Business Credit Journal Using Repayment Agree- June 2007 · 2007-06-11 · Business Credit Journal...

Business Credi t JournalJune2007

7931 NE Halsey, Suite 200, Portland, Oregon 97213Phone 503.257.0247 Fax 503.257.0247 www.nacmoregon.org

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In This IssueCoverUsing RepaymentAgreements in Out-of-Court Workouts—Part I

p. 2Chair's Message

p. 2President’s Message

p. 3Upcoming Events

p. 4International Corner

p. 5Meet the new Collec-tions Manager

p. 6Credentia

p. 7Education

p. 8Scholarship Funds

p. 9Credit Manager's Index

p. 10CFDD Chapters

p. 13Contacts

Using Repayment Agree-ments In Out-of-CourtWorkouts—Part 1by Scott Blakeley

Get Your Repayment Agreement Prepared As The BankruptcyReform Act Will Result In More Out-of-court Workouts

Your long-term customer (a retailer) has a sizeable balance past due on their account,and is heading into their slow season. Discussions with other vendors selling the customeron credit reveal similar payment delinquencies. Your experience is that too often when acustomer is being chased for payment by vendors, especially the customer’s lender, aChapter 11 may be imminent.With a Chapter 11 filing, the customer may obtain the protections of the automatic stay toenjoin creditors from further collection efforts. However, as a result of a number ofcreditor friendly provisions in the Bankruptcy Reform Act of 2005, debtors arereconsidering their financial restructuring alternatives to Chapter 11.

Because of the special treatment that certain creditor classes now receive under the ReformAct, as well as the pressure the debtor faces to exit Chapter 11 much faster, vendors mayfind more customers approaching them with repayment proposals on their delinquentaccounts as part of a comprehensive out-of-court strategy of dealing with its creditors.

A debtor’s hope for deferral of immediate payments owing to vendors may allow thedebtor breathing room to stay out of Chapter 11, while it continues to address its financialdifficulties. What provisions of the Bankruptcy Reform Act are forcing debtors toconsider out-of-court restructuring alternatives? What kind of out-of-court workouts arethere? What are common terms contained in a repayment agreement?

A.The Bankruptcy Reform Act and the New Playing Field for theCustomerOn April 20, 2005, the U.S. Bankruptcy Code was finally overhauled, withthe passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of2005 (“Reform Act”). Most provisions of the Reform Act became effective withbankruptcy cases filed after October 17, 2005. The changes to the bankruptcy lawswere intended, in large part, to make it more restrictive and burdensome forconsumers to escape their debts. The Reform Act also made a number of significantchanges to provisions affecting the commercial creditor. Indeed, much of the ReformAct’s changes to the provisions affecting commercial creditors reflect special interestlegislation. The overall impact of these special interest changes may make it moredifficult for the Chapter 11 debtors to survive their reorganization, thereby forcingthem to consider alternative out-of-court financial restructuring to Chapter 11.

B.Debtor’s Cash Availability Restricted Under the Reform Act As A Result OfProvisions Favoring Special Creditor InterestsSome of the provisions under the Reform Act that may force debtors to consideralternative out-of-court financial restructuring to Chapter 11, include:

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Messages

Chairman of the Board Pat Jones

Congratulations to all your 2007graduates and to my daughter, Meaghan,who graduated from high school this pastweekend. The ceremony andaccomplishments of the graduatesreminded me of the value and necessity of

a good education. Education opens doors and createsopportunities for students. NACM Oregon’sprofessional education program can do the same foryou. We have 16 different classes scheduled for therest of the year including a “Credit Management BootCamp” in Eugene on June 20, 2007. Don’t be late forthat one! Check out the website atwww.nacmoregon.org for a complete list of theavailable classes. You are sure to find one or morethat will be valuable for you.

President Rod Wheeland, CCE, CAE

As you may know, NACM Oregon hasexpanded its credit report offerings. Lastyear, we established a relationship withOneCreditSource, a provider ofconsumer credit reports. Many membersuse this service to verify creditworthiness of guaranties.Earlier this year we added Equifax Business reports toour mix and began working on an NACM Oregonnational credit report. With the latter, we will providebroad coverage and timely credit information at a verycompetitive price.

The value of the Experian, Equifax, and NACMOregon databases relates directly to the number ofcontributors providing information. If you currentlyprovide your company’s credit experience, thank you. Ifnot, please let us tell you more and help us develop astronger resource. Please contact Shannon Abnal,[email protected].

I hope you are planning to participate in the NACMOregon golf tournament at Persimmon Golf Club onAugust 20. This is an excellent private country clubcourse, and I know the teams will have a great day!Please plan to join us. Contact Claudia Sarinana,[email protected] to register.

We always appreciate your comments andconstructive criticism. These help us do a better job ofbeing your trade association and the best businesscredit resource. Please let me hear from you.



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Upcoming Events

2007 Golf TournamentAugust 20, 2007

Persimmon Country ClubGresham, Oregon

Don't miss this opportunity to enjoy fun in the sunwhile networking with other credit professionals. AllNACM Oregon members and guests are invited. Alllevels of golfers are welcome. The tournament is ascramble format with a shotgun start at 7 a.m. Contestsinclude long drive, KP, hole-in-one, and puttingcontests. To register, contact Claudia Sarinana at971.230.1184 or email [email protected], no refunds after August 1. Replacement playerpermitted.

Annual NACM WesternRegion Credit Conference

October 17-19, 2007,Monte Carlo Resort & Casino

Las Vegas, Nevada

This conference is designed for anyone who performsthe business credit function at your company. Oureducational tracks support entry-level to executiveexperience, from the credit analyst to the CFO. ContactJodi Owens at [email protected] for moreinformation.

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International Corner

Many of us dobusiness inCanada. In mostcases, it is verysimilar to doingbusiness in theU.S. However, itis important to remember that Canada isa separate country with its own laws andregulations. When things go wrong, youneed to work within their system.

Here is a brief overview of Canadianinsolvency and bankruptcy law:

There are two levels of government inCanada, federal and provincial. Federallaw governs bankruptcy and insolvency.Provincial law governs property and civilrights. Each province in Canada can havedifferent laws dealing with securityinterests in real and personal property.As in the U.S., if the two differ, Federallaw will generally prevail.

Canada has two Federal Statutes thatdeal with bankruptcy, insolvency andrestructuring. The first is The Bankruptcyand Insolvency Act (BIA). This Act isvery technical with little flexibility. Itdeals with procedural and other majorissues. It allows the debtor to makeproposals for compromise with creditorsand allows time to restructure thebusiness.

BIA part III deals with restructuring. Aproposal can be initiated by the debtor,the trustee, a liquidator, or a receiver.The Notice of Intention (NOI) to file aproposal or the proposal itself mustcontain the intention to make a proposal,the name and address of a trustee whohas agreed to serve and the names of allcreditors with a claim of at least $250. Aprojected cashflow statement must befiled within 10 days. If the cashflow

statement is not filed within 10 days, thecase is automatically assigned tobankruptcy. The NOI or filing of theproposal starts an automatic stay ofproceedings against the debtor for amaximum of six months. This stay does notnormally apply to secured creditors.

Just as in the U.S., the preferenceperiod for an arms length transaction isthree months and for a related party 12months. Preferences can be defendedunder certain conditions. Paperwork isalways important. Review your contracts tosee if they contain provisions for volumediscounts or rebates. There have beencases when the trustee has demanded thediscount or rebate as an asset of the estateeven though payment was not made for thegoods.

The second Federal Statute is TheCompanies’ Creditors Arrangement Act(CCAA). Under this Act, a judge has greatauthority and flexibility. This is the mostpopular and is often used for restructuring.It is an expensive process and is limited tocases with claims over $5,000,000.

The CCAA is similar to our Chapter 11.The court has great flexibility and minimalprocedural constraints. The debtor startsthe process by applying to the court andproviding a cashflow statement andfinancial statements prepared within oneyear. The court can issue a stay, usuallyfor 30 days, with indefinite extensions. TheCCAA calls for different classes ofcreditors and a formula for creditorapproval by class.

When a plan has been accepted by thevarious classes and approved by the court,the provisions are binding on all creditors.

There are a variety of provincial lawsincluding:

1.The Rules of Civil Procedure,which covers garnishment orders,writs of possession, and writs ofseizure and sale of property;

2.Personal Property Security Actwhich covers the creation andperfection of security interests andrights upon default;

3.Mortgages Act, which covers theenforcing of security on realproperty; and the

4.Execution Act, which covers rulesfor seizure and sale of land,money, securities and shares.

These Acts can vary by province, soyou need to check with legal counselwithin that province for the details.

Bankruptcies are time-consuming andcostly, whether in the U.S. or Canada.Sometimes they are inevitable, buthopefully, not too frequent.

Alice Knight is VicePresident of Finance &Administration forPaper ProductsMarketing (USA) Inc.,Ms. Knight has morethan 35 years of

experience in International Finance and isan active member of FCIB and NACM.She has served as Co-Chair, PanelMember and Presenter at Annual GlobalConferences, as President of FCIB ForestProducts Group, and participated in FCIBConferences in Mexico, Puerto Rico,Munich, and Brussels. She is currently amember of FCIB Board of Directors andthe FCIB Hotline Committee.



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NACM Oregon WelcomesNew Staff Member

Brenda Terreault is the newlyappointed Collection Services Managerfor NACM Oregon. Brenda graduatedfrom the University of Maine with adegree in broadcast journalism, andreceived her law degree from RutgersUniversity School of Law in Camden,

New Jersey. Upon graduation from law school, sheclerked for Justices Harry C. Martin and I. BeverlyLake, Jr. of the North Carolina Supreme Court.

Brenda is a member of both the Oregon and VirginiaState Bar Associations and has more than 15 years’experience as an attorney, bankruptcy specialist,investigator and operations manager in governmental,corporate and law firm settings.

Immediately prior to joining NACM Oregon, sheworked with a bankruptcy trustee and Federal equityreceiver on complex cases, several of which involvedFederal regulatory agency actions.

Credit Today's 2007Salary & Job SatisfactionSurvey Is Now Open!It’s time for Credit Today’s 2007 Salary & JobSatisfaction Survey. Your participation is veryimportant to help ensure a robust sample size toenable us to “drill down” in the data to havemeaningful data in various segments.

As a special thanks for your participation, allCredit Today members will receive a free copy ofthe entire $175 report. Non-members will receive afree copy of the Executive Summary. Make sure youuse the signup page following the survey to let usknow you participated!

The survey should take about 10 minutes,depending upon whether or not you’ve got yoursalary data handy. The survey has a total of 50questions, broken down into 6 “bite-sized” sections.You’ll see a progress bar at the bottom of each pageso you can see how far you’ve gone.

Keep in mind that your answers are saved as soonas you move on to the next page. If you close yourbrowser in the middle of a page, or refresh yourscreen, you will lose only that page. Also, the surveyis anonymous.

For your information, there are 6 parts to thesurvey:♦ Tell us about you and your company♦ Credit staff positions♦ Description of your job♦ Your department♦ Your job satisfaction

Go to http://credittoday.surveys.sgizmo.com/ tocomplete the questionnaire.



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“Credentia has always been a great source ofencouragement and support, helping me keep a positiveattitude while job searching in a difficult employmentenvironment. Credentia has given the best support andassistance of any employment agency that I’ve workedwith!

While employed in one of the two positions thatCredentia found for me, I was able to use their temporarystaffing resources and again received very positive andbeneficial results. Credentia always makes sure the bestcandidates for the position are available. I commendCredentia for doing an excellent job of providingassistance and support for all of my employment needs!”

Karen Carey, Credit Analyst, NW Pipe

So, instead of planning how your office is going to keepafloat, plan your own sea cruise and sail into summerknowing Credentia and their team of experts are only aphone call away!

Website Updates from Credentia!We have recently updated our website! Credentia wants tooffer as many tools as it can to make everyone’s job andemployee search a bit easier and a lot more successful!These new enhancements include:

Job Opportunities!—We’ve included a page in the JobSeekers section that highlights some of current jobopportunities. We will update this page regularly as thesepositions change.A Link to the Credentia Newsletter!—Credentia rolled outits first newsletter last winter and will continue to publish the

newsletter quarterly. These newsletters includearticles such as: interview tips, how to writeresumes, career wardrobe do’s and don’ts, andother bits of information to help take theguesswork out of looking for a new job.Downloadable forms!—Active employees canaccess forms online for download. These formsincluded current W4 forms, timesheets andpayday schedules.

We also have an entire section devoted toemployers that includes updated testimonials, alist of the services we offer, etc! We willcontinue to make enhancements to our website

as needed and always welcome suggestions!Please visit us today at www.credentiastaffing.com

Breeze Into SummerCredentia Staffing Resources is here to help!

Your employees have earnedtheir vacation...and so have you! Why notrelax, dig your toes in the sand,

and let Credentia Staffing Resources help you with your staffingneeds this summer!

From covering your assistant’s dream vacation to the Bahamas,to re-staffing crucial positions due to summer relocations,Credentia will give you a sense of relief by providing first-ratestaff to fill in where you need it most! Credentia’s team of highlyskilled employees can feel like a warm, tropical breeze giving youthe assurance that your office is running smoothly, even during theseason’s hiatuses.

Staffing assistance is offered in the following professional fields:CreditCollectionsAccountingBanking & LendingAdministrative SupportGeneral Office

We also offer pre-employment screening services including:Drug screeningEmployment verificationsSSI verificationsCriminal background checksCredit background checksEducational and certification verifications

Here’s what some of our clients have to say about CredentiaStaffing Resources:

“I have been associated with Credentia Staffing Resources,for nearly nine years. As a manager, I know I canrely on them for excellent, temporary assistance,because all candidates are carefully screened andskill-tested. Moreover, when a prior employerdownsized and I was in need of employment, Ifound Credentia to be compassionate and reliablein assisting me to get back on my feet. In these tighteconomic times, when companies are receivingmany resumes for one job opening, it is a hugecomfort to know that Credentia has a roster of topprofessional candidates.”

Cheryl Charlesworth,Former Corporate Credit Manager, Electrical Distributing, Inc.

“Credentia has given the

best support and

assistance of any

employment agency that

I've worked with.”



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Good Morning Credit!

The Good Morning Credit! series is an excellent way to learnfundamental credit and collection management techniques, totrain new staff, or to have a good review. The program startsat 7:30 a.m., so you or your staff can head back to theoffice by 9. Join us for these informative sessions packedwith practical tools for immediate use.

Second Tuesday of each month (except August), 7:30 - 9a.m.NACM Oregon, 7931 NE Halsey, Suite 201, Portland

$35 (M); $45 (NM)

.15 CEU per class

June 12—Checking Credit ReferencesJuly 10—Litigation for Commercial CreditorsSeptember 11—Credit Enhancements: Personal Guaranties,Standby Letters of Credit, etc.October 9—Out-of-Court Workouts & LiquidationsNovember 13—International Credit MethodsDecember 11—Bankruptcy Basics for Creditors

Half-day Seminars

July 17—How To Give An Effective Presentation, presentedby Marsha Johnson, TEC Equipment

8:30 a.m. - 12 p.m.

NACM Oregon, 7931 NE Halsey, Ste. 201, Portland

$95 (M); $170 (NM)

September 18—The Art of Conflict Resolution, presented byLynda Bader, Lynda C. Bader Consulting

8:30 a.m. - 12 p.m.

NACM Oregon, 7931 NE Halsey, Ste. 201, Portland

$95 (M); $170 (NM)

WebinarsEducation at your desk!June 19, 2007"Idaho Construction Lien Law," presented by theSussman Shank Construction GroupThis group will provide an overview of the Idaho State lienprocess.

All sessions are scheduled from 9 - 10 a.m. (PDT) andrequire high-speed internet connection and telephone line forparticipation. $49.95 per registered site. Continuing educa-tion credits (.10) for registered attendees only. For moreinformation contact Jeannie Snow, CBA, at 971.230.1186 orregister online athttp://members.nacmoregon.org/events/

Certification RoadmapSessionSeptember 6—Free session for those contemplatingachievement of their professional designation. Join us forlunch and learn how to get started on the road to earning anNACM National Credit Business Associates (CBA), CreditBusiness Fellow (CBF), or Certified Credit Executive (CCE).This session will be held from 11:30 a.m. to 1 p.m. at theNACM Oregon classroom. No fee, lunch included.

For more information contact Jeannie Snow, CBA, at971.230.1186 or email to [email protected]

Education



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Five (5) $500 scholarships to the Pacific Northwest CreditCongress (PNWCC), September 20-22, 2007, Tacoma, Washington

Deadline: August 17, 2007

NACM Seminars - $1,000

Certification Fees—to establish files and for continuingcertifications and recertifications.

$2,000

College Courses approved and required for Accreditation andCertification. Includes online courses offered through NACMNational Education Department—proof of completion required—$2,000

Certified International Credit Professional Fee—FCIB on-linecourse $350

Phylliss Clark Scholarships: Three (3) $500. Applicants must be aCFDD member and first- time attendee at the Pacific NorthwestCredit Congress.Each chapter—Portland, Salem, and Eugene is allocated one (1)scholarship.

Deadline: August 17, 2007

NACM-OregonFoundation ScholarshipFunds Meeting Room

RentalNACM Oregon has meeting rooms

available for your organization’s use.The larger room, approximately 700

square feet, will comfortablyaccommodate 24 people classroom-style or 35 people theater-style. Thisroom has whiteboards on two walls, andall contemporary technology isavailable.

Meeting Room Rental Fee:$190 per day/$70 per hour(two-hour minimum). NACMOregon Members/BuildingTenants receive a 50%discount on these fees.

NACM Oregon also has a Boardroomthat comfortably accommodates tenpeople. This room includes awhiteboard and appropriate technology.

Boardroom Rental Fee:$150 per day/$50 per hour(two-hour minimum). NACMOregon Members/BuildingTenants receive a 50%discount on these fees.

The Banfield Plaza, an NACMOregon property, is centrally located atthe I-205/I-84 junction in Portland.NACM Oregon offices are on thesecond floor.

For more information please contactLisa Rogstad, Building Manager, at971.230.1160 or [email protected].



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The seasonally adjusted Credit Manager’s Index (CMI) crept up 0.1% in May as a decline in themanufacturing sector of 0.7% was offset by a gain in the service sector of 0.9%. The report showed mostlysmall changes in the 10 components, with the number of increases and decreases evenly split. “The 0.1%increase for the combined index was hardly robust since it would have actually fallen 0.3% without the sharpincrease in the amount of credit extended in the manufacturing sector,” reported Dan North, chief economistwith credit insurer Euler Hermes ACI.

“Except for hints of improved cash flow in the service sector, the data suggest that conditions were onlyslightly improved from last month; however, the small improvement came off of a good base, pushing all ofthe components above the 50 level indicating economic expansion,” he said. “Overall, credit managers arecurrently reporting good business conditions.”

Credit Manager's Index

Combined Manufacturing & Service Sectors (seasonally adjusted)

May Jan‘06 Jun Jul Aug Sep Oct Nov Dec ‘07 Feb Mar Apr May

61.5 65.4 67.8 62.8 63.5 56.3 59.5 60.9 61.6 59.6 58.1 62.8 61.5

555.7 55.7 59.0 62.5 57.9 56.2 56.5 60.5 60.9 52.5 55.9 56.7 56.2

58.6 62.5 61.9 63.3 60.0 58.3 62.6 59.5 64.8 66.2 58.4 61.5 61.9

65.5 64.8 69.9 66.4 62.4 63.2 64.0 63.7 65.3 63.6 62.4 59.3 62.2

60.3 62.1 64.7 63.8 60.9 58.5 60.6 61.2 63.2 60.5 58.7 60.1 60.5

50.6 51.5 52.6 53.6 53.3 54.8 51.7 50.1 51.6 52.7 51.9 52.4 52.7

50.5 55.2 52.0 50.1 55.0 53.1 50.7 47.8 51.4 51.3 49.6 55.4 52.8

49.3 51.1 51.1 50.4 52.3 49.7 49.9 47.9 52.7 53.5 51.9 53.0 52.0

48.5 56.5 52.2 51.3 55.8 52.2 50.2 48.1 50.9 52.6 55.0 54.2 55.0

49.0 49.7 50.5 51.7 50.6 50.5 51.3 49.2 53.2 54.5 50.2 51.5 54.6

59.2 59.2 59.1 60.5 60.2 59.1 56.3 59.7 59.8 59.5 56.6 59.6 58.5

51.2 53.9 52.9 52.9 54.5 53.2 51.7 50.5 53.3 54.0 52.5 54.4 54.2

57.0 55.5 55.1 55.6 53.7 54.5 54.1 54.1 54.2 53.3 51.7 55.4 N/A

Sales

New credit applications

Dollar collections

Amount of credit extended

Index of favorable factors

Rejection of credit applications

Accounts placed for collections

Disputes

Dollar amount beyond terms

Dollar amount of customer deductions

Filings for bankruptcies

Index of unfavorable factors

ISM Combined Sectors Index



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Salem/AlbanyThis chapter of the NACM Credit& Financial Development Divi-sion meets the second Tuesdayof each month.

No meeting scheduled in Junebecause of a scheduling conflictwith the NACM National CreditCongress. Business meetings andprograms will resume in July.

Eugene/SpringfieldThis chapter of the NACM Credit &Financial Development Divisionmeets the second Wednesday ofeach month.

Meeting Date: Wednesday,June 13, 2007

Location: Downtown Athletic ClubConference Center,999 Willamette St., Eugene

Networking Time: 5:30 p.m.Dinner: 6 p.m.

Topic: “Doing Business WithIndian Tribes"

Presenter: Nancy K. Cary, Attor-ney, Hershner Hunter, LLP

Coordinator:Mary Ann GridelliFarwest Steel [email protected]

PortlandThis chapter of the NACM Credit &Financial Development Divisionmeets the second Thursday of eachmonth.

Meeting Date: Thursday,June 14, 2007

Location: Red Lion ConventionCenter, 1021 NE Grand Ave., 6thFloor, Portland

Networking Time: 5:30 p.m.Dinner: 6 p.m.

Topic: "No Time To Go ToTime Management Training?"

Presenter: Lynda Bader, Lynda C.Bader Consulting

Coordinator:Diane Snyder, CCERodgers Instruments, [email protected]

CFDD Chapters



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1. Employee WagesPrior to the Reform Act, employee wages were givenpriority up to $4,000 for each individual earned within90 days before bankruptcy. Under the Reform Act,employee wages and salaries are increased to $10,000for each individual up to 180 days before thebankruptcy. This means more of the debtor’s cash isdedicated to employees’ claims, which results in less cashavailable for operations.

2. Landlord ClaimsPrior to the 2005 Reform Act, a debtor had 60 days fromthe bankruptcy filing to decide whether to assume or rejectits commercial real estate lease. A bankruptcy courtroutinely extended this time during the course of thebankruptcy case. Under the Reform Act, a debtor mustassume or reject its real estate lease within 120 daysfollowing the petition date. A court may extend the 120 dayperiod to assume or reject for up to an additional 90 days.Further extensions require the lessor’s consent. This meansa debtor may be forced to prematurely assume and tocontinue to pay the rent, only to determine later that theearly assumption was wrong. Further, the debtor must curethe landlord’s pre-petition claim. The administrative cost ofa Chapter 11 case may be increased as the consequence offorcing the debtor to decide to assume or reject a realestate lease by an earlier deadline.

3. UtilitiesPrior to the Reform Act, the debtor must have providedadequate assurance to a utility within 20 days of filing.Under the Reform Act, a debtor offering a utility anadministrative expense claim no longer constitutes adequateassurance of payment. Adequate assurance of payment islimited to: a cash deposit, a letter of credit, a certificate ofdeposit, a surety bond, a prepayment of utility consumption,or another form of security that is mutually agreed on.This requires debtors to provide utilities with cash deposits orcredit enhancements during the early stage of the Chapter 11,which means that there are fewer assets for operations.

4. ReclamationPrior to the Reform Act, reclamation claims had to bebrought within 10 days after the debtor received the goodsor, if such 10-day period expired after the bankruptcy,within 20 days. The reclaiming creditor also had to proveup the goods were on hand at the time of the reclamation

Using Repayment Agreements...from cover

demand and the debtor was insolvent. The Reform Actexpands the time for reclaiming creditors to make theirreclamation demand to 45 days after the debtorreceives the goods or 20 days after the bankruptcy. Thevalue of the goods shipped to the debtor within 20 daysprior to the bankruptcy is given an administrative claim.This means that more of the debtor’s assets will bededicated to reclamation claims.

C. Both Large and Small Corporate Customers, as wellas Personal Guarantors, Face More Constraints Underthe Reform ActIn addition to the greater administrative expenses forspecial creditor interests that a debtor must endure, theReform Act has also created greater leverage for creditors,as well as pressure for the debtor to exit earlier fromChapter 11.

1. Large Corporate Customers Facing InsolvencyThe owners and professional managers ofcorporations, LLC’s and partnerships, as well aspersonal guarantors, may seek alternative out-of-courtfinancial restructuring to Chapter 11, given a numberof creditor-friendly provisions contained in the ReformAct, including the following:

a. Exclusive Right to File Plan of ReorganizationShortenedPrior to the Reform Act, debtors had theexclusive right to file a plan of reorganizationwithin the first 120 days of the bankruptcy filing,and an additional 60 days to solicit acceptance ofthe plan. A bankruptcy court could extend theexclusivity period indefinitely upon the debtorestablishing “cause.” The Reform Act limits thedebtor’s exclusive right to propose a plan to 18months. After that, there can be competing plansfrom creditors and creditor’s committees. Thismeans that debtors are under pressure to exitbankruptcy earlier, as well as losing leverage innegotiations with creditors.

b. Employee Retention Bonuses and SeveranceProgramsPrior to the Reform Act, corporate debtors in theopening days of a Chapter 11 would often request

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the bankruptcy court to approve a bonus scheme formanagement. Vendors would often view such requests bymanagement as overreaching and an attempt by manage-ment to enrich themselves at their expense. Under theReform Act, in order for the debtor’s management toobtain approval of a key employee retention plan, the debtormust establish that a retention or stay bonus is essential toinduce management to continue employment. For the insiderto be entitled to such a bonus, he or she must have a joboffer from another business. In addition, the insider’sservices must be essential to the debtor. The retentionbonus and severance package cannot exceed ten times theamount paid to nonmanagement persons within the year inwhich the transfer is made or, in the absence of suchnonmanagement bonuses, it cannot exceed 25 percent of theamount of bonuses transferred to the insider during the yearprior to the retention bonus. A debtor’s management willview these restrictions negatively as they believe it leads tothe departure of key personnel viewed as essential tothe reorganization.c. Appointment of trusteeThe Bankruptcy Code provides that existing managementcontinues in place in Chapter 11. The Reform Act providesthat the U.S. Trustee must file a motion to appoint a trusteeif there are grounds to suspect that the debtor’smanagement committed fraud or dishonesty. This provisionmay prompt more motions to displace management andperhaps action by the Board of Directors to remove officerswho may be alleged to be involved in questionableactivity.

2. Small Business Customers Facing InsolvencyPrior to the Reform Act, a small business Chapter 11debtor was one with non-contingent liquidated, secured andunsecured debts less than $2 million, as of the date of thebankruptcy filing. The debtor could elect not to be a smallbusiness debtor. Under the Reform Act, there is noelection. If the debtor’s assets are less than two million thenit must be a small business debtor. The small businessdebtor faces the following restrictions:

a.More Financial ReportingThe small business debtor has extensive financial reportingrequirements, such as periodic filings reporting on pro-fitability and expenses, and the U.S. Trustee is to scrutinizethe small business reporting.

b. Pressure on the Debtor to Exit BankruptcyEarlyOnly the debtor can file a plan within the first 180 days,and a plan must be filed within 300 days of filingbankruptcy. The plan must be confirmed within 45 daysafter it is filed.

c. No Chapter 22A small business debtor may not file a second Chapter 11within two years of a Chapter 11 being confirmed ordismissed. An exception is if the debtor can establish thata plan can be confirmed within a reasonable time.

3. Personal Guarantors Facing InsolvencyPrior to the Reform Act, an honest debtor was entitled todischarge its debts under Chapter 7, notwithstanding thedebtor’s post-bankruptcy income. The Reform Act imposesrestrictions on an individual’s use of Chapter 7 to escape itsdebts.

a. Means TestThe Reform Act makes it more difficult for individuals tofile Chapter 7 liquidation by imposing a means test, thatdetermines whether the individual debtor has the ability torepay a significant portion of their debts through futureincome (post-bankruptcy filing). If, after computing adebtor’s income and expenses, it is determined that adebtor is able to repay their debts, then the Chapter 7case may be dismissed or converted to Chapter 13. For avendor holding a personal guarantee, the means test mayforce the guarantor to repay a portion of the guaranteeddebt through a Chapter 13 plan, if the guarantor’s incomeis too great, or simply stay out of bankruptcy as they maynot be eligible to discharge the debts.

(To be continued in the July BCJ issue.)

Scott Blakeley is a principal of Blakeley & Blakeley LLP, where hepractices creditors’ rights and bankruptcy law. Scott advises companiesaround the country regarding creditors’ rights, commercial, e-commerceand bankruptcy law. He was selected as one of the 50 most influentialpeople in commercial credit by Credit Today. Scott is a member on theboard of editors for the California Bankruptcy Journal and is an editorialadvisor for Credit Today. Scott also is co-chair of the Sub-Committee ofUnsecured Creditors’ Committee of the American Bankruptcy Institute,and is a Trustee for the JD/MBA Association.

Using Repayment Agreements...from 11

Reprinted with permission of the Credit Research Foundation – Occasional Paper,October 2006



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ChairmanPat Jones, Consolidated Supply [email protected]

Vice ChairBarbara Davis, CCE, Liberty NW Insurance Co., [email protected]

SecretaryDoug Jacobson, CCE, [email protected]

TreasurerDarrell L. Robinson, E C [email protected]

CounselorCheryl Wahlberg, CCE, Food Services of [email protected]

DirectorsTony Ceniga, Industrial Finishes & [email protected]

Steven Fancy, CCE/CICP, Pope & Talbot, [email protected]

Kellie Hainline, National Builders Hardware [email protected]

Sue Hein, Rapid Bind, [email protected]

Kimi Shelton, CCE, Glacier Northwest, [email protected]

Raeann Smith, North Pacific [email protected]

Rick Weisman, CCE, Graybar Electric Co., [email protected]

PresidentRod Wheeland, CCE, CAE, NACM [email protected]

Board of Directors NACM OregonCustomer Service/Credit [email protected]

EducationJeannie Snow, [email protected]

Industry GroupsKathy [email protected]

Claudia [email protected]

Collection ServicesDenise [email protected]

Credentia Staffing ResourcesKaren [email protected]

BillingBarb [email protected]

Meeting Room RentalLisa [email protected]

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Business Credit Journal Using Repayment Agree- June 2007 · 2007-06-11 · Business Credit Journal...

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Transcript of Business Credit Journal Using Repayment Agree- June 2007 · 2007-06-11 · Business Credit Journal...