By Sass, Steven D.
Business Credit , Vol. 100, No. 4
Every company that issues credit has its credit failures. Regardless of the amount of research information that you collect, analyses that you perform and monitoring that you build into the system, there will still be occasional customers that can't or won't pay their bills. At times the reason is quite clear - insolvency or, in an increasing number of cases, bankruptcy. There is nothing more chilling to the credit and finance professionals than to receive word or, worse, a document from the U.S. Bankruptcy Court announcing the commencement of a bankruptcy case for a previously "good" customer.
The business and popular press have been full of stories chronicling the increasing number of bankruptcies and citing this as evidence of the problems within the bankruptcy system. The casual observer may fail to notice that the vast majority of these articles and complaints deal with segments of bankruptcy that have been increasing, the consumer bankruptcy. While it is true that for the first time during 1996, consumer bankruptcy filings passed the one million mark in a single year, and, while the losses in the consumer bankruptcy arena continue to mount, companies that sell to other companies face a very different and, some would argue, much better picture than that in the consumer arena.
Commercial business failures have increased dramatically in the past two decades, peaking at approximately 90,000 in 1992 and subsiding since then to remain constant at approximately 71,000 for the period from 1994-1996.
However, the focus of consideration for most non-consumer oriented companies is commercial bankruptcy, usually referred to as "Chapter 7" and "Chapter 11" for the relevant sections of the U.S. Bankruptcy Code dealing with bankruptcy liquidation and reorganization.
With the competitive pressures in most industries, and the end of the "right-sizing" movement, companies continue to look for new ways to drive more profit to the bottom line by saving on costs or increasing sales. Because historically most companies view the bankruptcy of one of their customers as the "end of the line," they tend to simply write off the outstanding balance and, surprisingly, some don't even take the minimal step of filing a proof of claim in the bankruptcy court. They are involuntarily taken in by the gloomy overall statistics that show that in many industries commercial bankruptcies don't usually result in a dividend. They fail to realize that there are financial reasons, beyond recovery, to deal with bankruptcy, as well as reasons of corporate protection. One of the reasons was recently highlighted by "the Sears situation," and has raised the consciousness of the corporate finance and credit managers with regard to the bankruptcy process overall, and the company's responsibilities and exposures with regard to the necessity of bankruptcy recovery.
The Sears Situation
After being ordered by a U.S. Bankruptcy Court judge in Massachusetts to stop using improper bankruptcy collection processes, Sears, Roebuck & Co. indicated that they would pay refunds to all bankrupt debtors who were wrongly treated and, in addition, provide them with a gift certificate (in Massachusetts alone, this was estimated to be 2,700 customers). The Federal Trade Commission subsequently agreed to a settlement whereby Sears, Roebuck & Co. will pay at least $100 million to customers whose bankruptcies were improperly handled by Sears.
While it is likely that the consumer environment of the Sears situation would never be duplicated in a commercial setting, the fact that the courts and corporate management are now sensitized to the bankruptcy environment exposure has begun to give rise to the question: "What are we doing with bankruptcies, and is that all we are required to do to handle them?"
What Should We Be Doing?
The good news is that there are no "secrets" in knowing how to handle bankruptcies. All of the requirements are outlined in the U. …