credit and collection reaction papers


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2nd sem 2012-2013

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credit and collection reaction papers

  1. 1. Aguilar, Ma. Janyne F. CHAPTER 8 CREDIT ANALYSIS Credit analysis is a process that creditors use to determine whether an applicant should bepermitted to borrow money, either in the form of a loan or the generation of debt. In cases wherecreditors are in favor of issuing credit, this process can also be used to determine how much credit togrant. Such processes are used to determine the creditworthiness of both individuals and businesses. Any entity that is interested in receiving credit or a loan can be subject to a credit analysis. Thepurpose of this process is to assess whether or not a potential borrower can afford to repay the debtand whether he is likely to do so. This determination is often made by acredit analyst ora credit analysis department. There are a number of items that are usually reviewed in a credit analysis. One of them isincome. A creditor almost always wants to know about a borrowers sources of income and the amountsthat are received. Even if a borrower appears to have enough income to cover the amount of thepayment installments, credit can be denied. This is because the borrower may have too much existingdebt. A credit analysis also commonly considers expenditures. Creditors generally assess what debts apotential borrower is responsible for. A borrower may have a large income, but if a large portion of it isneeded to make payments to existing creditors, this can be viewed as reducing the chances ofrepayment for other lenders. Another reason that a credit analysis may be unfavorable despite the amount of income is dueto instability. A person may have sufficient resources for repayment at the moment, but perhaps he hasnot been on his job for long or he has a history of changing jobs. This can cause creditors to assess theperson as being at high risk for defaulting on his payments. A credit analysis also generally looks at payment history. Creditors usually consider a potentialborrowers habits when paying his bills. If the potential borrower has a history of not paying certain bills,of missing payments, or of making late payments, his credit analysismay be unfavorable. The reason that credit or a loan is needed may also be assessed. A person may technically beable to afford payment installments, but many creditors believe that payments for certain things shouldnot exceed a certain percentage of a persons income. For example, a person may be looking for a homeloan. He may be able to afford the mortgage payments, but doing so may require 60% of his income.The potential lender may, however, have a rule of not issuing home loans when repayment exceeds 20%of a borrowers income. When a person is planning to borrow, there are things that he can do to make himself a morefavorable candidate for credit. Among other things, a borrower should make sure that all payments forexisting debt are made on time and that all accounts are in good standing. Smaller debts should be paidoff, if possible, to reduce the amount of debt the borrower is responsible for. Some of these things maytake time and borrowing may need to be delayed, but it is possible to improve ones creditworthiness. Credit analysis is the method by which one calculates the creditworthiness of a business ororganization. In other words, It is the evaluation of the ability of a company to honor it financialobligations. The audited financial statements of a large company might be analyzed when it issues or hasissued bonds. Or, a bank may analyze the financial statements of a small business before making orrenewing a commercial loan. The term refers to either case, whether the business is large or small. Credit analysis involves a wide variety of financial analysis techniques, including ratio and trendanalysis as well as the creation of projections and a detailed analysis of cash flows. Credit analysis alsoincludes an examination of collateral and other sources of repayment as well as credit history andmanagement ability. Analysts attempt to predict the probability that a borrower will default on itsdebts, and also the severity of losses in the event of default. Credit spreads--the difference in interest
  2. 2. Aguilar, Ma. Janyne F.rates between theoretically "risk-free" investments such as U.S. treasuries or LIBOR and investmentsthat carry some risk of default--reflect credit analysis by financial market participants. Before approving a commercial loan, a bank will look at all of these factors with the primaryemphasis being the cash flow of the borrower. A typical measurement of repayment ability is the debtservice coverage ratio. A credit analyst at a bank will measure the cash generated by a business (beforeinterest expense and excluding depreciation and any other non-cash or extraordinary expenses). Thedebt service coverage ratio divides this cash flow amount by the debt service (both principaland interest payments on all loans) that will be required to be met. Commercial Bankers like to see debtservice coverage of at least 120 percent. In other words, the debt service coverage ratio should be 1.2 orhigher to show that an extra cushion exists and that the business can afford its debt requirementsTypical education credentials often require a bachelor degree in business (to include an emphasis inaccounting, finance or economics). An MBA is not required however is increasingly being held orpursued by analyst, often to become more competitive for advancement opportunities. CommercialBankers also undergo intense credit training provided by their Bank or a third-party company. 5 C’s of Credit AnalysisRegardless of where you seek funding - from a bank, a local development corporation or a relative - aprospective lender will review your creditworthiness. A complete and thoroughly documented loanrequest (including a business plan) will help the lender understand you and your business. The "Five Cs"are the basic components of credit analysis. They are described here to help you understand what thelender looks for. Capacity to repay is the most critical of the five factors, it is the primary source of repayment -cash. The prospective lender will want to know exactly how you intend to repay the loan. The lender willconsider the cash flow from the business, the timing of the repayment, and the probability of successfulrepayment of the loan. Payment history on existing credit relationships - personal or commercial- isconsidered an indicator of future payment performance. Potential lenders also will want to know aboutother possible sources of repayment. Capital is the money you personally have invested in the business and is an indication of howmuch you have at risk should the business fail. Interested lenders and investors will expect you to havecontributed from your own assets and to have undertaken personal financial risk to establish thebusiness before asking them to commit any funding. Collateral, or guarantees, are additional forms of security you can provide the lender. Giving alender collateral means that you pledge an asset you own, such as your home, to the lender with theagreement that it will be the repayment source in case you cant repay the loan. A guarantee, on theother hand, is just that - someone else signs a guarantee document promising to repay the loan if youcant. Some lenders may require such a guarantee in addition to collateral as security for a loan. Conditions describe the intended purpose of the loan. Will the money be used for workingcapital, additional equipment or inventory? The lender will also consider local economic conditions andthe overall climate, both within your industry and in other industries that could affect your business. Character is the general impression you make on the prospective lender or investor. The lenderwill form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan orgenerate a return on funds invested in your company. Your educational background and experience inbusiness and in your industry will be considered. The quality of your references and the background andexperience levels of your employees will also be reviewed. A type of analysis an investor or bond portfolio manager performs on companies or other debtissuing entities encompassing the entitys ability to meet its debt obligations. The credit analysis seeks toidentify the appropriate level of default risk associated with investing in that particular entity.
  3. 3. Aguilar, Ma. Janyne F. By identifying companies that are about to experience a change in debt rating, an investor ormanager can speculate on that change and possibly make a profit. For example, assume a manager isconsidering buying junk bonds in a company, if the manager believes that the companys debt rating isabout to improve, which is a signal of relatively lower default risk, then the manager can purchase thebond before the rating change takes place, and then sell the bond after the change in rating at a higherprice.Agricultural Credit Agriculture has its own inherit risks and unique characteristics. As a result, agricultural credit isdifferent than normal consumer credit. We provide the following to aid farmers and ranchers inunderstanding and maintaining their credit.What is it that agricultural lenders look for, why, and what can you do to improve your standing withlenders? Due to the nature of agriculture, the following guidelines are for Ag borrowers, and due to thecomplexity of agriculture some of the suggestions may not apply to your situation. Risk is any lenders primary concern. Simply put, lenders determine what the chances are thatyou will have late payments, and/or they will be required to liquidate collateral to collect payment,and/or they will loose some portion of the loan. All quality lenders want to make loans, but only thoseloans that provide assurance of timely repayment.What do we look at to determine risk? The first thing is history – lenders believe that history is the window that allows us to see intothe future. For this reason it is critically important that you manage your operation very carefully. Allgood ag lenders understand you will have bad years – beyond your management ability, what we lookfor are trends and what, if any, steps you took to mitigate losses. One bad year will not normally kill yourfuture, but several back-to-back years can.When we examine your history – what is it that we want to see? Accurate, complete, detailed, realistic financial statements are the first item. Financialstatements tell us where you have been, where you are, and offer a small glimpse of how you got there.The next item is accurate profit & loss statements. Normally these are provided in the form of FederalIncome Tax Returns. For larger and/or more complex operations, both cash and accrual Profit and Lossstatements, along with production records are important additions that most lenders like to see. A positive cash flow is the most important item for timely debt repayment. A positive cash flowis defined as cash after payment of all expenses including taxes, living expenses, and all note payments.Lenders understand depreciation, we know in most cases it is a real expense item. Rarely do equipmentand other depreciable items increase in value as you use them – normally they wear out and must bereplaced. If you don’t reduce the loan balance as the item depreciates, when it is worn out you will havelittle to no equity, and replacing the item will be difficult. Credit underwriting is a judgment call utilizing all of the above. Good lenders will not providecredit based on the strength of a single item, but may very well deny credit based on the weakness of asingle item. As an example, our largest single reason for denial is lack of collateral equity, meaningpeople want to borrow too high a percentage of the value of the asset provided for security. A final note on Risk: when or if you find a lender who is willing to advance funds when the risk isabove acceptable levels – most often you have found a lender whocharges excessive fees and/or interest, and
  4. 4. Aguilar, Ma. Janyne totally focused on the collateral. These lenders are normally referred to as “hard money lenders”, they provide funds with littleto no consideration of your future, but they fully understand the concept of collateral. While most goodlenders view collateral as the last source of repayment, these lenders view collateral liquidation as thefirst source of repayment. To accept a loan under these circumstances gambles your collateral againstyour chances of future success, all while minimizing its probability due to excessive interest and relatedcosts.Record Keeping In order to provide what you need for decision making and what your lender will look for toapprove your loan request, accurate and timely records are a must. In today’s age of computers thereare few excuses left for not having complete, accurate, and timely records. INTERNAL RECORDS ARECRITICAL! If your idea of record keeping is to take 12 bank statements to your accountant at the end ofthe year and say “Do my taxes,” then you need to improve your internal record keeping.Internal record keeping must include all of the following:Accurate, detailed and individual listings of all assets, including: date purchased, make and model, cost,serial number or other description, expected useful life, and if pledged as security – who is the creditor.Accurate, up to date listing of all creditors, with balance outstanding, repayment terms, collateral, loanofficer and complete contact informationBalanced checking account, one that you know exactly how much money is in the bank, what checkshave cleared, what checks are outstanding, etc. If you must access the bank via ATM and/or theInternet to find out your account balance, then your record keeping could use some seriousimprovement.Accurate and detailed record of all income and expenses. This must be broken down by the variouscategories in such a fashion that you can rapidly determine what you made from all the various sources,and what you have spent on all the various expense categories.Accurate and detailed records of all Accounts Receivable. When you sell something, until you havecollected the money, it really doesn’t do you a lot of good. You must know exactly WHO purchasedWHAT, WHEN, and what the terms of repayment are. It is advisable to always get invoices SIGNED!When you have Accounts Receivable, you are lending your money to the individual - it might be wise toevaluate the risk.Accurate and detailed listing of all Accounts Payable. This needs to include what the terms of repaymentare.Production records. You need to know (and almost all operating lenders will ask) what you produced.This needs to include the number of acres, trees, cows etc as applicable for your operation. There are a number of good record keeping programs available for your PC. Classes are availableat many local community colleges, and your tax accountant can make recommendations on how to keepaccurate records. Use whatever means are necessary to ensure you have timely and accurate records.For many small to medium sized operations, good checkbook programs like Quicken or QuickBooks,along with a spreadsheet program such as Excel will provide all the tools you need. For larger and morecomplex operations, integrated software designed for your particular agricultural enterprise is availableand should be considered.
  5. 5. Aguilar, Ma. Janyne F. Last, be sure you utilize the services of a good, reputable, knowledgeable accountant for taxpreparation. Given the complexity of todays tax laws, doing taxes by hand is like performing brainsurgery on yourself. However, do NOT make purchase decisions based solely on the accountants advicethat doing so will avoiding paying a few dollars of taxes by gaining the depreciation. It may be better topay a few thousand in taxes than to have to debt service the purchase to the tune of tens of thousandfor several years.Consumer Credit The easy availability of consumer credit is a leading cause of problems with many agricultureproducers. Just because a credit card company will say yes and give you a $25,000 line doesn’t meanyou should immediately take a trip to Vegas and run the card up. Don’t utilize your credit cards foroperating costs just because it’s so easy. The interest costs are too excessive, and thereafter, alloperating lenders will be very suspect of your prior practice. Do NOT use one card to pay another card;this is a game that will ruin your credit. If you are taking more than 90 days to pay off your credit cards (from the date of the advance tothe date that advance is totally paid off), then you may want to examine your credit spending habits. Ifyou are past due with consumer credit, the first step in finding your way out of this trap is to throw awaythe shovel you are using to dig your financial grave with. The next step after you stop charging is to paymore than the minimum balance. There are a number of consumer credit counseling services available,but avoid those who are going to compromise your debt. This will almost always end up with largerproblems than you started with.What follows is a brief definition of how consumer credit histories (credit reports) are viewed by mostlenders: Excellent Credit – high score, NO derogatory, very limited occasional 30 day delinquency.Good Credit – NO derogatory, minor but non reoccurring occasional delinquency. Average Credit – Any derogatory is resolved, some occasional delinquency but no reoccurring 60or over delinquency, all of which is explainable. Poor Credit – minor unresolved derogatory and/or multiple repeating delinquencies includingaccounts 60 and 90 over. Adverse Credit – multiple and/or significant unresolved derogatory accounts (judgments,collections, tax liens, bankruptcy or other public records), and/or multiple continuing delinquencies.Excellent, Good, and Average credit history can expect to receive financing, assuming there are no otherweaknesses or problems. Regardless of the collateral, if you have poor and/or adverse consumer credithistory, you should not expect to receive credit under normal circumstances and terms.
  6. 6. Aguilar, Ma. Janyne F. CHAPTER 9 FINANCIAL ANALYSIS The process of evaluating businesses, projects, budgets and other finance-related entities todetermine their suitability for investment. Typically, financial analysis is used to analyze whether anentity is stable, solvent, liquid, or profitable enough to be invested in. When looking at a specificcompany, the financial analyst will often focus on the income statement, balance sheet, and cash flowstatement. In addition, one key area of financial analysis involves extrapolating the companys pastperformance into an estimate of the companys future performance. One of the most common ways of analyzing financial data is to calculate ratios from the data tocompare against those of other companies or against the companys own historical performance. Forexample, return on assets is a common ratio used to determine how efficient a company is at using itsassets and as a measure of profitability. This ratio could be calculated for several similar companies andcompared as part of a larger analysis. Financial Analysis consists of four areas—the Office of Financial Analysis, Space Analysis,Property Control and Property Disposition. The Office of Financial Analysis is responsible for supporting the instruction, research and publicservice activities of the university. This objective is accomplished by providing analytical support to theexecutive vice president and chief financial officer (EVPCFO) and the associate vice president for Finance(AVPF). Financial Analysis provides analytical services including annual reports and surveys, universityand EVPCFO budget process, consulting services, capital planning and recharge rate approvals.Space Analysis is the official custodian of university space and location data. The unit oversees an annualinventory of all university owned and occupied space and make location, square footage, occupancy,and utilization updates as changes occur throughout the year. Space data is used for state, federal anduniversity space utilization reporting. Many university systems, including facilities and plant operations,classroom scheduling and procurement, rely on this data. Property Control is responsible for the tracking, tagging and inventory of all capital equipmentwith title vested to the university with a dollar value of $5,000 and above. The office is also responsiblefor the tracking, tagging and inventory of all government-owned equipment with a dollar value set bygovernment agencies and as required by OMB Circular A21. Property Disposition is responsible for the accountable disposal of University of Michiganproperty designated as surplus by university departments.GoalsFinancial analysts often assess the following elements of a firm:1. Profitability - its ability to earn income and sustain growth in both the short- and long-term. Acompanys degree of profitability is usually based on the income statement, which reports on thecompanys results of operations;2. Solvency - its ability to pay its obligation to creditors and other third parties in the long-term;3. Liquidity - its ability to maintain positive cash flow, while satisfying immediate obligations;Both 2 and 3 are based on the companys balance sheet, which indicates the financial condition of abusiness as of a given point in time.4. Stability - the firms ability to remain in business in the long run, without having to sustain significantlosses in the conduct of its business. Assessing a companys stability requires the use of the incomestatement and the balance sheet, as well as other financial and non-financial indicators. etc.
  7. 7. Aguilar, Ma. Janyne F.Methods Financial analysts often compare financial ratios (of solvency, profitability, growth, etc.):Past Performance - Across historical time periods for the same firm (the last 5 years for example),Future Performance - Using historical figures and certain mathematical and statistical techniques,including present and future values, this extrapolation method is the main source of errors in financialanalysis as past statistics can be poor predictors of future prospects.Comparative Performance - Comparison between similar firms. These ratios are calculated by dividing a (group of) account balance(s), taken from the balancesheet and / or the income statement, by another, for example : Net income / equity = return on equity (ROE) Net income / total assets = return on assets (ROA) Stock price / earnings per share = P/E ratioComparing financial ratios is merely one way of conducting financial analysis. Financial ratios faceseveral theoretical challenges: They say little about the firms prospects in an absolute sense. Their insights about relativeperformance require a reference point from other time periods or similar firms.One ratio holds little meaning. As indicators, ratios can be logically interpreted in at least two ways. Onecan partially overcome this problem by combining several related ratios to paint a more comprehensivepicture of the firms performance. Seasonal factors may prevent year-end values from being representative. A ratios values maybe distorted as account balances change from the beginning to the end of an accounting period. Useaverage values for such accounts whenever possible. Financial ratios are no more objective than the accounting methods employed. Changes inaccounting policies or choices can yield drastically different ratio values. Financial analysts can also use percentage analysis which involves reducing a series of figures asa percentage of some base amounts. For example, a group of items can be expressed as a percentage ofnet income. When proportionate changes in the same figure over a given time period expressed as apercentage is known as horizontal analysis. Vertical or common-size analysis reduces all items on astatement to a “common size” as a percentage of some base value which assists in comparability withother companies of different sizes. As a result, all Income Statement items are divided by Sales, and allBalance Sheet items are divided by Total Assets. Comparative analysis presents the same information for two or more time periods and ispresented side-by-side to allow for easy analysis.Financial analysis using ratiosRatios are used to evaluate the performance of your business and identify potential problems. Eachratio informs you about factors such as the earning power, solvency, efficiency, and debt load of yourbusiness. They are used to measure the relationship between two or more components of the financialstatements and have greater meaning when the results are compared to industry standards forbusinesses of similar size and activity.Ratios are effective performance indicators when results for the current period are compared to thepast performance over several periods. For example, by examining the inventory turnover over morethan one fiscal year, you can compare the rate at which inventory turns over to the year before. Youcan also determine whether or not sales of inventories are still growing and at what rate. This isreferred to as horizontal or trend analysis, as data is compared for multiple consecutive periods todetermine if the businesss performance is following a predictable course. A dramatic upward or
  8. 8. Aguilar, Ma. Janyne F.downward trend can signify areas requiring attention, permitting you to forecast future results.Following and reacting to these trends is your first line of strategic defence.The performance of the business should also be compared to that of competitors or other businesses ofcomparable size and activity. If your business experiences a downturn in its Net Profit Margin by 6% butthe competitors experience an average downturn of 21%, this indicates that your business isperforming better than the industry as a whole. Nonetheless, it is still necessary to analyze theunderlying data to establish the cause of the downturn in the Net Profit Margin and to take effectivemeasures.Interpreting financial ratios is fairly straightforward. Ratios for your business are compared to thefinancial statistics of the industry. For example, if the Quick Ratio for your business is 1.0 (also writtenas 1:1 or 1 to 1) compared to the industry standard of 2.0 for companies of similar size and activity, theconclusion is that your company has half the current asset dollars to pay current liabilities, according tothe norm. Further investigation is required to determine if this deviance from industry standards iscause for alarm.When you compare ratios with those of other companies, it is important to ensure you are using thesame equation in your calculation.Financial ratios are one of the many tools used in financial analysis. A ratio may vary in importancedepending on the business type, the industry category it belongs to, or its location. For example,regional differences such as labour or shipping costs can affect the result of a ratio. Sound financialanalysis always requires scrutinizing the data used with the ratios and examining the circumstances thatgenerated the results.
  9. 9. Aguilar, Ma. Janyne F. CHAPTER 10 INSPECTION AND APPRAISALWhy Do I Need an Appraisal?The basic purpose of an appraisal is to help in making a real estate decision. An appraisal could beneeded in any of the following situations: Setting a price for buying or selling. Setting collateral value for financing. Assisting in a refinancing decision. Determining just compensation in condemnation proceedings. Assisting in real estate and personal income tax matters. Setting rent schedules and lease provisions. Determining the feasibility of a project. Estimating the price for a corporations purchase of a transferred employees ho me. Assisting in insurance matters. Estimating liquidation value for forced sale or auction proceedings. Determining supply and de ma n d trends in market.What Is Market Value? Market value is the most probable price for which the property should sell after reasonableexposure in a competitive market with a willing and knowledgeable buyer and seller and assuming a fairand norm al sale with no undue pressure upon either party.Is There A Difference Between Selling Price and Value? Sometimes, every day some properties sell at a price which is above or below the normalmarket value. A professional appraisal is an unbiased estimate of value which includes an analysis ofpast and current sale prices.How Does One Determine Market Value? Three different methods are generally used in the appraisal process. A brief description of eachfollows: Cost approach: This method involves estimating building cost and deducting for wear and tear,design flaws or location problems. Land value is added to this building cost to derive a value estimate.Sales comparison approach: This method is the most commonly utilized. This approach compares thesubject property with some w hat similar properties which have recently sold. Adjustments fordifferences such as overall square footage, condition and location lead to value indication.Income a p pro ac h: This method analyzes the value of the property based on its ability to produce netrental income. The income approach is seldom used in appraisals of single-family residences.How Long Is An Appraisal Valid? Supply and de man d and market conditions are constantly changing, causing value to increaseor decrease. In a fairly stable market, an appraisal should be valid for 60 to 90 days.
  10. 10. Aguilar, Ma. Janyne F.Objectives of appraisalTo evaluate the property subject to inspection and appraisement to arrive at its fair market value basedon existing conditions in the locality and general economic conditions.INSPECTION Purposes of inspection are: to ascertain the actual existence of the property, determine its exactlocation, and to look into its actual condition.TYPES OF PROPERTIES The vast majority of real estate agents and brokers work with three major property types. Its nocoincidence that these are the three property types accounting for most of the real estate transfers. As anew agent or broker, you may want to narrow your focus and specialize in one or more property types.A study of the number of properties of each type in your area, and their relative values, would indicatethe possible financial rewards of working with those types.TANGIBLE AND INTANGIBLE PROPERTY Tangible property is property which occupies physical space. The term “tangible” meanstouchable and tangible property is literally touchable. People can hold it and they can also see it. This isin contrast with intangible property, which cannot be physically touched and is not corporeal in nature.Within the law, there are many categories of tangible property which may be considered for purposes oftaxation, valuing an estate, and so forth. Some simple examples of tangible property include things like furniture, cars, and houses. All ofthese things can be seen and touched. In the case of furniture and cars, they can also be moved, as mayoccur when they are sold. For legal purposes, livestock are also considered tangible property. One mightthink of tangible property as physical property. Something like real estate is also considered immovableproperty because it cannot be relocated, although people can sell their rights to it, thus transferringownership of the property to another party. By contrast, intangible property is something like an interest in land, a stock certificate, or abank account. These things have value but the value is representative rather than physical in nature.Someone cannot hold interest in land, a stock certificate represents ownership rather than havingintrinsic value, and a bank account is not physical in nature. Easements are another example ofintangible property since they involve a concept, not an actual physical thing.Money is an interesting example of something which straddles the divide. Historically, cash currency wasoften viewed as intangible property, despite the fact that it could be seen and felt, because it wasbacked with gold or silver and thus represented value rather than having a value of its own. Today, suchstandards have been struck down, and currency may be considered tangible property because it isinherently valuable, rather than standing in for something sitting in a bank vault.There may be cases in which the distinction between tangible and intangible property becomesimportant. Likewise, the difference between categories such as movable and immovable property canbecome crucial. For property taxes, for example, motor homes, even if people are living in a fixedlocation, are taxed differently than homes which have foundations, because one is technically movableand the other is not without leaving the foundation behind; one could relocate a motor home, if desired,to another location, while a house cannot be wheeled away.
  11. 11. Aguilar, Ma. Janyne F. Intangible property is property that has value but that is not tangible. In other words, you maybe unable to touch the property, to physically see it, or to hold it in your hands. However, despite yourinability to actually see the property, the property still has some type of actual value which the lawrecognizes and protects. Common examples of intangible property include brand names and patents for ideas. Forexample, a brand name such as Nike or Apple has a value, even though you cannot actually see thevalue associated with the word. The value lies in the brand recognition, which is an intangible concept.Likewise, the ideas that are patented or copyrighted also have intangible value.Some types of property have both tangible and intangible value. The intangible value may far exceed theactual tangible value. For example, the Coca Cola companies recipe for coke is a written recipe, and thatwritten recipe is something tangible that you can touch. However, the intangible value- the ideas that gointo that recipe- are what give it its value.REAL ESTATE PROPERTY1. Vacant Land Farm and ranch specialists have long been quite successful in this business. Generally theproperty size and price is quite large, with corresponding commissions. Be sure you understand thespecific buying requirements and motivations of your prospect. In rapidly growing areas, specializing in building lots for properties can be lucrative for an agent.Just know that, as long as the spread continues, the area you have to cover will get farther out from thecity and possibly your office.2. Residential Properties The residential type of property is by far the most popular with both new and experiencedagents. Thats no surprise, since the year 2000 US Census shows more than 105 million occupied housingunits. Real estate agents then further specialize in types of homes, including condominiums, separatehomes, duplexes, high value homes, vacations homes, etc. Theres plenty to go around.3. Commercial Properties Commercial property can be empty land zoned for commercial use, or an existing businessbuilding or buildings. Commercial property valuation requires a more complex method, taking into account theincome potential of the property, historical revenue, cash flow with owner perks removed and muchmore. Unless someone has extensive business valuation experience, its better to enter thisspecialization carefully after time in the business in land or residential property markets. Chattel is a term in the financial world which refers to personal property which can be moved; itis also known as movable property. Some examples of chattel include jewelry, cars, and furniture. Theopposite of chattel is immovable property, like real estate and buildings, although in somecircumstances, of course buildings can be moved. Some people just call chattel “personal property,”differentiating it from things like real estate with the term “immovable property.” The word is derived from the Middle English chattel, which means “movable property.” It isrelated to the Old French chattel, meaning “cattle,” a reference to one of the most famous examples ofmovable property of all time. Humans have had chattel for thousands of years; movable property wasprobably the introduction to the concept of property for early humans, as people learned to make anduse things, thereby attaching value to them. This term has another, more sinister meaning, which dates to 1649. In the 1600s, abolitionistsstarted calling slaves chattel, emphasizing the fact that slaves were viewed as personal property, ratherthan human beings. Although slave owners resisted the use of the term, it was remarkably apt and also
  12. 12. Aguilar, Ma. Janyne F.correct: like inanimate chattel, slaves could be seized by the government and sold to recoup debt, forexample. You may still encounter terms like “human chattel” in literature from anti-slaveryorganizations. Economically, chattel is viewed differently from immovable property. As a general rule, thevalue of chattel drops rapidly, thanks to a process called depreciation. Anyone who has purchased a newcar is probably aware of this phenomenon. Typically, the decline in value cannot be arrested withimprovements to the chattel, unlike real property, which can constantly be made more valuable withthe use of improvements and renovation. Because of this issue, chattel is treated differently from realestate in financial assessments like those involved in determining how much money someone owes intaxes. You might be surprised by the value of your chattel. While an individual piece of movableproperty may not be that valuable, it is easy to pack a home with a substantial amount of belongings.Because replacing such belongings can be expensive and stressful, some people like to get insurance toprotect their movable property from things like theft and fires, ensuring that their movable goods areprotected along with their real estate and providing rapid replacements for things like cars andcomputers which may be vitally necessary for work. Land valuation typically involves numerous calculations to determine how much money a plotof land is worth. Among other things, valuation requires a determination of how much the land is worthindependent of any buildings, how much the neighborhood is expected to develop in future years, andthe likelihood of either appreciation or depreciation. Performing land valuation is generally a verycomplex endeavor. Valuation assessors often use more than one method of determining landvalue before coming to a final number. Knowing land value is important for a number of reasons. Prospective land purchasers oftenwant to know how much a piece of land is worth before investing in it, for instance. Governments alsohave an interest in knowing how much a given piece of land is worth in order to assess propertytaxes. Land valuation is the process of ascertaining the actual current value of any piece of land,developed or not. One of the most common valuation methods relies on the sale price of other, similar land.The comparable sales method surveys the recent sales of similar land within the same geographic areato get a sense of what the land would sell for on the open market. Often times, the comparable salesmethod requires subjective adjustments for differences in the land and surrounding area. The sellingprice of an enclosed lot may help determine the value of a similarly sized lot nearby, for instance, but ifthat lot abuts a busy street, its value will necessarily be a bit different. Many valuation assessors also use a cost of development model. Under this method, assessorsstudy the existing costs involved in developing similar plots of land, and consider anyphysical land attributes — such as streams, irrigation wells, or rocky soil — that might affect buildingpotential. This type of valuation is typically quite exhaustive, taking many different factors into account.If buildings are already attached to the lots, things often get more complicated where valuation isconcerned. In these cases, land valuation requires a calculation of how much the buildings are affectingthe sale price, and what the value of the land would be without those buildings attached. There areseveral methods for making this calculation. The income analysis and cost analysis methods are among the most common. In the incomeanalysis method, land valuation assessors estimate how much money the property makes each year.Then, the agents determine how much the building is worth, and allocate a portion of the earnedincome to the building. The remainder is the land value.
  13. 13. Aguilar, Ma. Janyne F. Assessors also look at building value under the cost analysis method, but only in terms of howmuch it cost to construct them. Under this method, the land value is the property value minus anyconstruction costs. Cost analysis valuation is often criticized for not taking depreciation or upkeep costsinto consideration. Shares of stock are written articles that represent the amount of money invested in thecorporation by an individual shareholder. The corporation determines, at the outset of incorporating,how many shares it shall issue and what classes of shares (No Par, Par, Common, Preferred,Participating, etc.) it will issue. In a close corporation, the number of shares are determined and sold toonly one or a few investors. In other corporations the shares are sold to many investors or to the public.Each share represents ownership in the company, and it entitles the holder to certain types of rights(voting rights, dividends, etc.). The different classes of stock determine how dividends will be paid, and how much money willbe paid for each share of stock in the corporation. Each share certificate will be marked with the amountof par (the minimum amount of money that must be paid for the share). Share certificates may also bemarked as no par, with no minimum amount being paid for the share. This designation must be made atthe outset of incorporating and provided for in the Articles of Incorporation. Additionally, Common stock represents the class of shareholders who shall be paid a dividendlast, after the preferred shareholders are paid first (if any exist). If there are no Preferred shareholders,then the dividend amounts are split equally among the Common shareholders.What is Par Value? A business corporation must sell shares of stock in order to capitalize the corporation, that is,provide the corporation with its own capital, separate from the money of its owners. This separationprovides part of the support for shielding the shareholders from personal liability for the debts andobligations of the corporation. Shares of stock sold by the corporation represent proportionate ownership interests held byshareholders in the corporation. “Par value” is a dollar value assigned to shares of stock which is theminimum amount for which each share may be sold. There is no minimum or maximum value that mustbe assigned. Shares may also have “no par value,” which means that the Board of Directors will assign avalue to the stock below which the shares cannot be issued. There is no minimum number of shares that must be authorized in the articles of incorporation.One or more shares may be authorized. However, the corporation may not sell more shares than it isauthorized to issue and it must receive consideration in exchange for its shares.What are Authorized Shares? State law specifies that shares of stock in the corporation will be issued under the direction ofthe board of directors. But, since the corporation is set up to benefit the shareholders, the shareholdersset, or limit, the number of shares the directors are “authorized”, or allowed, to issue. Since thedirectors are not allowed to issue shares without authorization from the shareholders, the number ofauthorized shares is equal to the number of total shares.What does Capitalization Mean? Capitalization is a term that requires a knowledge of accounting to understand, and can havedifferent meanings. With a new corporation, the term generally refers to the amount of money that acorporation has in its “kitty” when operations begin.
  14. 14. Aguilar, Ma. Janyne F. Some states have minimum capitalization requirements to insure that corporations have a bareminimum of assets before starting operations. Since shareholders are somewhat insulated from lawsuitsagainst a corporation, these assets provide a means to pay any potential lawsuit winners.Minimum capitalization requirements also make it a little more difficult to start a corporation, and wasprobably started to help to keep out the “riff raff” Today, only a few states have minimum capitalizationrequirements.What is a Dividend? A dividend is a special payment, usually paid at the end of each quarter, and is based on theprofits made by the corporation during that quarter. Dividends are usually paid in cash or additionalstock to the shareholders. This is a shareholder’s reward for investing in the corporation. It is much thesame as interest on a loan except that the dividend is based on the income of the corporation, and mayor may not be a regular payment. Also, dividends are not deductible by the corporation while interestpayments are. Some owners pay themselves a small salary to minimize FICA withholding, and paythemselves a quarterly dividend instead.What are Issued Shares? Issued shares are easily confused with authorized shares. Authorized shares are the maximumnumber of shares that the board of directors is “authorized”, or allowed to issue. Issued shares,however, is the number of shares actually “issued”, or given out to shareholders? Only issued shares arecounted for ownership purposes.How Many Shares of Stock are required? A corporation can’t be a corporation without at least one share of stock. So you must have atleast one shareholder, and one share of stock. You can have (authorize) as many shares of stock as youwant, however, this may increase your filing fees in some cases.What is no Par Value Stock? Since par value more or less means the price to be paid for the shares when purchased from thecorporation, no par value stock is stock for which no fixed price is set. This is usually the case in smallcorporations where the owners issue themselves a number of shares and simply infuse money in thecorporation when needed. Corporations issue no par stock for flexibility. If the corporation’s stock has no par value, thenthere is no set “price” for the stock. In this case, the directors can raise the “price” of the stock when thecorporation becomes more valuable. You see, with no par value stock, the directors decide how muchmust be paid for the stock each time it is issued to a shareholder.What is the difference between “par” and “no par” stock? Par value stock has a stated value on its face. No par value stock has any stated value and itsworth depends on what an investor is willing to pay.
  15. 15. Aguilar, Ma. Janyne F. CHAPTER 11 SHARES OF STOCKS AS COLLATERAL Capital stock has to do with all the shares of stock that represent the ownership of a givencompany. The exact number of shares that can be issued in the way of capital stock is normally recordedin the current balance sheet for a company. Capital stock will involve all types or classes of stock that thecompany is authorized to issue. The basis for issuing capital stock is normally outlined in the charter of the corporation. Often,the charter will specify not only the number of shares that can be included as part of the issuance, butalso define the class or classes of stock that the corporation will release for issue. It is not unusual for acompany to issue both common stocks along with preferred stock as part of the overall strategy. Thecommon stock may be provided to hourly employees of the company as part of the benefit package,while the preferred stock is open for issue to any outside investor. Generally, capital stock is issued at a nominal value, but may increase in value over time. Thereis also the possibility of additional shares of capital stock coming available as the company expands itsoperations and begins to realize higher profits. When this happens, it is necessary for current investorsto work with board members to amend the charter of the company, making it legal to issue more sharesof stock. At the same time, the company must work within the financial laws currently in place in thecountry of jurisdiction to determine the maximum number of shares that the company can publiclytrade. The charter of the company will also address the total value of stock that can be issued. Thistotal value will of course impact the number of shares of capital stock that the corporation can issueunder current circumstances. Generally, when the charter is amended and the Articles of Associationupdated, existing stockholders are notified and given the opportunity to purchase the newly issuedshares on the open market. Sometimes referred to as a certificate of stock, the stock certificate is adocument that establishes the ownership of a specific number of shares in a stock that is issued by agiven corporation. The stock certificate provides the legal ability to perform several different tasksinvolving the shares of stock. Among these rights and privileges are such essential tasks as trading theshares or participating in shareholder’s meetings. Stock certificates are generally issued in two different types or categories. The first is known asa registered stock certificate. Registered certificates functions essentially as proof of ownership of theshares, with the name of the owner appearing in the corporation’s register of stockholders. Aregistered certificate of stock allows the owner to exercise all rights and privileges associated with beinga shareholder in the company, including voice and vote in shareholder’s meetings. The second form of stock certificates is known as the bearer stock certificate. Essentially, theentity that is in possession of the bearer certificate may exercise any and all privileges that areauthorized by the actual registered owner of the shares. This may include trading the shares on behalf ofthe owner, or voting the shares at corporation stockholder meetings, if the corporation’s charter allowsthis type of activity. From time to time, shareholders may choose to appoint a proxy or substitute to managestock shares. The ability to utilize the services of a proxy is generally defined in the terms of purchase forthe stock certificate and in the bylaws of the corporation that issues the share certificate. In most cases,the proxy has limited powers and will only cast votes according to the wishes of the legal owner of theshares. A proxy may also handle the sale of shares of stock on behalf of the stockholder, always workingwithin perimeters that are set by the proper owner of the shares and in accordance with the terms ofissue that govern the stock.
  16. 16. Aguilar, Ma. Janyne F. Common stock is stock in a company which comes with voting rights and an opportunity toshare in the profits of the company. This type of stock is commonly issued by companies makingofferings of stock and is a popular choice for people interested in buying and selling stocks. Pricesfor common stock vary depending on market pressures. Stock exchanges offer opportunities for peopleto buy, sell, and trade common stock with each other and with brokers. This type of stock should be contrasted with preferred stock, another type of stock which worksslightly differently. Preferred stock offers several advantages over common stock. The first advantage isa fixed dividend, which generates more reliable returns than common stock, although it also means thatthe stockholder can miss out when large profits are made because the dividend will not be adjusted. Inaddition, in the event of a bankruptcy, preferred stockholders are ahead of holders of common stock, asare creditors, lien holders, and so forth. There are some advantages to holding common stock. Voting rights can be important becausethey allow people to vote on members of the board of directors, policy, and stock splits, which givesthem a role in the governance of the company. In addition, the dividends paid out on common stock canbe big when the company is making large profits. Finally, common stock also appreciates in value,allowing people to sell their stock at a higher price than they paid. Conversely, of course, the stock canalso depreciate, leaving people holding stocks which are worth less than they paid. Some issuing of common stock comes with what are known as preemptive rights. If preemptiverights are attached to the stock, in the event that a company issues more stock, holdersof common stock have an opportunity to maintain their proportional share of ownership in the companyby being given first choice when it comes to buying the new stock issue. Also known as ordinary shares, common stocks are bought and sold in very high volume onstock exchanges all over the world. The common stock value can vary in response to many differentfactors and it is not uncommon to see volatility in value around the time that companies pay outdividends and release new products. The art of trading stocks requires a number of different skills whichwill allow people to identify good buys and the right time to sell so that they can maximize their tradingprofits. Preferred stocks are a name given to a special category of stock which has characteristicsdifferentiating it from the general or "common" stock of the same company. This can includeadvantages such as being first in line to get dividend payments or having priority over claims if thecompany goes into liquidation. There are some disadvantages most notably that which preferred stocksdo not usually come with voting rights. The precise characteristics of preferred stocks vary from company to company. The mostcommon is that anyone holding preferred stocks will be higher up in the pecking order if a company isliquidated and its assets divided among creditors. Depending on the rules of the stock, holdersof preferred stocks will either get back the amount they invested or the market value of their stockswhen the company was liquidated. As long as there is enough money left in the company, these holderswill get this amount back as a flat amount. Holders of ordinary stocks will have to wait in line with othercreditors and will usually only get a portion of the money they are "owed." Another characteristic of preferred stocks is that holders normally get paid a fixed dividend. Thisdividend is paid before the dividend payments to holders of ordinary stocks. The payments to ordinarystocks will be determined on a year by year basis and is usually dependent on the companysperformance and cash reserves.
  17. 17. Aguilar, Ma. Janyne F. There is usually no guarantee that holders of preferred stocks will get a dividend payment. Ifthey do, it must be paid at the agreed rate. This payment must be made before any dividend payment toother stockholders. The result of this is that it is impossible for a firm to make a dividend payment toordinary stock holders without making one to preferred stock holders. If a preferred stock is classed as cumulative, then whenever the company opts not to make adividend payment, the amount it would have paid to preferred stock holders is carried over. Forexample, if the company makes no dividend payments whatsoever for two years, then in the third yearit must pay preferred stock holders three years worth of dividends before it is allowed to pay anythingto holders of ordinary stocks. The alternative to this is known as non-cumulative. In this situation, if acompany doesnt pay dividends one year, the holders of the preferred stock will never get any dividendfor that year. Sometimes known simply as preferred stock, redeemable preferred stock is a type of stockoption that carries the possibility of being returned by the investor to the issuing entity after certainprovisions within the terms and conditions of the original sale have been fulfilled. Typically, this meansthat the shares can be redeemed once the unit price of the shares reaches a certain level, or once aspecific date after the sale date has passed. In some cases, there is a need for the holder of theredeemable preferred stock to notify the issuing entity ahead of time of the intent to cash in the sharesin order for the transaction to actually take place. Due to the structure of redeemable preferred stock, many companies that issue this type ofoffering will include some incentives for investors to hold onto those shares for an extended period oftime. One of the more common incentives is the inclusion of a higher rate of interest with the issue, incomparison to other types of preferred stock currently issued by the company. When coupled with anattractive schedule for providing dividend payments to shareholders, there is a very good chance thatinvestors will prefer to hold onto the shares over the long-term, rather than make use of any provisionsto cash in the shares as soon as the basic terms related to the sale of the shares have been met.Cumulative preferred stock is a form of preferred stock that allows the issuer of the stock to withhold oromit the payment of dividends under certain conditions. While the payment date for the dividends maypass, this does not mean the investor loses the dividend altogether. Instead, the dividend payments willaccumulate until such time as the issuer determines circumstances have changed and the dividends maybe distributed to the shareholders. One of the more common reasons for delaying a dividend payment on cumulative preferredstock is poor performance of the corporation that issued the stock. When the earnings generated duringthe period are not up to projections, the company may shortly experience a period where available cashis low. Depending on the terms and conditions connected with the issuance of the stock, the companymay inform shareholders that the dividend payments scheduled for the upcoming quarter will beomitted. Shareholders who own shares of cumulative preferred stock have a couple of advantages overinvestors who hold shares of common stock. When the company begins to issue dividend paymentsagain, every investor holding shares of cumulative preferred stock will receive past and present dividendpayments before any dividend payments are issued to shareholders with common stock. Convertible preferred stock is a type of preferred stock that has the option of being convertedinto common shares issued by the same company. The terms and conditions that apply tothe stock normally set the conditions that must apply before the conversion can take place. Generally,the terms outlined at the time of purchase also define the ratio of conversion from theconvertible preferred stock to shares of common stock.
  18. 18. Aguilar, Ma. Janyne F. Convertible preferred stock is one of the less commonly employed approaches of issuing sharesof stock. Usually there are some underlying factors that preclude the issuing of straight common stock.One scenario that often applies to the issuing of convertible preferred stock is that the company iscurrently considered to be in a high risk situation, and needs to raise capital quickly. Within thisscenario, the company finds that raising money through equity or through the accumulation oftemporary debt will not adequately address the current circumstances. Preferred stock, also known as non-participating preferred stock, is a type of stock that pays theinvestor a specific dividend only. Generally, preferred stockholders do not receive any extra dividendsthat are paid to common stockholders. When a provision is added allowing preferred stockholders toshare in additional dividends, the stock is known as participating preferred stock.Participating preferred stock dividends are usually a fixed percentage of the par value of the stock.Sometimes, an adjustable rate provision exists with a certain stock. In this case, the payout is usuallybased on the movement of benchmarks, such as U.S. Treasury interest rates. Participating preferred stock owners usually do not have any voting rights at stockholdermeetings. Owners of common stock do have voting rights. A provision is sometimes added toallow preferred stockholders to have voting rights for a specific period of time. This usually happenswhen dividends are not paid. Typically, participating preferred stock dividends are paid only when the company is doing welland making a profit. If the company is not doing well, dividends may or may not be owed to theinvestor. Cumulative participating preferred stock can accrue dividends that will be paid to the investoronce the company’s performance improves. In finance, par value is the least amount that a share of stock can be sold for, according to theterms and conditions that are found in the regulations of the issuing company. In most cases,the par value will also be the initial trading price for the stock when it is introduced in the market place.However, the expectation is that the par value for the stock will shortly be exceeded by a higher marketprice. It is important to remember that the establishment of a par value for a stock offering is essentialto the basic structure of any stock. By establishing the minimum amount or price that a stock can betraded, the company makes places a limit on how far the stock can fall before being removed fromactive trading. This helps protect the company from any attempts to devalue the stock below a certainpoint and thus make it possible for raiders to acquire cheap stock and a controlling interest inthe corporation.At the same time, the designation of a par value does not in any way inhibit the upward price thatthe stock can command in an investment market. This is an important point for investors to keep inmind, since the par value is also understood to be the face value as well. This means that the investorwill want to look at three factors when considering a stock purchase. Book value per share is a type of evaluation or measure of the worth of shares of stock issuedby a specific company. The calculation makes it possible to identify the specific monetary amount thatthe investor would receive for each share in the event that the company’s assets had to be liquidatedand all outstanding debts settled. This particular measure normally focuses on the book value ofcommon shares rather than the value of preferred shares. While there is sometimes confusion by what is meant by the market value per share and thebook value per share, it is important to realize that the two figures are very different. The market valueper share has to do with how much the share would sell for at today’s market prices, and is subject toconstant change as the desirability of those shares shifts in the marketplace. In contrast, the book value
  19. 19. Aguilar, Ma. Janyne F.per share is a figure that is carried on the company’s balance sheet, and is affected by the currentoutstanding debts that the company owes. Typically, the book value will be less than the current marketvalue. Monitoring the changes in book value per share from one accounting period to another canprovide insights into the financial condition of the company. When that value increases, which is a signthat the business is managing its debt efficiently and that in the event of a business sale and liquidation,investors would receive a higher amount per share. At the same time, if the book value remainsstagnant or is reduced over successive periods, this may point toward impending financial problems forthe company, especially if the debt load is continuing to increase due to a reduction in income.Investors may also want to consider the book value per share when making decisions about buying,holding, or selling those shares. This is especially true if there are some indications that the issuingcompany is facing an upcoming period of financial difficulty that could result in bankruptcy and eventualliquidation. In this scenario, investors would want to establish some benchmark for that book valueper share, selling off the shares just before that figure is reached. Since many companies includethe book value per share in the financial information released to investors in periodic reports andearnings meetings, tracking the current book value of the shares is a relatively simple task that requiresvery little in the way of time or effort.
  20. 20. Aguilar, Ma. Janyne F. CHAPTER 12 LAND AS COLLATERAL Collateral is borrowing funds often requires the designation of collateral on the part of therecipient of the loan. Collateral is simply assets that have been pledged by the recipient as security onthe value of the loan. In the event that circumstances make it impossible for the recipient to repay theloan, ownership of the collateral is transferred to the entity that issued the loan in order to settle thedebt. Here is some information about the different types of assets that may be used as collateral indifferent situations. One of the most common examples of a collateral loan is with real estate purchases. In manycases, the property that is being purchased with the mortgage is held as collateral for the duration ofthe loan. Essentially, the financial institution that grants the loan retains interest in the property untilthe mortgage is paid in full by the homeowner. The mortgage holder must approve any changes inownership of the property as long as there is an outstanding balance on the loan. Once the debtobligation is discharged, the mortgage holder considers the business arrangement to be concluded andreleases all claims to the property. In like manner, many finance companies will use a newly purchased vehicle as the collateral onthe loan used to purchase the car. This provides the finance company with the right to take possessionof the vehicle if the owner defaults on the loan for any reason. Generally, companies that finance carloans will only finance what is understood to be the current market value of the vehicle. This helps toensure that the collateral held on the property is sufficient to recoup any losses that result from thedefault. Other assets can also be used as collateral on cash loans. For example, jewelry and securitiesthat have a certified value may be held as collateral until the loan is repaid. In some cases, rare antiquesmay be accepted as collateral. Depending on the circumstances, just about any asset that is clearlyowned by an individual may be used as collateral, as long as the entity that makes the loan is willing toaccept the asset as being sufficient to guarantee the loan amount. Providing collateral usually does not mean surrendering possession of the asset that is usedas collateral. However, the borrower is covenanting to retain control of the asset for as long as it takesto repay the loan. This helps to provide the lender with a reasonable amount of confidence that theinvestment made in the borrower will be recouped, either through the systematic repayment of theloan, or by taking possession of the collateral.Function of LandIt provides “standing room”. Inspite of the fact man has learned to fly, and to dive under the surface ofthe water in submersible ships, we are still bound pretty close to the surface of the earth.Modes of acquiring title: Public grant Private grant Involuntary grant Inheritance Reclamation Accretion Prescription
  21. 21. Aguilar, Ma. Janyne F.Zonal valuation Different approaches to valuation of properties have been introduced in this country. In the caseof land, not only it its price dictated by the interplay of supply and demand but moreover by the conceptof zonal valuation instituted by the government. Government agencies like the Office of the Register ofDeeds under the Department of Justice.IMPORTANT FACTORS IN OWNERSHIPPEACE AND ORDER The prevailing peace and order affects the value of the land.Today, a number of areas in the country are infested by the presence of bandits and other lawlesselements like the NPAs for instance. They are known to have been exacting be so-called “revolutionarytax” on business establishment in such areas. Such deplorable conditions inhibit buyers from anyinterest. In buying such land or even in locating their business establishments.
  22. 22. Aguilar, Ma. Janyne F. CHAPTER13 COLLECTION POLICIES AND PROCEDURES Collections are a part of a process in the "accounts receivable" or billing department. It meansthat, at some point in time, a company extended to another company or an individual credit terms forgoods or services, or a cash loan advance of some kind that was to be paid or repaid at a certain time. Ifthat bill is not paid when it is due, or within an agreed upon grace period, the collection process begins. Collection procedures usually consist of a set of in-house company policies that are written in amanual or guidebook of some kind, though smaller companies may not have a manual. Usually, lawfirms that engage in collection practices will have manuals and training classes for their employeesbefore they make their first collection call to a debtor. Most of the time, large corporations and smallcompanies have a collection manager or collection department that will go through certain"housekeeping" procedures before an unpaid debt is turned over to a lawyer.Laws and Regulations The laws that cover collection policies and procedures are mandated by federal and stategovernments. On the federal level, the Federal Trade Commission regulates what is called the Fair DebtCollection Practices Act (FDCPA). In the case of a conflict between state and federal law, federal lawprevails. Those who extend credit to others should be aware of the legal rules about how to collectmoney that is past due, particularly as those rules apply to bankruptcy. Special federal laws are in placefor debtors who file for consumer protection under bankruptcy law. Under the collection procedure, debtors need to receive notices providing information aboutthe debt, any applicable interest and fees, and where to direct payment. If they respond, the companycan enter the next phase, of collecting the debt in full or creating a payment plan. When debtors do notrespond to requests for payment, the company may be able to pursue action in court to collect thefunds. It can also conduct an investigation to locate missing debtors and identify assets that might beeligible for seizure, if it is authorized to engage in seizure activity. Clearly established collection procedures can protect a company from legal liability. If it treats alldebtors equally, it cannot be accused of discriminatory practices. Having set policies in place allowsemployees to follow them carefully and neutrally with all debtors, rather than using their own bestjudgment. The documentation can also be useful in the event of a dispute, as the company can showthat it obeyed the law and followed internal procedures when it handled a matter. Those with questions about collection procedure can ask to see documentation and mayrequest an explanation of any components they have difficulty understanding. Before taking on a debt,it can be advisable to review all terms and conditions, including the collection procedure disclosures.This can provide important information about what people should do when they worry they may not beable to pay.
  23. 23. Aguilar, Ma. Janyne F. A collection policy is a set of business practices and procedures that outline the way a companygoes about collecting money owed to it as a result of an extension of credit. Companies often allow theirbest business customers to establish payment terms that give the customer an extended amount oftime, such as 30, 60 or 90 days, to pay an outstanding invoice. Other companies extend credit toindividual consumers and implement a collection policy to control the process of obtaining payment onthe credit account. Companies build their businesses by developing relationships with their customers. One of theways to build a relationship is to allow customers to take goods when needed but pay for them later.This extension of credit enables business customers to manage their cash flow by giving them time toresell product before having to pay the supplier. Credit extensions allow individual consumers to obtain needed merchandise upfront but pay forpurchase over time. In the case of business-to-business transactions, the extension of credit is carried onthe suppliers book under accounts receivable. Extensions of consumer credit are typically carried on thebooks under a separate consumer credit category that is also a type of receivable. Accounts receivable is a companys list of outstanding extensions of credit to customers. Thecompanys collection policy establishes how the accounts receivable or collections department shouldgo about reminding customers that payments are due and how the department should handledelinquent accounts or accounts that are not paid as agreed. This policy is critical to a companysrelationship with its customers. A relationship can be irreparably damaged by miscommunication aboutamounts owed or aggressive collection tactics, undermining the goodwill that was generated by theinitial extension of credit. Typically, a collection policy is comprised of a set of rules that govern the acceptable actions bypeople assigned to work to collect payments on credit extensions. The policy addresses issues such aswhen and how to contact customers, when to place a hold on an account, how to resolve paymentdisputes and when to send an account to an outside collections agency. Establishing a collection policymakes the process consistent and fair. If an account is delinquent and requires more aggressive tactics,such as suspending a customers buying privileges, the existence of a collection policy ensures that thecustomer is treated in the same way as any other customer under the same circumstances. Bad debt can cover a wide variety of definitions. The most common meaning is money owedwhich is unlikely to be recovered. This form of bad debt may be written off by a company or mayultimately lead to the person with bad debt finding him unable to gain anymore credit.Many companies have a bad debt allowance, as it is unlikely that all bad debts will be recovered.Companies make an estimate of the bad debt that may be incurred within a current time period. Thisestimate is based on past records and used in the process to estimate overall earnings. Major banks have a strange way of looking at bad debt. A bank can make a profit of 10 billion USdollars (USD) while stating that they have 4 billion USD in bad debt. Most of a banks profit is made fromthe interest on loans, credit cards and bank charges from their customers. If a customer falls into debtwith a bank, the interest payments and late charges make the bank money. It seems to be in the banksinterest to have customers who eventually end up with bad debt. If a person falls into debt, it can sometimes be extremely difficult to climb out. Credit cardpayments, mortgage payments and loan repayments can spiral out of control. If they are not dealt with,the results can cause extreme worry, break up families and end in bankruptcy or imprisonment.Regardless of this, banks and other lending establishments continue giving high interest credit cards andloans to people who have seriously bad debt, compounding the problem.
  24. 24. Aguilar, Ma. Janyne F. If you find yourself in debt, there are a number of avenues available in order to find help. Do notunder any circumstances bury your head in the sand and hope the problem will go away. There are debtcounseling and debt consolidation companies that will do their best to help with your problem.You can work towards financial freedom by consulting these companies on ways of reducing yourmonthly payments. Some of these companies charge a fee, but many are run with government approvalor are voluntary. Most communities have their own debt counseling offices, and it is best to approachthem before trying anyone else. Beware of companies that advertise on television or in newspapers. They are there to make aprofit from your bad debt situation and may not be regulated financial advisors. They may end up doingmore harm than good to your credit score. Remember, these firms have to recoup their advertisingcosts somewhere, and it is usually at the expense of the customer. If a company makes promises thatsound too good to be true, they usually are.Types of Bad Debt Buyers Also known as junk debt buyers, bad debt buyers are firms that purchase unpaid debts fromdifferent types of creditors at rates that are below the actual face value of the debts, then attempt tocollect the full amount plus interest and penalties from the debtor. Bad debt buyers sometimesspecialize on securing and collecting specific types of debt, including credit card debt, business debt, orloan debt. Credit card bad debt buyers are one of the more common types of junk debt buyers. Here, thebuyer purchases old credit card accounts with outstanding balances that the originator was unable tocollect. Typically, the buyer offers the originator up to 50% of the face value of the debt, with theamount of the offer depending on the degree of risk associated with eventually collecting the total debtowed. In many cases, the purchase may be as low as 10% of the actual debt if the risk level is consideredsomewhat higher. The originator is then able to close the account and write off a partial loss. Whensuccessful, the buyer is able to collect not only the face amount, but also any penalties or interest thatapply during the repayment period. A similar approach is used when it comes to bad debt buyers who focus on taking overoutstanding business debt. As with the unpaid credit card debt, the originator sells the delinquentaccount to buyer at a price that is less than the actual amount of the debt. The buyer in turn attempts toarrange repayment terms with the debtor, often making a significant profit in the interim. Bad debt buyers sometimes specialize in purchasing outstanding loans that have fallen intodefault for one reason or another. This includes delinquent mortgages that may be currently held byinvestment companies. The debts may be sold in blocks that are sometimes identified as debt pool, witha discounted price negotiated for the collection of bad debts. Once the buyer has control of the debts,the process of debt collection begins, with the expectation that enough of the face value ofthose debts will be recovered to make the effort profitable. It is important to note that bad debt buyers are different from debt collection agencies. Whenan agency is involved, the original owner of the debt still retains control and ultimately receives thefunds recovered by the collection agency, less a percentage that is withheld by the agency for servicesrendered. In contrast, bad debt buyers purchase debt outright, becoming the new owners of that debt.When this is the case, the debtor no longer has the opportunity to work with the originator and mustwork directly with the bad debt buyer to settle the balance of the delinquent account.
  25. 25. Aguilar, Ma. Janyne F. CHAPTER 14 BANKRUPTCY Bankruptcy is the process where a person legally declares himself or his business unable to payoutstanding debts. Depending upon the type filed, one meets with a judge to determine a paymentschedule, or have a legal bankruptcy discharge most if not all debts. Businesses also may declarebankruptcy, which either means the business will close, or that the business will continue to operatewith reduced payments to debtors. Each country has its own designations, but this explanation willfocus on the most common types in the US. The time it takes a person to file for bankruptcy and have his or her debts discharged variesgreatly. It depends on what type the person intends to file, and also how quickly he or she can gathertogether information about his or her income and debts. Bankruptcy is the most common proceeding, and it is usually filed when a person doesn’t have alarge number of assets that he or she needs to protect. Generally, the person uses a lawyer whospecializes in bankruptcy to help file all the papers required. The part that typically requires the mostamount of time when someone is preparing to file bankruptcy is gathering all the required informationfor the form. If a person owes money to numerous creditors, and these creditors have sold theiraccounts to collection agencies, it may be challenging to figure out who exactly is owed money.Usually, a person must also provide statements about income, any assets, and tax reports as part of abankruptcy filing. If a person has not kept meticulous records of income or debt, it can be challenging tofind out all this information. A lawyer may do some of the legwork by tracking down parties who havepurchased the debt. All this information needs to be gathered prior to filing, when possible, sothe bankruptcy is declared without complications. Usually, once the bankruptcy papers are officially filed, it takes a month or two, for a court dateto be set. At that time, providing that all papers are in order, the court will declare the person bankrupt.This is the end of most debts, but some, like student loans, court feeds, and recent taxes owed, are notdischarged. At minimum, the process takes about a month, and often takes longer. Once a person hiresa lawyer, however, any calls from creditors can be referred to the legal professional, which may endharassment by creditors. Bankruptcy is meant to protect a person with a significant number of assetsthat go beyond normal living requirements. Instead of discharging debts, Chapter 13 works withcreditors to reduce debts and come up with reasonable payments. Payment schedules can beconstructed on a 3 to 5 year basis, which means that a person can expect to make payments monthly forthis length of time. In this sense, though bankruptcy has been declared, the actual process last forseveral years.Financial distress As it relates to businesses, financial distress is an economic situation where a corporation isundergoing increasing difficulty in honoring its debt obligations in a timely manner. If left unchecked,the distress can eventually reach a point at which the business is unable to meet those obligations. Atthat point, the company is likely to take several different measures to relieve the stress, including sellingoff assets or possibly declaring bankruptcy. There are a number of reasons why a business may experience financial distress. In some cases,the problem is poor management of assets, leading to situations where the revenue generated by thebusiness is diverted into projects that ultimately do not generate any type of return. At other times, themanagement may be due to overestimating projected income and functioning with an operating budgetthat is not realistic. With these types of causes for financial distress, reworking the budget and
  26. 26. Aguilar, Ma. Janyne F.eliminating waste will often help the company move out of the crisis and be able to pay bills on timewithout a great deal of hardship. Financial distress may also occur due to unforeseen factors that have an adverse effect on thedifferent revenue streams that the corporation enjoys. For example, an unfavorable outcome in apolitical election or the occurrence of a natural disaster may undermine the value of securities held bythe business. This effectively reduces the revenue stream that the corporation may have depended onto cover its expenses. When situations of this type arise, trimming expenses as much as possible willoften ease the financial distress and allow the company to avoid bankruptcy, or even the need to selloff distressed securities that are likely to increase in value in a reasonable amount of time.In some situations, the financial distress may be so great that the business must either liquidate orundergo bankruptcy as a way of relieving the stress. The bankruptcy action may be necessary to protectthe business from creditors while the company is reorganized under the direction of the courts, allowingthe corporation to at least have a chance of getting back on a firm financial foundation. Liquidation maybe partial or complete, depending on the amount of debt involved. With a partial liquidation, thebusiness sells off assets, including divisions of the business that are not needed for the continuedoperation of the core businesses. A complete liquidation means the selling of all assets and the eventualdismantling of the company as a business entity. Insolvency is the inability of a person to meet his obligations as they mature (Equity sense). Itrefers to the excess of liabilities, in the case of corporation, excluding capital stock over assets.(Bankruptcy sense)Two types of InsolvencyVoluntary InsolvencyUnder voluntary insolvency, an insolvent debtor, owing debts exceeding in amount the sum of P1,000.00 may apply to be discharged from his debts and liabilities by filing a petition with the Court ofFirst Instance of the province or city which is the domicile of the petitioner for six months preceding thepetition.In his petition, he shall set forth his place of residence, therein immediately prior to filing said petition,his inability to pay all his debts in full, his willingness to surrender all his property, estate, and effects notexempt from execution for the benefit of his creditors., and an application to be adjudged insolvent. Heshall moreover annex to his petition a schedule and inventory in the form as prescribed under theDeclaration of Insolvency Upon receipt of such petition, together with the schedule and inventory, the court or the judgethereof in vacation, shall make an order declaring the petitioner insolvent. The said order shall furtherforbid the payment to the debtor of any debts due to him and the delivery to the debtor or to anyperson for him, of any property belonging to him, and the transfer of any property by him, and shallfurther appoint a time and place for a meeting of the creditors to choose an assignee of the estate.
  27. 27. Aguilar, Ma. Janyne F. Said order shall designate a newspaper of general circulation published in the province or city inwhich the petition is filed, if there be one, and if there be none, in a newspaper which, in the opinion ofthe judge, will best give notice to the creditors.Involuntary Insolvency In the case of involuntary insolvency, an adjudication of insolvency may be made on the petitionof three or more creditors, residents of the Philippines, whose credits or demands accrued in thePhilippines, and the amount of which credits or demands are in the aggregate of not less than onethousand pesos. Provided, that none of the said creditors has become a creditor by assignment,however made, within 30 days prior to the filing of said petition. Petition. The petition must be filed in the Court of First Instance of the province or city in whichthe debtor resides or has his principal place of business, and must be verified by at least three of thepetitioners. The following shall be considered acts of insolvency, and the petition for insolvency shall setforth one or more of such acts: 1. That such person is about to depart or has departed from the Philippines, with intend to defraud his creditors; 2. That being absent from the Philippines, with intend to defraud his creditors, he remains absent; 3. That he conceals himself to avoid the service if legal process for the purpose of hindering or delaying or defrauding his creditors; 4. That he conceals, or removing, any of his property to avoid its being attached or taken in legal process; 5. That he has suffered his property to remain under attachment or legal process for 3 days for the purpose of hindering or delaying or defrauding his creditors; 6. That he has confessed or offered to allow judgment in favor of any creditor or claimant for the purpose of hindering or delaying or defrauding his creditors or claimant; 7. That he is willfully suffered judgment to be taken against him by default purpose of hindering or delaying or defrauding his creditors or claimant; 8. That he has suffered or procured his property to be taken on legal process with the intent to give a preference to one or more of his creditors and thereby hinder, delay or defraud any of his creditor; 9. That he has made any assignment, gift, sale, conveyance, or transfer of his estate, property, rights, or credits for purpose of hindering or delaying or defrauding his creditors or claimant; 10. That he has, in contemplation of insolvency, made any payment, gift, grant, sale, conveyance, or transfer of his estate, property, rights, or credits; 11. That being a merchant or tradesman has generally defaulted in the payment of his current obligations for period of 30 days;
  28. 28. Aguilar, Ma. Janyne F. 12. That for a period of 30 says he has failed after demand, to pay any money deposited with him or received by him in a fiduciary capacity; and 13. That an execution having been issued against him on final judgment for money, he shall have been found to be without sufficient property to execution to satisfy the judgment. The petitioners may, from time to time, by leave of court, ament and correct the petition, sothat same shall conform to the facts, such amendment or amendments un the on the original petition. The said petition shall be accompanied by a bond, approved by the court, with at least 2sureties, in such penal sum as the court shall direct, conditioned that if the petition in insolvency bedismissed by the court, or withdrawn by the petitioners, of if the debtor shall not be declared aninsolvent, the petitioners will pay to the debtor alleged in the petition to be insolvent all costs,expenses, and damages occasioned by the proceedings in insolvency, together with a reasonablecounsel fee to be fixed by the court. The court may, upon motion, direct the filing of an additional bond,with different sureties when deemed necessary. Creditors Petition. Upon the filing of such creditors’ petition, the court or judge shall issue anorder requiring such debtor to show cause, at a time and place to be fixes by said court or judge, why heshould not be adjudged an insolvent debtor. At the same time or thereafter, upon good cause showntherefore, said court or judge may make an order for bidding the payment if any debts, and delivery ofany other persons for his use or benefit or the transfer of any property by him. A copy of said petition, with a copy of order to show cause, shall be served in the debtor, in thesame manner as is provided by law of device of summons in civil actions, but such service shall be madeat least 5 days before the time fixed for hearing. However, if for any reason, the service is not made, theorder may be renewed, and the time and place of hearing changed by supplemental order of the court,whenever the debtor on whom the service is to be made resides out of the Philippines or cannot, afterdue diligence, be found within the Philippines or conceals himself to avoid the service of the order toshow cause, or any other process or order in the matter, or is a foreign corporation having no managingor business agent, cashier, or secretary within the Philippines upon whom service can be made, andsuch facts are shown to the court or a judge thereof, by affidavit, such court or judge thereof shall makean order that the service of such order, or other process, be made by publication, in the same manner,and with same effect, as service of summons by publication in ordinary civil actions. The debtor must answer the petition at the time fixed for the hearing, or may demur for thesame caused as are provided for the demurrer in other cases by the Code if Civil Procedure. If thedemurs and the demurrer* be overruled. The debtor shall immediately answer the petition. Suchanswer shall contain a specific denial of the material allegations of the petition controverted by him, andshall be sworn to; and the issues raised thereon shall issues are found in the favor of the respondent,the proceedings shall be dismissed, and the respondents shall be allowed all costs, counsel fees, anddamages sustained by reason of proceedings therein.
  29. 29. Aguilar, Ma. Janyne F. Presence of Creditors Only creditors included in the schedule filed by the debtor shall be cited to appear and take partin the meeting called for by the court of competent jurisdiction. Creditors may be represented at the meeting by one or more lawyers or by any person dullyauthorized by the power of attorney, which documents shall be presented and attached to the record. Persons appearing for more than one creditor shall have only one personal vote, but the claimspresented by them shall be taken into consideration for the purpose of arriving at the majority of theamount represented. The presence of the creditors representing at least 3/5 of the liabilities shall be necessary forholding a meeting. The meeting shall be held on the day and at the hour and place designated. Thejudge or commissioner deputized by him when he is absent from the province where the meeting isheld, acting as president and the clerk as secretary thereof, shall be subject to the following rules. a. The clerk shall prepare for the insertion in the minutes of the meeting a statement of the person present and their claims; the judge, or, in default thereof, the commissioner, shall examine the written evidences of the claims and the power of attorneys, if any. If the persons present who have complied with the foregoing ruled represent at least 3/5 of the liabilities, the judge or commissioner shall declare the meeting open for business. b. The petition of the debtor, the schedule of debts and of property, the statement of assets and liabilities and the proposed agreement filed therewith shall be read forthwith by the clerk, and the discussion shall be opened. c. The debtor may modify his propositions in the view of the result of the debate, or insists upon the once already made, and the judge or commissioner, without further discussions, shall clearly and succinctly place these several propositions before the meeting for a vote thereupon. d. The vote shall be taken by a call of names and shall be inserted in the minutes; a majority vote shall rule. e. To form a majority, it is necessary: 1. That 2/3 of the creditors voting unites upon the same proposition. 2. That the claims represented by majority vote amount or at least 3/5 of the total liabilities of the debtor mention the petition. f. After the result of the voting has been announced, all protest made against the majority vote shall be admitted and stated on the record, and meeting shall be closed. g. The minutes of the meeting, containing succinct statement of all proceeding has therein, shall be drawn up, and there shall be inserted therein the proposition or proposition voted upon, which after having been read and approved, shall be signed by the judge or commissioner together will all persons taking part in the voting; if any such persons present shall sign, at their requests, and the clerk shall certify to all of the above.