Service Area: Collection Services

Can a Mechanic’s Lien Be Avoided in Bankruptcy

Posted on August 4, 2017 by - In Other Commercial Credit News, Mechanic's Liens & Bond Claims

Can a Mechanic’s Lien Be Avoided in Bankruptcy?

This should come as no surprise: mechanic’s lien and bond claim rights vary by state. Right? We remind you of this frequently. (It’s the reason that resources like The National Lien Digest are so important.) It turns out, the time and information requirements for lien filings aren’t the only part of the lien process that is state specific.

According to an article from Robinson + Cole, The Enforceability of Mechanics’ Liens in Bankruptcy is Dependent on State Law, whether a lien can/can’t be avoided in bankruptcy is also state specific.

“In a recent decision, the Third Circuit Court of Appeals held that a mechanic’s lien filed by an unpaid supplier against a construction project, after the contractor through whom the materials were furnished filed for bankruptcy protection, was voidable. However, the Court noted that this doesn’t apply if applicable state law permitted the lien to relate back to a date prior to the filing of the petition. Under the laws of most states, perfected mechanics’ liens do in fact relate back to the first day on which the lienor furnished labor, materials, or equipment to the construction project.”

The referenced case involves an unpaid supplier who filed a mechanic’s lien, in compliance with New Jersey statute.

The contractor, who had failed to pay the supplier, filed for bankruptcy protection. Naturally, the supplier took steps to enforce its mechanic’s lien, but the contractor filed a motion claiming the supplier’s suit to enforce the mechanic’s lien was a violation of the automatic stay.

Unfortunately for the supplier, the trial court, and subsequently the appeals court, agreed with the contractor, and the supplier’s mechanic’s lien was invalidated. However, as the trial court pointed out, a lien may sometimes survive a bankruptcy, depending on the date the lien relates back to.

“[T]he result would have been different if applicable state law provided for the mechanics’ liens to relate back prior to the filing of the bankruptcy petition. …[T]he filing of a mechanic’s lien by a subcontractor did not violate the automatic stay provision because, under Pennsylvania law, the date of filing the mechanic’s lien related back to ‘the date of visible commencement upon the ground of the work of erecting or construction the improvement.’ New Jersey law contained no such provision; therefore, the mechanic’s lien was effective only as the date of filing.”

If you have concerns about a project you are furnishing to, or a party within the contractual chain filing bankruptcy, you may want to take an extra step and confirm statutory guidelines for the date to which the lien relates back.

Four Signs Your Customer May Be in Financial Distress

Posted on July 31, 2017 by - Credit Risk Management

Four Signs Your Customer May Be in Financial Distress

Business failure is inevitable. It is imperative that you, as a creditor, protect yourself from a customer’s failure/default. Your best defense? Be proactive! Take advantage of secured transactions (UCCs and Mechanic’s Liens) and pay attention to signs of distress.

#1 Change in Corporate Status

Monitor your customer’s corporate standing with the Secretary of State, as a change in corporate status is an early sign of distress. Negative changes in status could indicate the company is preparing to close. Check out this testimonial:

“The customer business standing with each State is one early red flag signaling that something could go wrong with collecting accounts receivable. Using the service NCS has been providing, our company has already identified two accounts with open credit limits which could have resulted in material losses.

One of the accounts identified had $100,000 open credit limit and open accounts receivable. NCS notified us the account had fallen inactive with the State. Subsequent conference calls with our customer’s CFO found the customer was “very close to running out of cash and it is unlikely to be funded further by outside investors.” Given such dire status provided verbally as well as the State standing, we reduced the limit to $0.” — Credit Manager, currently utilizing NCS’ Corporate Monitoring

#2 Pay-When-Paid

The dreaded contingent payment clause. In this case, it’s the infamous “I can’t pay you until I get paid” or “The check’s in the mail.” They may also say “We are waiting on financing from the bank. Once the bank loan goes through, we will pay you.” This is a sign of poor cash flow/lack of working capital…and it’s dangerous territory.

#3 Broken Promises

This is in line with “the check’s in the mail.” These promises include promises to pay, promises to contact you with updates on payment status and promises of quicker payment if additional credit can be extended. Empty or broken promises don’t pay the bills!

#4 Silence

Silence is golden — unless you have a toddler or a customer with past due invoices.

Unreturned calls, unread emails, a disconnected phone number, undeliverable mail & email are all signs of silence. And, when money is owed, silence is never a good thing. When you no longer have your customer’s cooperation or, in this case, communication, it may be time to look at hiring a third-party agency or attorney.

Bonus! Part of knowing your customer, is also knowing who they do business with. If your customer’s biggest customer has filed for bankruptcy protection, it could easily impact your customer’s cashflow.

What Can You Do?

We’ve previously covered some tips on handling past-due receivables. Tips include closely monitoring open invoices (don’t allow days beyond terms to get out of hand), trying various methods of contact (phone, email, letter) stopping by their office (if able) to review credit reports and carefully looking for recent collection placements/judgments.

Lastly, stop extending credit. Don’t expose your AR to any unnecessary risk. If your customer isn’t paying their bill, then don’t give them the opportunity to make the debt worse.

3 in 3 Bankruptcy Proof of Claim

Posted on March 22, 2017 by - Credit Risk Management

3-in-3 Topic is Bankruptcy Proof of Claim

Today’s 3-in-3 features Danielle Moon. Read on to learn more about the ABCs of a Bankruptcy Proof of Claim.

What is a Bankruptcy Proof of Claim?

Danielle: A bankruptcy proof of claim is a form used by the creditor to indicate the amount of the debt owed by the debtor on the date of the bankruptcy filing.

Typically, creditors receive a notice from the bankruptcy court advising their debtor has filed for bankruptcy protection with instructions for filing a proof of claim and the deadline for filing.

What Should Creditors Be Aware of When Filing a Proof of Claim?

Danielle: You always want to file your proof of claim using the full balance, both secured and unsecured, on all projects or open accounts. Often, we see creditors filing a proof of claim for the amount on a specific job that is past due or in collections.

Always double-check that you file your proof of claim correctly. Make sure the secured and unsecured amounts are identified properly.

Be aware that mechanic’s liens, bond claims, UCCs and judgments may allow you to file a secured proof of claim, putting you in a better position to get paid.

Is There a Deadline to File Your Proof of Claim?

Danielle: Yes. You must consider your deadline or the bar date. The bankruptcy courts will typically set a date by which time a creditor’s proof of claim must be filed, commonly known as the bar date.

The bar date can be found within the bankruptcy notice or, if it’s set at a later date, within the docket report of the bankruptcy.

The court will send a notification on the bar date to all creditors that are listed in its original petition, and the proof of claim must be filed in the same court in which the bankruptcy case was filed.

3-in-3 Takeaways

These are all great tips to consider when filing a bankruptcy proof of claim.  Know your ABCs!

  • Always include the entire amount you are owed on the proof of claim.
  • Be sure you correctly complete and file your proof of claim.
  • Consider the deadline, aka the bar date, and file your proof of claim on time.

Remember that errors and inaccuracies may affect the validity of your proof of claim. Don’t take that risk.  NCS can help you. We can file the proof of claim on your behalf.

How to Ask Customers About Their Past Due Invoices

Posted on February 3, 2017 by - In Other Commercial Credit News

What to Ask Your Customers

Past due invoices — it’s a simple fact (Although, what a world it would be if everyone paid on time every time!). Perhaps there is a dispute, so your customer is holding off on paying the invoice. Maybe your customer is in fiscal distress and just can’t pay the invoice. But, what should you do if your customer tells you they didn’t get the invoice?

In an article from International Association of Commercial Collectors there are 8 easy questions to ask your customer. A couple of the questions are standard such as confirming your customer’s current address as well as the contact information for the person who should be receiving the invoice.

However, as the author points out, it’s a best practice to also confirm:

“According to our records, the invoice corresponds to your purchase order number ___. Is this P.O. number valid in your system?

Do you have receiving documents for this open item?

Am I correct that the only reason this item remains unpaid is that you do not have an invoice copy on file?

Once you have received the invoice copy, is there any reason this invoice cannot be processed and paid this week?”

Why ask your customer so many questions?

Per the author, for clarification purposes and to discourage future use of the tired excuse.

“There are two main reasons for turning a customer’s simple request for an invoice copy into a question-and-answer session:

You have to make certain that excuses for delaying payment once the invoice copy is received by the customer have been addressed and resolved, and

You have to discourage customers from using the “lost invoice” excuse as a regular reason for delaying payment. Customers are less likely to use this excuse in the future if they have to answer these kinds of questions every time they request an invoice copy.”

What questions would you add to this list? Do you have best practices to share?

Send us an email or give us a call to share your successes!

Standby Letter of Credit Shows Willingness & Ability to Pay

Posted on January 30, 2017 by - Credit Risk Management

What is a Standby Letter of Credit?

A Standby Letter of Credit is a written guarantee issued by a bank to pay on behalf of their customer in the event their customer does not pay. If the bank’s customer fails to do something (pay on time, complete a project on time, or satisfy terms of a contract), the bank (not the customer who failed to deliver) pays you–the beneficiary.

How do I implement a Standby Letter of Credit?

Here are some basic steps you can take to implement a Standby Letter of Credit for your company:

Step 1

Work with your Sales and Credit Departments to establish guidelines for what kind of job or order will require a Standby Letter of Credit. These guidelines are usually set by very high dollar amounts. From there, you can set the terms of the Standby Letter of Credit for the customer.

Step 2

Communicate the terms of the Standby Letter of Credit to your customer. Make sure one of the terms in the Standby Letter of Credit is “irrevocable.”  Your customer, also known as the applicant, will apply to their bank for the Standby Letter of Credit and will have to provide collateral or meet certain credit standards to compel the bank to issue the Standby Letter of Credit.

Step 3

Once the Standby Letter of Credit has been issued and the issuing bank is viable, orders can be fulfilled/work can be performed for the customer.

*Make sure the total value of the goods/work is not more than the dollar amount of the protection described in the Standby Letter of Credit. It is critical to pay attention to this, especially when multiple orders are being fulfilled.

Why should I use it and what are the benefits?

  • Ultimately, the Standby Letter of Credit is never meant to be “used.”
  • The goal of the Standby Letter of Credit is to show a customer’s ability to repay credit. It prevents large dollar contracts from going unfulfilled if a customer does not pay or cannot pay.
  • If used correctly, a standby notice of credit will be payable upon demand–typically without any objection as long as the collection procedure is followed according to the Standby Letter of Credit.
  • The terms of the Standby Letter of Credit will detail the procedure for collection–it is important that you comply with the terms, as you are required to follow them in order to be paid from the letter of credit.

Standby for Summary

  • A Standby Letter of Credit is a guarantee from a bank to pay the debts of a customer in the event of non-payment.
  • It is a good business practice on both sides; shows willingness and ability to pay.
  • Make sure you keep track of the total value of the project or order, so the dollar amount does not exceed the amount protected by the Standby Letter of Credit.
  • In the event of non-payment, collection can be pursued, but you must comply with the terms of the Standby Letter of Credit and follow the collection procedure detailed in the terms in order to get paid.

Credit Survival Guide: Proof of Claim

Posted on September 27, 2016 by - Credit Risk Management

Credit Survival Guide: Proof of Claim

Maybe you heard it from a colleague, maybe you were notified by your customer’s bank, maybe you saw it online or received an alert from NCS via Bankruptcy Monitoring… It’s official. Your customer has filed for bankruptcy protection and their outstanding balance could have a significant impact on your accounts receivable.

What now?

Tip #36: Filing a Bankruptcy Proof of Claim as a Secured Creditor

Whenever possible, creditors should file a Proof of Claim as a secured creditor. In the event of a debtor’s bankruptcy, secured creditors are paid before unsecured creditors. Properly executing a Mechanic’s Lien, Bond Claim or UCC grants the creditor a secured interest, which increases the likelihood of payment in the event of a bankruptcy.

Mechanic’s Liens, Bond Claims & UCCs are credit tools, proven to put creditors in the best possible position to get paid, but they aren’t the only tools available. A creditor may also be considered secured if there is a Corporate Guarantee or Personal Guarantee in place.

It is important to remember, a creditor can have a secured & unsecured claim in the same bankruptcy.

Simple enough, right? Wrong.

Tip #53: Avoid Common Missteps with the Bankruptcy Proof of Claim Form

Beware! Although the Bankruptcy Proof of Claim form may seem straightforward, here are a few common missteps:

  1. Be on Time! Too often, creditors miss the bar date to file.
  2. Know Your Claim! Including all amounts owed for all accounts and affiliates is a must.
  3. Secured or Unsecured? That Is the Question! Know whether or not you are a secured creditor and file properly.

This takes us to our next tip…

Tip #55: Have NCS Determine If You Have Lien or Bond Claim Rights

Did you provide materials and/or labor to a construction project? If so, request NCS to determine whether lien or bond rights are available!

A review of your claim is easy & complimentary! All you need to do is check the box that reads “Request NCS to determine whether lien or bond rights are available” on your placement form.

After it’s all said and done, don’t let your customer’s debt slip through the cracks.

Tip #58: Keep Track of Unpaid Judgments and Liens

Don’t lose track of those unpaid judgments and liens, and consider renewing an old judgment before it expires.

Title companies may demand pay-offs on old judgments, liens and other encumbrances that remain of record on property being sold or refinanced.

Takeaway

The Proof of Claim can be critical in recovering your accounts receivable. Contact the experts at NCS to evaluate and file the Proof of Claim for you, help you avoid common mistakes, and make sure you are in the best position to get paid.

What Should I Know About Attorney Collection Expenses?

Posted on August 1, 2016 by - Credit Risk Management

Today’s 3-in-3 Topic is: What Costs Should I Expect with Attorney Collection Efforts?

Today we sat down with Danielle Moon to discuss attorney collections and the fees you can expect regarding court costs and suit fees and whether or not you can recover these fees from your customer.

“Could you please explain the process of court costs and suit fees and how they differ?”

Danielle: The attorney will exhaust all amicable efforts to collect the balance prior to recommending suit. They will require the creditor to advance court costs and possibly suit fees, to proceed.

The court costs are used to establish and maintain the suit, including filing the complaint, service on all parties, and any necessary motions. The costs are set by the state, vary by jurisdiction, and are non-negotiable.

The suit fees, by industry standards, are an overall contingent suit fee taken only if funds are collected after suit is filed. Some attorneys will combine a contingent suit fee with a non-contingent suit fee which is a non-refundable fee to initiate the suit.

It is above and beyond the court costs and the contingent fees, and the attorney is entitled to this fee as an officer of the court.

“What factors do attorneys typically look at to determine if they’re going to charge a non-contingent suit fee?”

Danielle:  There are simple factors that may cause the attorney to ask for the fee.

  • If a dispute exists
  • If the attorney believes the suit will lead to an uncollectible judgment
  • If the debtor is in an area with limited legal resources or
  • Some attorneys have that “we’ve always done it this way” mentality, and will always ask for the fee.

The non-contingent suit fee is usually calculated as a percentage of the claim amount, or a flat fee. For example, with a $10,000 claim, you might be asked for a $500 non-contingent suit fee plus court costs.

“Can some of these fees be passed on to the debtor like interest charges and collection fees?”

Danielle:  Absolutely. That is the most common question we get from our clients. When the attorneys file suit, they always ask for interest, costs, and fees based on the client’s credit application, contract, or the statute.

Once a judgment is entered, the debtor is responsible for those fees. Though it’s not likely they will be paid, they are very useful in settlement negotiations. It often comes down to the time value of money.

Do you want to get paid your full judgment over time or take a lesser lump sum now? We’ve had clients who settle at a discount, such as $320,000 paid on a $335,000 claim, rather than go through lengthy, costly litigation…and clients who settle at a $10,000 lump sum now rather than taking the chance a debtor is going to pay a $15,000 judgment over time when they are struggling to keep their doors open.

3-in-3 Takeaways

  • When looking to file suit, the costs vary by jurisdiction and state.
  • Attorneys may charge a non-contingent suit fee, which will vary by the attorney and the specific case. It’s typically charged as a flat fee or a percentage of the full amount.
  • Fees can be passed on to the debtor, but look at the time value of money. Does it make sense to continue to chase a balance if you can settle for slightly less, as opposed to going through a lengthy litigation?

Please remember, every situation is different. If you have any questions, please do not hesitate to contact NCS!

Understanding Bankruptcy Claims and Periods

Posted on July 19, 2016 by - Credit Risk Management

Understanding Bankruptcy Claims and Periods, Plus the Difference between Chapter 7 vs. Chapter 11

What is the primary difference between Chapters 7 & 11? Chapter 7 is a liquidation and Chapter 11 is a reorganization. An entity that files for protection under Chapter 11 is typically an entity that wants to continue to do business.

According to The United States Bankruptcy Court, the debtor typically “proposes a plan of reorganization to keep its business alive and pay creditors over time.” Whereas, an entity that files for protection under Chapter 7 is likely to dissolve once their assets have been distributed – hence the term “liquidation.”

Debtor in Possession

Entities in bankruptcy need money. Seems obvious, right? Bob Eisenbach of Cooley LLP refers to this need for cash as a liquidity crisis.

“Companies in financial distress often find that their need for liquidity goes up just as the availability of traditional financing goes down. The borrowing base may shrink, the ability to get further advances may be cut off, and loans may go into default. Worse, new lenders may be unwilling to make loans given the distress. For many distressed businesses, revenues may also be declining and insufficient to cover expenses without additional financing. A liquidity crunch can quickly snowball into a liquidity crisis.”

You may hear the bankrupt entity referred to as Debtor in Possession (“DIP”). DIP means the business will remain in the possession of the debtor during the bankruptcy and it will continue its normal transactions, such as payments to creditors, under the bankruptcy guidelines.

DIP financing is exactly what you would think: it’s financing approved through the bankruptcy court that allows the debtor to continue to operate their business as usual. When the DIP has financing to pay bills, you, as a creditor, could benefit.

Are You a Secured Creditor?

If your customer files for bankruptcy protection and you have a security interest via a UCC filing or are securing mechanic’s lien rights, then you would be considered a secured creditor. In other words, you have secured your customer’s credit with some type of collateral.

If you have not secured your customer’s credit, then you are an unsecured creditor. (Always better to be a secured creditor!) Whether secured or unsecured, there are several bankruptcy claims and periods you should be aware of.

Bankruptcy Claims & Periods

  • 503(b)(9) Claim: the claim a creditor can make for the materials or services provided to the debtor within 20 days preceding the petition date, if “the goods have been sold to the debtor in the ordinary course of such debtor’s business.”
  • Reclamation Claim Period: the timeframe in which the creditor is permitted to take back certain goods sold to their insolvent customer. The reclamation notice needs to be sent within 20 days from the petition date and covers materials or services provided to the debtor within 45 days preceding the petition date.
  • Proof of Claim: defined by the United States Bankruptcy Court as “a written statement and verifying documentation filed by a creditor that describes the reason the debtor owes the creditor money.” – The due date for this document is determined by the court.
  • Preference Period: the 90-day period prior to the bankruptcy filing.  If the debtor makes any payments to the creditor within that preference period, the trustee can recall those payments.

Please bear in mind, this is not an exhaustive list. If you anticipate your customer filing for bankruptcy protection or if your customer has already filed for bankruptcy protection, quickly contact a legal professional for guidance.