Workouts and Liquidations

Workouts & Liquidations How They Differ From Bankruptcies Brenda Terreault NACM Oregon September 17, 2009

Available (General) Avenues for Distressed Debtors
Bankruptcies
Out-of-Court Negotiated Work-outs
Assignments for the Benefit of Creditors

The Distressed Debtor
One symptom of distress by itself may not mean much
Consider
Reviewing the credit file
Proactively dealing with the Account in other ways

Spotting the Distressed Debtor
Downward trend in debtor’s payment history
Requests for extended terms after shipment or billing
Excessive requests for invoice copy and proof of delivery
Repeatedly overlooks invoice due dates
Only makes partial payments
Unauthorized deductions eventually resolved in creditor’s favor
(continued)

Disputes products or services long after delivery
Breaks account terms
Requires telephone contact before issuing check; cuts and holds checks
Breaks promises to pay
Ignores your calls and letters; no return calls
Avoids phone or personal contact with you
Inability to contact the debtor
(continued)

Issues NSF checks, out of compliance with loan agreements, bank problems
Law suits; tax judgment or other liens in place or being placed
General disorganization within the business
Several competitors call for credit references
Change in banks
Rumors in the industry of trouble
Visible decreases in inventory (continued)

Business for sale or recently sold
Excessive key employee turnover
Personnel layoffs
Owner with domestic problems
Refuses to sign personal guarantee
Broken promises
Collection actions, litigation and judgments
Moratorium Letter
Request for Compromise

Bankruptcy Chapter 7 Liquidation With or Without Assets

Advantages
For debtor
Automatic Stay
Get out of debt
For creditor
Equal treatment among similarly situated creditors
Can move on instead of chasing debt

Disadvantages
For debtor
Credit ruined for years
May lose assets
For creditor
Paid only part of debt or perhaps nothing
Trustee percentage diminishes estate
Preference actions

Basics
Debtor ….
Gets court protection from creditors - automatic stay
Must disclose information for benefit of creditors
Statement of Financial Affairs (SOFA)
List of Assets
List of Debts
Must appear at Section 341(a) meeting of creditors

People with control
Trustee
Debtor
Priority Claimants
Secured Creditors
Executory Contract Creditors
Unsecured Creditors

Time is money
Chapter 7 without assets – approximately 90 to 120 days from date of filing until discharge of debts
Chapter 7 with assets – length of time depends on assets, economy and debtor.

About the claims if there are any assets
Pro-rata treatment of claims
within the same classification
Administrative claims - trustee and estate expenses
Priority Claims - taxes, child support, etc.
Secured claims
Unsecured claims
Any remaining funds go to Debtor

Cost to the bankruptcy estate
Trustee paid before anyone else
On all moneys disbursed by the trustee
To parties in interest
Excluding the debtor
But including holders of secured claims.
R easonable compensation for trustee ’ s services:
25% first $5,000
10% $5,000 - $50,000
5% $50,000 - $1,000,000
3% more than $1,000,000

Out-of-Court Liquidation Primarily Assignments for the Benefit of Creditors

Advantages For an Out-of-Court Liquidation
From Debtor’s viewpoint
Can give Debtor time to review and evaluate options
Allows Debtor to maintain relationships with customers and suppliers
Debtor can deal with creditors fairly and without favoritism

Advantages For an Out-of-Court Liquidation
From Creditor’s viewpoint
Estate can have more money - no trustee to pay
No preference actions or other bankruptcy court actions
Creditors in each category take pro rata share of allowed amount – no secret negotiations
Time Factor - Generally faster than bankruptcy
Cost –generally more funds pay creditors than in court action
Lower legal fees for Creditors generally

Disadvantages
Why not to have an Out-of-Court Liquidation?
Inexperienced Practitioners
Attorney Practitioners who charged standard attorney rates to act as Assignee for debtor
No court or trustee oversight

The Liquidation
… . Is a plan in which the creditors agree to accept less than full past due amount owed so that…
The debtor can close the business
The creditor can recover as much as possible

Reasons to Agree to Liquidation
Debtor has a cash flow problem which:
Cannot be corrected OR
Has a probability of recurring

People with Control
Assignee or Debtor as Assignee
Priority claimants – taxing authorities
Secured creditors
Executory contracts
Unsecured Creditors

Time is money
If/When funds become available, estate will disburse.
No guarantee of financial recovery.
Time frame from start to payment depends on many factors including:
Debtor co-operation
Creditor co-operation
The size of the estate
Disputed debts
Assignee expertise, knowledge, organization
Other issues

About the claims generally there are assets
Pro-rata treatment of claims within the same classification
Administrative claims – assignee and estate expenses
Priority Claims - taxes, amounts owed to employees, etc.
Secured claims
Unsecured claims
Any funds remaining goes to Debtor

Cost to the estate
Estate administrative fees and expenses as they occur.
R easonable compensation for administrator ’ s services is negotiated with administrator before hiring.
Flat rate
Hourly rate
Percentage - On all moneys disbursed by the administrator to parties in interest, excluding the debtor, but including holders of secured claims.

Bankruptcy Chapter 11 or 13 Reorganization Chapter 11 for businesses Chapter 13 for wage earners with regular income

Advantages
For debtor
Automatic Stay
Get out of most debt
Be able to reject leases
Continue in business
For creditor
Better treatment if a necessary creditor
May be able to continue business with debtor

Disadvantages
For debtor
May lose assets
Creditors may not want to extend credit
Creditors may not want to continue selling
For creditor
Debtor in Possession instead of trustee
Preference actions
Possible Trustee percentage diminishes estate

Basics
Debtor ….
Gets court protection from creditors - automatic stay
Must disclose information for benefit of creditors
Statement of Financial Affairs (SOFA)
List of Assets
List of Debts
Must appear at Section 341(a) meeting of creditors

Basics
Debtor ….
Must submit a plan of reorganization
If debtor does not submit plan or receive an extension, creditors may submit a plan

People with control
Debtor in possession/Trustee
Priority Claimants
Secured creditors
Executory contracts
Trade creditors – especially if necessary for continuing business
Unsecured creditors

Time is money
Chapter 13 – up to 60 months from date that plan is accepted.
Chapter 11 – Who knows

About the claims Generally there are assets
Of claims within the same classification
Priority Claims - taxes, amounts owed to employees, etc.
Secured claims
Necessary creditors
Unsecured claims

Cost to the bankruptcy estate
Trustee paid before anyone else
On all moneys disbursed by the trustee
To parties in interest
Excluding the debtor
But including holders of secured claims.
R easonable compensation for trustee ’ s services:
25% first $5,000
10% $5,000 - $50,000
5% $50,000 - $1,000,000
3% more than $1,000,000

Out-of-Court Work-out Reorganization, Adjustments, Extension Agreements, Compromises, Compromised Settlements, Negotiated Agreement, Negotiated Settlement, etc.

Advantages For an Out-of-Court Workout
Can give Debtor time to review and evaluate options
Allows Debtor to maintain relationships with customers and suppliers
Debtor can deal with creditors fairly and without favoritism
Minimizes cost to business if it can be saved

Advantages
For debtor
Lower debt
Stay in business
For creditor
May be able to continue business with debtor

Disadvantages
For debtor
May lose assets
Creditors may not want to extend credit
Creditors may not want to continue selling
For creditor
Assignee percentage diminishes estate
Debtor principal may still be active in operation

The Work Out
… . Is a plan in which the creditors agree to accept less than full past due amount owed so that…
The debtor can continue in business
The creditor can continue a business relationship with the debtor

Reasons to Agree to a Work Out
Debtor ….
Has a temporary cash flow problem which is caused by an identifiable issue that can be corrected and has minimal chance of recurrence.
Is a long term customer with decent payment history.
There may be other reasons

People with control
Debtor and/or other professional
Priority Claimants
Secured Creditors
Executory contracts
Trade Creditors
Unsecured creditors

Time is money
When funds are available, the estate will disburse.
Time frame from start to payment depends on many factors including:
Debtor co-operation
Creditor co-operation
The size of the estate
Disputed debts
Assignee expertise, knowledge, organization
Other issues

Time is money
Parties will generally receive funds sooner than in most bankruptcies with assets available.
Negotiated payment plan
Payment of lesser amount

About the claims if there are any assets
within the same classification
Priority Claims
Secured claims
Unsecured claims
Any funds remaining go to Debtor

Cost to the liquidation estate
Estate administrative fees & expenses as they occur
R easonable compensation for administrator ’ s services
Negotiated before hiring.
Flat rate
Hourly rate
Percentage- On all moneys disbursed by the administrator to parties in interest, excluding the debtor, but including holders of secured claims.

Questions? [email_address]

Workouts and Liquidations

by Credit Management Association

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