Service Area: Collection Services

Bankruptcy Payout Priority – Secured Creditors Make Bank

Posted on December 23, 2014 by - Credit Risk Management

Bankruptcy Payout Priority – Secured Creditors Make Bank

As a credit professional, you’ve likely heard this once or twice: “It’s better to be a secured creditor than an unsecured creditor.” After all, credit is how the majority of us do business in today’s economy and, as credit professionals, we want to insure we are paid for the goods & services we provide.

I often hear secured-credit-skeptics say “If my customer files bankruptcy, I won’t see a dime, why waste my money on a UCC or lien” or “Once the courts get paid, there won’t be anything left for me” and, my favorite, “My customer and I have a great relationship, they’ll never fail & I will always get paid.”

“If I file a UCC Financing Statement is it a guarantee that I will get paid?”

As with everything in life, there are no guarantees – with the exception of death and taxes. No, you are not guaranteed to be paid in the event your customer files bankruptcy; however a perfected UCC filing will make you a secured creditor, which would put you in the best possible position to get paid.

“If a company files bankruptcy, which creditors get paid first?”

The bankruptcy code is specific, detailed and, well…it’s long – but here is the basic payout priority:
Payout Priority in Chapter 11 Bankruptcy

  1. Secured Creditors (i.e. creditors who have a perfected security interest)
  2. Administrative Expenses (i.e. costs associated with filing & processing the bankruptcy)
  3. Unsecured Creditors (i.e. creditors without a security interest)

“Do creditors really get paid?”

Yes, creditors really do get paid – although every bankruptcy exit plan is different. Let’s take a look at a few bankruptcy cases, which demonstrate the immense benefit of being a secured creditor rather than an unsecured creditor.

  • Filene’s Basement “Secured creditors have been paid in full, holders of priority claims and convenience class claims have received 100% of their allowed claims, and unsecured creditors have been paid 50% of their allowed claims.”
  • Uno “The plan gives the holders of $142 million of senior secured debt 100 percent of the stock in the new company. Unsecured creditors who sell their claims will receive about 13 percent.”
  • HomeBanc Corp.  “The accompanying disclosure statement says that unsecured creditors with $223.5 million in claims would recover between 1 percent and 10 percent. Secured creditors with claims of $69.6 million would be paid fully.”
  • Intermet Corp. “The disclosure statement says first-lien creditors should expect a 70 percent recovery while second-lien term loan lenders, owed $107 million, and unsecured creditors with $93 million in claims, could realize around 1 percent.”

Although there are no guarantees, time and time again we see secured creditors receiving more funds than unsecured creditors.

The information presented here illustrates that secured creditors are in the best possible position to get paid. However, this assessment does not guarantee a payout in future bankruptcies.

Past Due Accounts and Commercial Collections

Posted on October 7, 2014 by - Credit Risk Management

Collections, Collections, Collections

It doesn’t matter how it’s said or how often it’s said, the word “collections” often elicits a negative reaction. In fact, a cringe followed by an eye roll and loud sigh is one of the most common reactions. This cringe-eye-roll-sigh we experience is typically due to an unfortunate & frustrating experience…

“I have hired collection agencies in the past. They were difficult to deal with, the fees were out of control and our money was rarely recovered.”

What can you do to make the collections process less painful for your credit teams? Why is it important to partner with the right agency? What can you do to reduce the need for collection services altogether?

Before we tackle these questions, let’s define the 3 common steps that lead to a need for collection services:

  1. Extend credit to your customer
  2. Your customer doesn’t pay within agreed upon billing terms
  3. You spend the next few months frustrated over endless phone calls and broken promises

Yes, this is an oversimplification and you don’t need me to tell you the steps, because we (you and I) know you have encountered this time and time again.

What Can You Do to Make the Collection Process Less Painful?

If you find yourself staring at your phone, loathing the idea of calling on past due accounts, make sure you have everything about your customer at the ready, before making the call. Review the history of the account, have copies of open invoices available. Make sure you know whether or not this is typically a slow-paying customer, have they made payment arrangements and failed to keep the arrangements, have you limited their credit because of their inability to pay timely.

It’s also important to not wait until the 11th hour to start contacting your customer, the longer an account remains unpaid, the harder it is to collect. I recommend you make a collection schedule and more importantly, stick to it.

Here is an example of a schedule:

30 Days Past Due

Call your customer and simply ask when you can expect payment for the open invoice

Asking a simple question like “Could you please tell me when invoice #4619661 will be paid?” is likely to be perceived as a “check-in” call and your customer may provide insight as to why the invoice is past due.

Based on the information your customer provides, you may find the invoice “got lost” or you may find you will need to be more straightforward.

*DON’T let your customer off the phone without getting a firm pay date; setting an expectation and then following through to ensure that expectation is met makes your customer accountable, but it also makes you accountable, which limits the number of accounts that slip through your fingers.

45 Days Past Due

Call your customer, if verbal negotiations are a struggle, send a demand letter

Demand letters can do wonders in prompting payment. Make sure your demand is clear: include the dollar amount outstanding, the date you expect payment and what the consequences will be if payment is not received. (i.e. “If we do not receive the payment within 10 days of receipt of this letter, we will have no choice but to proceed with the next legal action…”)

60 Days Past Due

Call your customer with a final warning; place account with a collections agency

Once the date set forth in the demand letter has come and gone, it’s time to provide one last opportunity to your customer and then place the account with an agency – after all, you have more than one customer to keep tabs on.

The longer an account is held, the less likely it is that it will be recovered. If payment or a payout is not arranged within 90 days, place the claim with a collection agency.

 Why It’s Important to Partner with the Right Collection Agency

Selecting a collection agency is not usually a pleasant or easy process. But, when extending credit, it’s a necessity. When it is time to outsource to a collection agency, make a list of the qualities you would like the agency to have.

For example, some companies are interested in collection agencies that are more persistent, aggressive and forceful, while other companies prefer agencies that adopt a straightforward, professional business-like attitude, with willingness to negotiate.  Or, you may wish to choose an agency that will tailor their approach to your circumstances.

It’s also important to ask about the fee structure and have a clear understanding of the steps the agency will take on your behalf.

What You Can Do to Reduce the Need for Collection Services

The answer to this question is easy: secure your receivables! Utilize the UCC process or the Mechanic’s Lien process to ensure you are a secured creditor. As a secured creditor you have leverage, backed by law, which often makes getting paid easier.

Filing a Bankruptcy Proof of Claim as a Secured Creditor

Posted on May 1, 2014 by - Credit Risk Management

Filing a Bankruptcy Proof of Claim as a Secured Creditor

In the event of a debtor’s bankruptcy, secured creditors are paid before unsecured creditors; therefore, creditors want to file a Proof of Claim as a secured creditor whenever possible.

What is a Secured Creditor?

The United States Bankruptcy Court defines a secured creditor as “a creditor holding a claim against the debtor who has the right to take and hold or sell certain property of the debtor in satisfaction of some or all of the claim.”

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.

What is a Proof of Claim?

A Proof of Claim, per The United States Bankruptcy Court, is “a written statement and verifying documentation filed by a creditor that describes the reason the debtor owes the creditor money. “

The Proof of Claim is filed by creditors, in order to notify the bankruptcy court there is money owed to them by the debtor. Typically a Proof of Claim will include the amount of the claim, the basis for the claim, whether or not it is a secured claim and of course, backup documentation supporting the claim.

Beware!

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

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

Did You Know?

A creditor can have a secured & unsecured claim in the same bankruptcy! If you need assistance with filing your Proof of Claim or have questions on how to become a secured creditor, please contact us.