CMA Note: This is the first post in a new blog series authored by Michael Dennis, CBF called Covering Credit Commentary. Michael will be posting every Thursday sharing his viewpoint and personal experience on aspects of business credit, career advancement, leadership and collections. We hope you enjoy this new blog series and encourage you to comment on the posts to increase the conversation.
A friend of mine asked me what I thought about selling claims in bankruptcy to a third party company purchasing claims from unsecured creditors. I responded that I have always convinced my employers not to do so. He said he was considering it, pointing out that he would have payment within ten days. I agree that one of the main reasons that companies sell their claims in bankruptcy is the proverbial Bird in the Hand argument — meaning that you get your money sooner rather than later.
However, I also believe that all of the following facts are true. These buyers are in business to make a profit. Therefore, the amount they offer you will be and must be significantly less than the amount they expect to receive from the debtor. Also, these companies usually reserve the right, but not the obligation, to purchase any other bankruptcy claims approved by the court for whatever percent you originally agreed to accept for your unsecured claim. This would include secured claims for which you as a creditor could expect to receive 100 cents on the dollar.
Another concern I have is the contract that must be signed before you receive payment. At least one contract I received and read recently stated that the sale was being made with recourse. This meant that if the third party did not recover at least as much as they paid to my company that we would owe them the difference in cash plus interest!
Are there conditions under which I would sell a claim in bankruptcy? Sure. One would be if my employer was in a cash crunch and needed the money sooner rather than later. In my opinion, the costs and risks normally outweigh the benefits. One of those risks is the boilerplate terms in the sales contract. I understand why a creditor would be reluctant to spend the money to have an attorney review a contract involving a customer that has already filed for bankruptcy protection and has already cost them money. To me, the money spent on a legal opinion in this scenario is a necessary evil.
Do you still want to sell your claim in bankruptcy? Don’t let me discourage you from doing so but please make sure that you do so with your eyes open knowing all the facts and understanding all the risks and ramifications. In this situation, don’t just look a gift horse in the mouth, start counting his teeth.
Michael Dennis’ Covering Credit Commentary. Michael’s website is at www.coveringcredit.com.
The opinions presented are those of the author. The opinions and recommendations do not necessarily reflect the views of CMA, or their Officers and Directors. Readers are encouraged to evaluate any suggestions or recommendations made, and accept and adopt only those concepts that make sense to them.