Workouts and Liquidations

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Discusses how workouts and liquidations differ from bankruptcies. Covers the distressed debtor, bankruptcy, out of court workouts, and out of court liquidation.

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Workouts and Liquidations

  1. 1. Workouts & Liquidations How They Differ From Bankruptcies Brenda Terreault NACM Oregon September 17, 2009
  2. 2. Available (General) Avenues for Distressed Debtors <ul><li>Bankruptcies </li></ul><ul><li>Out-of-Court Negotiated Work-outs </li></ul><ul><li>Assignments for the Benefit of Creditors </li></ul>
  3. 3. The Distressed Debtor <ul><li>One symptom of distress by itself may not mean much </li></ul><ul><li>Consider </li></ul><ul><ul><li>Reviewing the credit file </li></ul></ul><ul><ul><li>Proactively dealing with the Account in other ways </li></ul></ul>
  4. 4. Spotting the Distressed Debtor <ul><li>Downward trend in debtor’s payment history </li></ul><ul><li>Requests for extended terms after shipment or billing </li></ul><ul><li>Excessive requests for invoice copy and proof of delivery </li></ul><ul><li>Repeatedly overlooks invoice due dates </li></ul><ul><li>Only makes partial payments </li></ul><ul><li>Unauthorized deductions eventually resolved in creditor’s favor </li></ul><ul><li>(continued) </li></ul>
  5. 5. Spotting the Distressed Debtor <ul><li>Disputes products or services long after delivery </li></ul><ul><li>Breaks account terms </li></ul><ul><li>Requires telephone contact before issuing check; cuts and holds checks </li></ul><ul><li>Breaks promises to pay </li></ul><ul><li>Ignores your calls and letters; no return calls </li></ul><ul><li>Avoids phone or personal contact with you </li></ul><ul><li>Inability to contact the debtor </li></ul><ul><li> (continued) </li></ul>
  6. 6. Spotting the Distressed Debtor <ul><li>Issues NSF checks, out of compliance with loan agreements, bank problems </li></ul><ul><li>Law suits; tax judgment or other liens in place or being placed </li></ul><ul><li>General disorganization within the business </li></ul><ul><li>Several competitors call for credit references </li></ul><ul><li>Change in banks </li></ul><ul><li>Rumors in the industry of trouble </li></ul><ul><li>Visible decreases in inventory (continued) </li></ul>
  7. 7. Spotting the Distressed Debtor <ul><li>Business for sale or recently sold </li></ul><ul><li>Excessive key employee turnover </li></ul><ul><li>Personnel layoffs </li></ul><ul><li>Owner with domestic problems </li></ul><ul><li>Refuses to sign personal guarantee </li></ul><ul><li>Broken promises </li></ul><ul><li>Collection actions, litigation and judgments </li></ul><ul><li>Moratorium Letter </li></ul><ul><li>Request for Compromise </li></ul>
  8. 8. Bankruptcy Chapter 7 Liquidation With or Without Assets
  9. 9. Advantages <ul><li>For debtor </li></ul><ul><ul><li>Automatic Stay </li></ul></ul><ul><ul><li>Get out of debt </li></ul></ul><ul><li>For creditor </li></ul><ul><ul><li>Equal treatment among similarly situated creditors </li></ul></ul><ul><ul><li>Can move on instead of chasing debt </li></ul></ul>
  10. 10. Disadvantages <ul><li>For debtor </li></ul><ul><ul><li>Credit ruined for years </li></ul></ul><ul><ul><li>May lose assets </li></ul></ul><ul><li>For creditor </li></ul><ul><ul><li>Paid only part of debt or perhaps nothing </li></ul></ul><ul><ul><li>Trustee percentage diminishes estate </li></ul></ul><ul><ul><li>Preference actions </li></ul></ul>
  11. 11. Basics <ul><li>Debtor …. </li></ul><ul><li>Gets court protection from creditors - automatic stay </li></ul><ul><li>Must disclose information for benefit of creditors </li></ul><ul><li>Statement of Financial Affairs (SOFA) </li></ul><ul><li>List of Assets </li></ul><ul><li>List of Debts </li></ul><ul><li>Must appear at Section 341(a) meeting of creditors </li></ul>
  12. 12. People with control <ul><li>Trustee </li></ul><ul><li>Debtor </li></ul><ul><li>Priority Claimants </li></ul><ul><li>Secured Creditors </li></ul><ul><li>Executory Contract Creditors </li></ul><ul><li>Unsecured Creditors </li></ul>
  13. 13. Time is money <ul><li>Chapter 7 without assets – approximately 90 to 120 days from date of filing until discharge of debts </li></ul><ul><li>Chapter 7 with assets – length of time depends on assets, economy and debtor. </li></ul>
  14. 14. About the claims if there are any assets <ul><li>Pro-rata treatment of claims </li></ul><ul><li>within the same classification </li></ul><ul><li>Administrative claims - trustee and estate expenses </li></ul><ul><li>Priority Claims - taxes, child support, etc. </li></ul><ul><li>Secured claims </li></ul><ul><li>Unsecured claims </li></ul><ul><li>Any remaining funds go to Debtor </li></ul>
  15. 15. Cost to the bankruptcy estate <ul><li>Trustee paid before anyone else </li></ul><ul><li>On all moneys disbursed by the trustee </li></ul><ul><li>To parties in interest </li></ul><ul><ul><li>Excluding the debtor </li></ul></ul><ul><ul><li>But including holders of secured claims. </li></ul></ul><ul><li>R easonable compensation for trustee ’ s services: </li></ul><ul><li>25% first $5,000 </li></ul><ul><li>10% $5,000 - $50,000 </li></ul><ul><li>5% $50,000 - $1,000,000 </li></ul><ul><li>3% more than $1,000,000 </li></ul>
  16. 16. Out-of-Court Liquidation Primarily Assignments for the Benefit of Creditors
  17. 17. Advantages For an Out-of-Court Liquidation <ul><li>From Debtor’s viewpoint </li></ul><ul><ul><li>Can give Debtor time to review and evaluate options </li></ul></ul><ul><ul><li>Allows Debtor to maintain relationships with customers and suppliers </li></ul></ul><ul><ul><li>Debtor can deal with creditors fairly and without favoritism </li></ul></ul>
  18. 18. Advantages For an Out-of-Court Liquidation <ul><li>From Creditor’s viewpoint </li></ul><ul><ul><li>Estate can have more money - no trustee to pay </li></ul></ul><ul><ul><li>No preference actions or other bankruptcy court actions </li></ul></ul><ul><ul><li>Creditors in each category take pro rata share of allowed amount – no secret negotiations </li></ul></ul><ul><ul><li>Time Factor - Generally faster than bankruptcy </li></ul></ul><ul><ul><li>Cost –generally more funds pay creditors than in court action </li></ul></ul><ul><ul><li>Lower legal fees for Creditors generally </li></ul></ul>
  19. 19. Disadvantages <ul><li>Why not to have an Out-of-Court Liquidation? </li></ul><ul><ul><li>Inexperienced Practitioners </li></ul></ul><ul><ul><li>Attorney Practitioners who charged standard attorney rates to act as Assignee for debtor </li></ul></ul><ul><ul><li>No court or trustee oversight </li></ul></ul>
  20. 20. The Liquidation <ul><li>… . Is a plan in which the creditors agree to accept less than full past due amount owed so that… </li></ul><ul><li>The debtor can close the business </li></ul><ul><li>The creditor can recover as much as possible </li></ul>
  21. 21. Reasons to Agree to Liquidation <ul><li>Debtor has a cash flow problem which: </li></ul><ul><li>Cannot be corrected OR </li></ul><ul><li>Has a probability of recurring </li></ul>
  22. 22. People with Control <ul><li>Assignee or Debtor as Assignee </li></ul><ul><li>Priority claimants – taxing authorities </li></ul><ul><li>Secured creditors </li></ul><ul><li>Executory contracts </li></ul><ul><li>Unsecured Creditors </li></ul>
  23. 23. Time is money <ul><li>If/When funds become available, estate will disburse. </li></ul><ul><li>No guarantee of financial recovery. </li></ul><ul><li>Time frame from start to payment depends on many factors including: </li></ul><ul><li>Debtor co-operation </li></ul><ul><li>Creditor co-operation </li></ul><ul><li>The size of the estate </li></ul><ul><li>Disputed debts </li></ul><ul><li>Assignee expertise, knowledge, organization </li></ul><ul><li>Other issues </li></ul>
  24. 24. About the claims generally there are assets <ul><li>Pro-rata treatment of claims within the same classification </li></ul><ul><li>Administrative claims – assignee and estate expenses </li></ul><ul><li>Priority Claims - taxes, amounts owed to employees, etc. </li></ul><ul><li>Secured claims </li></ul><ul><li>Unsecured claims </li></ul><ul><li>Any funds remaining goes to Debtor </li></ul>
  25. 25. Cost to the estate <ul><li>Estate administrative fees and expenses as they occur. </li></ul><ul><li>R easonable compensation for administrator ’ s services is negotiated with administrator before hiring. </li></ul><ul><ul><ul><li>Flat rate </li></ul></ul></ul><ul><ul><ul><li>Hourly rate </li></ul></ul></ul><ul><ul><ul><li>Percentage - On all moneys disbursed by the administrator to parties in interest, excluding the debtor, but including holders of secured claims. </li></ul></ul></ul>
  26. 26. Bankruptcy Chapter 11 or 13 Reorganization Chapter 11 for businesses Chapter 13 for wage earners with regular income
  27. 27. Advantages <ul><li>For debtor </li></ul><ul><ul><li>Automatic Stay </li></ul></ul><ul><ul><li>Get out of most debt </li></ul></ul><ul><ul><li>Be able to reject leases </li></ul></ul><ul><ul><li>Continue in business </li></ul></ul><ul><li>For creditor </li></ul><ul><ul><li>Better treatment if a necessary creditor </li></ul></ul><ul><ul><li>Equal treatment among similarly situated creditors </li></ul></ul><ul><ul><li>Can move on instead of chasing debt </li></ul></ul><ul><ul><li>May be able to continue business with debtor </li></ul></ul>
  28. 28. Disadvantages <ul><li>For debtor </li></ul><ul><ul><li>Credit ruined for years </li></ul></ul><ul><ul><li>May lose assets </li></ul></ul><ul><ul><li>Creditors may not want to extend credit </li></ul></ul><ul><ul><li>Creditors may not want to continue selling </li></ul></ul><ul><li>For creditor </li></ul><ul><ul><li>Debtor in Possession instead of trustee </li></ul></ul><ul><ul><li>Paid only part of debt or perhaps nothing </li></ul></ul><ul><ul><li>Preference actions </li></ul></ul><ul><ul><li>Possible Trustee percentage diminishes estate </li></ul></ul>
  29. 29. Basics <ul><li>Debtor …. </li></ul><ul><li>Gets court protection from creditors - automatic stay </li></ul><ul><li>Must disclose information for benefit of creditors </li></ul><ul><li>Statement of Financial Affairs (SOFA) </li></ul><ul><li>List of Assets </li></ul><ul><li>List of Debts </li></ul><ul><li>Must appear at Section 341(a) meeting of creditors </li></ul>
  30. 30. Basics <ul><li>Debtor …. </li></ul><ul><li>Must submit a plan of reorganization </li></ul><ul><li>If debtor does not submit plan or receive an extension, creditors may submit a plan </li></ul>
  31. 31. People with control <ul><li>Debtor in possession/Trustee </li></ul><ul><li>Priority Claimants </li></ul><ul><li>Secured creditors </li></ul><ul><li>Executory contracts </li></ul><ul><li>Trade creditors – especially if necessary for continuing business </li></ul><ul><li>Unsecured creditors </li></ul>
  32. 32. Time is money <ul><li>Chapter 13 – up to 60 months from date that plan is accepted. </li></ul><ul><li>Chapter 11 – Who knows </li></ul>
  33. 33. About the claims Generally there are assets <ul><li>Pro-rata treatment of claims </li></ul><ul><ul><li>Of claims within the same classification </li></ul></ul><ul><li>Administrative claims - trustee and estate expenses </li></ul><ul><li>Priority Claims - taxes, amounts owed to employees, etc. </li></ul><ul><li>Secured claims </li></ul><ul><li>Necessary creditors </li></ul><ul><li>Unsecured claims </li></ul>
  34. 34. Cost to the bankruptcy estate <ul><li>Trustee paid before anyone else </li></ul><ul><li>On all moneys disbursed by the trustee </li></ul><ul><li>To parties in interest </li></ul><ul><ul><li>Excluding the debtor </li></ul></ul><ul><ul><li>But including holders of secured claims. </li></ul></ul><ul><li>R easonable compensation for trustee ’ s services: </li></ul><ul><li>25% first $5,000 </li></ul><ul><li>10% $5,000 - $50,000 </li></ul><ul><li>5% $50,000 - $1,000,000 </li></ul><ul><li>3% more than $1,000,000 </li></ul>
  35. 35. Out-of-Court Work-out Reorganization, Adjustments, Extension Agreements, Compromises, Compromised Settlements, Negotiated Agreement, Negotiated Settlement, etc.
  36. 36. Advantages For an Out-of-Court Workout <ul><li>Can give Debtor time to review and evaluate options </li></ul><ul><li>Allows Debtor to maintain relationships with customers and suppliers </li></ul><ul><li>Debtor can deal with creditors fairly and without favoritism </li></ul><ul><li>Minimizes cost to business if it can be saved </li></ul>
  37. 37. Advantages <ul><li>For debtor </li></ul><ul><ul><li>Lower debt </li></ul></ul><ul><ul><li>Stay in business </li></ul></ul><ul><li>For creditor </li></ul><ul><ul><li>Equal treatment among similarly situated creditors </li></ul></ul><ul><ul><li>Can move on instead of chasing debt </li></ul></ul><ul><ul><li>May be able to continue business with debtor </li></ul></ul>
  38. 38. Disadvantages <ul><li>For debtor </li></ul><ul><ul><li>Credit ruined for years </li></ul></ul><ul><ul><li>May lose assets </li></ul></ul><ul><ul><li>Creditors may not want to extend credit </li></ul></ul><ul><ul><li>Creditors may not want to continue selling </li></ul></ul><ul><li>For creditor </li></ul><ul><ul><li>Paid only part of debt or perhaps nothing </li></ul></ul><ul><ul><li>Assignee percentage diminishes estate </li></ul></ul><ul><ul><li>Debtor principal may still be active in operation </li></ul></ul>
  39. 39. The Work Out <ul><li>… . Is a plan in which the creditors agree to accept less than full past due amount owed so that… </li></ul><ul><li>The debtor can continue in business </li></ul><ul><li>The creditor can continue a business relationship with the debtor </li></ul>
  40. 40. Reasons to Agree to a Work Out <ul><li>Debtor …. </li></ul><ul><li>Has a temporary cash flow problem which is caused by an identifiable issue that can be corrected and has minimal chance of recurrence. </li></ul><ul><li>Is a long term customer with decent payment history. </li></ul><ul><li>There may be other reasons </li></ul>
  41. 41. People with control <ul><li>Debtor and/or other professional </li></ul><ul><li>Priority Claimants </li></ul><ul><li>Secured Creditors </li></ul><ul><li>Executory contracts </li></ul><ul><li>Trade Creditors </li></ul><ul><li>Unsecured creditors </li></ul>
  42. 42. Time is money <ul><li>When funds are available, the estate will disburse. </li></ul><ul><li>Time frame from start to payment depends on many factors including: </li></ul><ul><li>Debtor co-operation </li></ul><ul><li>Creditor co-operation </li></ul><ul><li>The size of the estate </li></ul><ul><li>Disputed debts </li></ul><ul><li>Assignee expertise, knowledge, organization </li></ul><ul><li>Other issues </li></ul>
  43. 43. Time is money <ul><li>Parties will generally receive funds sooner than in most bankruptcies with assets available. </li></ul><ul><li>Negotiated payment plan </li></ul><ul><li>Payment of lesser amount </li></ul>
  44. 44. About the claims if there are any assets <ul><li>Pro-rata treatment of claims </li></ul><ul><ul><li>within the same classification </li></ul></ul><ul><li>Administrative claims - trustee and estate expenses </li></ul><ul><li>Priority Claims </li></ul><ul><li>Secured claims </li></ul><ul><li>Unsecured claims </li></ul><ul><li>Any funds remaining go to Debtor </li></ul>
  45. 45. Cost to the liquidation estate <ul><li>Estate administrative fees & expenses as they occur </li></ul><ul><li>R easonable compensation for administrator ’ s services </li></ul><ul><li>Negotiated before hiring. </li></ul><ul><ul><ul><li>Flat rate </li></ul></ul></ul><ul><ul><ul><li>Hourly rate </li></ul></ul></ul><ul><ul><ul><li>Percentage- On all moneys disbursed by the administrator to parties in interest, excluding the debtor, but including holders of secured claims. </li></ul></ul></ul>
  46. 46. Questions? [email_address]

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