. "If it's a few thousand compared to $20 million, I'm irrelevant," she says. "But that few thousand dollars is a weekly payroll for an employee, or several."

An ounce of prevention is still the best cure. Experts agree that the most important precaution is making sure that you're adequately diversified. If you place all or even most of your eggs in one customer's basket, your business is at a tremendous risk, particularly if you've made decisions based on that customer being there. "If you added a second shift or bought additional equipment to meet their needs, you could really be in a very difficult position," says Bruce Kemelgor, professor of entrepreneurship and management and director of the Small Business Institute at the University of Louisville in Kentucky.

Be sure to heed the warning signs. Obvious clues are customers taking longer to pay or not returning phone calls, says Eva Rosenberg, CPA and publisher of Taxmama.com, a Web site providing free tax information to individuals and small-business owners. "And their order pattern will change. They're either ordering a lot more because they know you're not going to give them credit shortly or a lot less because they're going out of business."

Of course, the easiest way to eliminate risk is to stop extending credit. Although McKay hasn't stopped extending credit on the retail side for fear of alienating customers and losing them to bigger players, she has changed policies on the franchising side, cutting out freebies, encouraging payment upfront and imposing a finance charge if franchisees finance. Surprisingly, she says, business is up about 17 percent since the changes started last December. "I'm not sure why," she says. "Maybe psychologically, if people feel they're being evaluated in more distinctive terms, maybe they feel it's more of a value for them."

C.J. Prince is executive editor of CEO Magazine. She can be reached at cjprince@chiefexecutive.net.