The essential skills of a credit professional include the efficient management of aged receivables. Information about customers who are not timely paying their bills is critical for decisions regarding the account. Prompt action in response to information received can greatly improve recovery from account debtors in financial distress. CMA’s Adjustment Bureau provides valuable assistance to the credit professional to maximize recovery on troubled accounts.
Reliable information about the financial condition of a distressed account can sometimes elude the most diligent credit professional. Calls to the debtor frequently are not returned, senior managers are not available, data is unreliable and changing daily. CMA member services such as credit reporting andindustry trade groups provide valuable third-party information about other vendors’ experience with the debtor. However, direct communication with the debtor is clearly the most effective way to evaluate collection options and to make informed decisions. Formation of a committee composed of creditors of the debtor and meetings between a committee and the debtor’s representatives will usually re-open dialog. The debtor’s management, in turn, finds that discussions with a representative group of creditors provides some relief from individual information demands from multiple creditors.
CMA’s Adjustment Bureau can assist with the formation of an informal creditors’ committee. At the request of one or more creditors, we can identify and communicate with other creditors of the debtor who have reported the account as delinquent. When creditors are willing to participate on a committee, we contact the debtor to request a meeting between the committee and the debtor to discuss solutions to the debtor’s situation. At such meeting, CMA acts to facilitate communication between the parties to develop a plan for resolving the delinquent accounts.
Frequently, a debtor will seek CMA’s assistance with formation of a creditors’ committee in an attempt to negotiate an out-of-court reorganization. The debtor provides CMA with addresses for its open accounts payable; CMA sends creditors an invitation to a meeting with the debtor. At the meeting the debtor provides financial information on its current status and requests creditors present to form a committee to monitor operations and/or to negotiate a plan for payment of creditor claims. CMA facilitates the exchange between creditors and the debtor and regularly communicates with all creditors of the debtor about the process.
Once formed, the creditors’ committee acts in the interest of all creditors of the debtor. Committees often recommend that all creditors observe for a limited period of time a moratorium on activities to collect from the debtor until the committee can assess the debtor’s viability and negotiate a repayment plan. In exchange for the moratorium, the committee can make demands on a debtor for regular financial reports and other actions which it deems to be in the best interest of all creditors generally. In addition, the committee can require the debtor to grant creditors a blanket security interest in its assets. The security interest usually is held by CMA, in trust for all creditors of the debtor. The existence of a creditor lien on all a debtor’s assets discourages individual creditors from attempting to “get ahead” of other creditors by way of attachment or asset seizure.
During the negotiating process and pending creditor acceptance of a repayment plan, the debtor operates its business, usually paying vendors C.O.D. for goods and services.
If the committee determines that the debtor is not viable or the debtor fails to cooperate, the committee can elect to disband and advise general creditors through CMA of its action. Creditors then individually proceed with their collection remedies. If the debtor elects to file a proceeding for reorganization under the bankruptcy code, the informal committee is frequently selected to serve as the official creditors’ committee.
When a debtor’s business cannot survive and must be liquidated, CMA frequently accepts from the debtor a general assignment for the benefit of creditors. As assignee, CMA liquidates all the debtor’s assets and distributes the proceeds pro rata to creditors, according to a priority scheme similar to that followed in bankruptcy proceedings.
For more than seventy-five years CMA has been involved with formation of creditors’ committees, out-of-court reorganizations and the non-judicial liquidation of an insolvent debtor’s assets. Experience shows that, as an alternative to formal bankruptcy proceedings, most companies can reorganize debt or be liquidated more quickly, more efficiently, and distributions to creditors occur sooner through proceedings administered by CMA.
Informal negotiations with creditors for reorganization of debt are significantly less expensive than formal proceeding through Chapter 11 bankruptcy. Legal expenses are minimized, and management of the debtor is less distracted by the financial reporting requirements of a Chapter 11 debtor-in-possession. An informal proceeding offers greater flexibility for reaching a consensual repayment plan.