Magazine article Business Credit

You Have Decided to Sell Your Bankruptcy Creditor Claim.Now What?

Magazine article Business Credit

You Have Decided to Sell Your Bankruptcy Creditor Claim.Now What?

Article excerpt

In the last issue of Business Credit, we discussed the challenges a credit professional faces when assessing his/her bankruptcy claim, as well as some considerations creditors should take into account during their evaluation process. In this article, we will discuss the fundamental steps credit executives should take when identifying a liquidity service provider, how to compare the firms and offers, as well as some tips for ensuring that your transaction is handled in an efficient and timely manner.

Do Your Due Diligence

At this point, you've weighed all of your options to determine the most appropriate course of action for your company, and decided that the best option is to sell your claim. Depending upon the bankruptcy case in which you're involved, you may have several offers, or no offers at all. Regardless of the number of eager buyers, you should conduct thorough due diligence on the buying firm that you are considering working with.

Unfortunately, the trade claims arena has seen many firms come and go over the years, leaving some credit professionals in grim situations, with a negative perception of all liquidity service providers. A number of small and novice operations have set up shop, mailed out hundreds of offer letters, only to find their capital sources rapidly depleted, and therefore unable to finalize the transaction. Troubling stories like this damage the reputation of all liquidity service providers in the industry. Fortunately, these types of situations can generally be prevented by taking a few precautionary due diligence steps on the potential buying firm.

Step 1: How long has the buying firm been in business? How many transactions has it completed? A liquidity service provider's depth and breadth of experience in this industry is probably the most telling piece of information for predicting the success of your transaction. Focus on liquidity service providers that have been in the business for some time, that have an excellent reputation, and that have successfully completed a large number of transactions. Understanding the firm's track record provides comfort that the firm has navigated the intricacies of the claims buying process, minimizing the possibility that you will end up as a "guinea pig". The credit professional should research the potential buying firm by (a) reviewing its website and sales material, (b) conducting a personal interview of the firm, and (c) speaking with colleagues or references to learn about their experiences when working with the firm.

Step 2: Is the buying firm well capitalized, and are you confident that it will be able to fund the purchase of your claim? Claims buyers are acquiring your claim for investment purposes. Their ability to diversify-away much of the risk (by investing in numerous claims in a wide variety of different bankruptcy cases) allows them to purchase claims that you may be hesitant to hold or manage through the duration of the bankruptcy process. Ask how the buying firm is backing the transaction, especially if your claim is of a sizeable amount. When questioned, credible liquidity service providers will not have any problem telling you where the funds originate.

Step 3: Does the firm have affiliations with associations and professional industry groups? The more well-regarded and specialized liquidity service providers often align themselves and work cooperatively with various industry groups. Some of the more established and respected organizations in the industry include the National Association of Credit Management (NACM), the Turnaround Management Association and the American Bankruptcy Institute. In addition, the liquidity service provider should be a member of the Better Business Bureau ("BBB"). A BBB member has met certain membership requirements, pledged to abide by a code of ethics and to uphold high standards of commercial practices-a declaration that you should find comfort in. In addition, you can inquire about a firm's complaint history with the BBB, regardless of its membership affiliation. …

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