eNews March 10, 2009

eNews Weekly Update - National Association of Credit Management
March 10th, 2009

News Briefs

  1. Discussions Geared for Creditors Rights
  2. What to Do When Your Customer Files Chapter 11
  3. Are You Down With IPP?
  4. FTC and NACM Promote Red Flags Readiness
  5. Proposed Budget Cuts Farm Subsidies
  6. Administration Pushes for Contracting Overhaul
  7. IRS Ends Use of Private Debt Collectors
  8. Total Bankruptcy Filings Increase 31%, Business Filings Surge 54% in 2008


Discussions Geared for Creditors Rights
The 2009 Creditors Rights Forum at Credit Congress will be held from 10:30am to Noon on Wednesday, June 17. This unique educational opportunity was developed by the members of the National Bankruptcy & Insolvency Group to provide a forum for open discussion of credit management issues.

The 2009 Forum will include nine tables, each with a specific topic and table leader. This year, in light of the current economic situation, table topics will include FACTA and red flags, dealing with the delinquent debtor, pre-bankruptcy UCC Article 2 and your customer sliding into bankruptcy, composition agreements and assignments for the benefit of creditors, involuntary bankruptcy, first day orders and serving on the creditors' committee, 503(b)(9) administrative claims and reclamation, and defending preference actions.

Each table leader provides a brief introduction to the topic and then the participants may ask questions or make comments. The table leader or other participants may respond. This allows the participants to learn from the table leader and each other. Every 30 minutes a break is called to allow participants to change tables.

The forum received rave reviews at the 2008 Credit Congress in Louisville. We hope you'll plan to join us for the 2009 Creditors Rights Forum!

To register for Credit Congress and this event, click here.


A Creditor's Guide to the Bankruptcy Process

Have a customer on the verge of filing? "A Creditor's Guide to the Bankruptcy Process" is just one of the 28 chapters ready to help you in the new Manual of Credit and Commercial Laws, 100th edition.

The NACM Bookstore has many other resources to help you in these trying times. For more information, or go order the Manual of Credit now, click here.



What to Do When Your Customer Files Chapter 11
It's been a difficult year for creditors. The dour economy and timid spending from consumers has sunk enterprises across the country at a rapid pace. The rise in corporate bankruptcies has been a troubling event for credit managers to wrangle with and, ultimately, no credit professional wants to discover themselves in a position asking, "What do I do?" when one of their customers files for bankruptcy protection.

"This is a more current topic than perhaps what it was a year ago," said Mark Berman, Esq., partner, Nixon Peabody LLP, during the NACM-sponsored teleconference "What to Do When Your Customer Files Chapter 11." "Unfortunately, some of the things I'm going to recommend should have been done a year ago, but there's not much we can do about that. It's a matter of making sure you are doing things going forward that best helps you if one of your customers becomes the subject of a bankruptcy proceeding."

Automatic stays are the first step for creditors to consider. Section 362 of the Bankruptcy Code covers automatic stays, and they are just that: no one has to ask for it or issue it, a bankruptcy petition automatically triggers it.

"The provisions in section 362 make certain things a creditor might otherwise do a violation of law," warned Berman. "For example, a creditor cannot sue the debtor other than by going to the bankruptcy court. If the creditor has a lien on the customer's assets, as you would if you were a secured creditor, you cannot foreclose against those assets. You can't conduct a foreclosure sale and you can't notice a foreclosure sale, so you have to first go to the bankruptcy court for permission to proceed."

Berman also covered stopping goods in transit and reclamations, plus administrative priority for suppliers of goods, creditors' committees, proofs of claims, executory contracts as well as doing business with a Chapter 11 debtor.

Berman advised that credit managers should also be proactive in protecting themselves from the repercussions of their customer's filing for bankruptcy protection and dreaded preference claims by determining whether a customer should be sold to on credit terms, COD or on a cash-in-advance basis. The advantage of these strategies is that goods sold on a cash-in-advance basis will never be subject to a preference claim since a preference requires that a payment be received on an account of sale of goods and ascendant before the payment was made.

"If you're receiving payment in advance, you could never be receiving that payment on an ascendant of debt," explained Berman. "The payment in advance protects you from preference recovery." He noted that most credit managers run into problems by requiring not just payment in advance but also a payment on arrearage. That makes that payment on the old debt potentially preferential.

He recommended that credit managers consider whether or not sales should be backed up by some sort of collateral.

"Banks lend money oftentimes on a secured basis," said Berman. "There's no reason why you can't condition your sales to being on a secured basis. And I would include in security, letters of credit or guaranties or purchase money security interests as well as just regular secured interest as means to enhance the chances you are going to be ultimately paid."

With the surge in bankruptcies, there has been an overall increased interest by credit managers on how to deal with the various chapter protections and ensure that they are entitled to the most pennies on the dollar. NACM members are welcome to contact their local affiliates to receive copies of the free NACM pamphlet Your Customer Files Bankruptcy, which provides a checklist of immediate actions credit managers can take, as well as other actions that they should weigh. To accommodate this interest, NACM will also be hosting a teleconference on March 26th on "Hot Issues in Bankruptcy in Today's Economic Climate," which will be presented by Bruce Nathan, Esq., Lowenstein Sandler PC and Wanda Borges, Esq., Borges and Associates, LLC. Members can register for this event here.

Matthew Carr, NACM staff writer


Export Letters of Credit: The Fundamentals

For credit managers dealing in international trade, the documentary credit cycle deserves unparalleled importance. Letters of credit (LCs) are what get exporters paid by enabling importers to offer secure terms of payment. The process is complex and failure can be rooted in mundane mistakes as simple as a missing period or comma, a premature expiration date or the inability to produce a particular document when asked. An estimated 70% of all LCs submitted to banks for payment are initially rejected due to incorrectly issued documentation, meaning payment delays, additional fees and even nonpayment in some cases. Danielle Austin, Export Trade Associates, LLC, said that the discrepancies in LCs typically occur due to a lack of education.

Austin will tap her 14 years' experience of specializing in LCs during the NACM-sponsored teleconference "Export Letters of Credit: The Fundamentals" on March 11. The teleconference will not only discuss the importance of LC basics to avoid costly elementary mistakes, but also the importance of LC instructions, Incoterms and how to read an LC. The goal is to enable credit managers to get paid in a matter of days versus weeks or months.

Members interested in attending can click here.



Are You Down With IPP?
A recent teleconference hosted by NACM's Government Business Group (GBG) offered attendees a thorough look at the federal government's electronic invoicing system, the Internet Payment Platform (IPP). The web-based service, free of charge for agencies and their suppliers, aims to centralize purchase order, invoice and payment information for all parties involved in government business.

Led by Teresa Ricoy and Paula Stephens of the Federal Reserve Bank of Boston (FRBB), the entity responsible for IPP's development, operation and maintenance, the teleconference offered users a chance to get behind the scenes of the system's birth and operation, and also gave them a forum to ask specific questions about how the IPP will affect their company's business. "It's a way to conduct transactions with multiple agencies with one centralized portal," said Ricoy. "It will reduce late payments and enhance the relationship you have with the agencies." She also noted that the IPP can generate reports for users, calculating account aging and aiding in a business' cash flow analysis.

In the presentation, Ricoy and Stephens led listeners through a detailed demo of how to use the IPP, and also discussed what suppliers have to do to be eligible for the IPP. "The supplier prerequisites are pretty straightforward, but you obviously have to have a relationship with an agency using the IPP," said Stephens. "You must be receiving EFT payments and have registered in the Central Contractor Registry (CCR) and the vendor must have a designated primary administrator."

Suppliers who relied on the government's Payment Advice Internet Delivery (PAID) system may have noticed the migration from PAID to IPP in November 2008 and Ricoy and Stephens also discussed the relationship between the two systems as it stands. "It was decided that we had the IPP platform and we had the PAID system and they were kind of doing the same thing," said Stephens. "The PAID would send out email notifications and was all about payments. The IPP is now doing the same exact process, but we will continue to offer the PAID service through the IPP."

For more information on NACM's teleconference series and GBG, visit www.nacm.org.

Jacob Barron, NACM staff writer


NACM's Monthly Survey for March

Want to earn a quick .1 roadmap point and a chance to win a free teleconference registration? Participate in NACM's Monthly Survey. It only takes a minute!
This month, we want to know, do you think the stimulus package will have a financial impact on your business?

Let us know by clicking here.



FTC and NACM Promote Red Flags Readiness
According to the Federal Trade Commission (FTC), in 2006, there were nearly 10 million victims of identity theft in the United States. The cost to businesses and individuals was roughly $53 billion; a staggering bleed out as consumers lost wages and businesses were forced to write-off merchandise purchased fraudulently.

After a six-month delay, the May 1, 2009 deadline for companies to be in compliance with the FTC's Red Flags Rules regulation is fast approaching. The regulations will require most creditors and financial institutions to adopt a written program to detect, prevent and mitigate identity theft in connection with the opening of a covered account or any existing covered account. A "red flag" is a pattern, practice or specific activity that could indicate identity theft. The FTC lists 26 red flags, but that list is far from complete. A covered account, as it pertains to business creditors, is any account designed to permit multiple payments or transactions or for which there is any reasonably foreseeable risk from identity theft.

The FTC and NACM have partnered together to educate members of their responsibilities and the initiatives they should take to ensure those affected are in compliance with the federal regulation. In the second joint teleconference between the FTC and NACM, the FTC's Manas Mohapatra, attorney, Division of Privacy and Identity Protection, Bureau of Consumer Protection, outlined what the agency expects business creditors to put into place.

"Many people confuse data security with the Red Flags Rules," said Mohapatra. "These are two distinct but related concepts. Data security is aimed at protecting the personal information that you have about your customers. The Red Flags Rules pick up where data security leaves off."

He added, "Despite the best of efforts, thieves do steal people's information. Red Flags Rules are aimed at stopping and identifying identity thieves from using someone else's personal information at your organization to commit fraud or illegally obtain goods and services."

To help companies establish their policy, the FTC has published a list of guidelines, divided into seven steps: incorporating existing policies and procedures, identifying relevant red flags, setting up procedures to detect red flags, responding appropriately to red flags, updating the program, administering the program and considering other legal requirements. The FTC continues to stress that a creditor doesn't have to start from scratch on their program; they can tailor their program and build upon fraud or security measures they might already have in place.

"The guidelines state that a financial institution or creditor doesn't have to build the Red Flags program from scratch. You can incorporate relevant existing policies and procedures, such as from existing fraud prevention programs or information security programs. Then, look for gaps that need to be filled," said Mohapatra.

In reality, most companies would simply need to write down the policies and procedures they use to verify the identity of their customers, and what they do when they discover that the information on a credit application or purchase order is suspected to be fraudulent or compromised. As long as those steps are outlined and a board of directors or senior management agrees upon them, a company has met the FTC's general requirements. The other positive aspect of going forward and developing this policy is that part of the Red Flags Rules guidelines requires that companies periodically check to ensure that the accounts they offer are not subject to a reasonably foreseeable risk of identity theft. So, though those accounts may not be susceptible now, it does not mean that the same can be said months or years down the road. The standard with the Red Flags Rules is a reasonably foreseeable risk of identity theft, not any risk of identity theft.

"Each business is unique and there's no one-size-fits-all program," said Mohapatra. "You know your business inside and out so you tailor your program to your business and the risks you face."

The purposefully ambiguous wording of the FTC regulation means its jurisdiction can be broad, and NACM has been actively advising members to be proactive and develop their own Red Flags program. Any credit professional in need of a thorough run-down of the regulation can turn to the March issue of Business Credit magazine where NACM provides members a detailed explanation and breakdown of the rules' tenets, as well as a sample policy that credit managers can use as a guide to construct their own Red Flags program.

"I want to clarify that accepting credit cards does not make you a creditor," said Mohapatra. "There, the entity extending the credit is the organization that issued the credit card. The fact that you accept a credit card will not on its own make you a creditor. If you are extending credit—providing products and services that people can pay for after they have been delivered—under FACTA and the ECOA that is considered credit. There's no distinction between consumer or business credit. If you are extending business credit, then you probably fall under the creditor wing of this rule."

For more information on the FTC's Red Flags Rules, visit www.ftc.gov or refer to the March issue of Business Credit magazine.

Matthew Carr, NACM staff writer


Get Ready for the FTC's Red Flag Regulations and Guidelines

After a six-month delay, the May 2009 deadline for companies to be in compliance with the Federal Trade Commission's (FTC) Red Flags Rules is fast approaching. The regulations will require most creditors and financial institutions to adopt a written program to detect, prevent and mitigate identity theft in connection with the opening of a covered account or any existing covered account. The ambiguous wording of the FTC regulation means its jurisdiction can be far-reaching, and NACM is advising members to proactively develop their own Red Flags program. In the March issue of Business Credit magazine, NACM provides members a detailed explanation and breakdown of the rules' tenets, as well as a sample policy that credit managers can use as a guide to construct their own Red Flags program.

Not a subscriber? Click here for the NACM Bookstore to start your subscription now.



Proposed Budget Cuts Farm Subsidies
President Barack Obama's recently-submitted budget takes aim at corporate agriculture subsidies, reducing the threshold for receiving subsidies from $750,000 to $500,000 in sales. Should the budget be approved, direct payments to companies with annual sales revenues of more than $500,000 would end, saving the country about $10 billion over the course of the next decade.

The proposal is hotly contested and many parties are expecting a fierce battle along party lines over whether or not the subsidy rules change. According to Senator and former Secretary of Agriculture Mike Johanns (R-NE), the proposal will affect almost 76,500 farms in the U.S. and fails to properly account for income, suggesting that payment limits be applied as an absolute cap on dollars received from all commodity programs or that the limits themselves be tied to adjusted gross income, meaning sales after expenses. "This proposal gives no consideration to the level of need for a safety net," he said. "A farm with $500,000 gross sales might also have $600,000 in input, production and transportation costs." Johanns also noted that average farm production costs have skyrocketed in recent years, making the proposal even more challenging for farmers.

Johanns' sentiments were echoed by fellow plains state Senator and ranking member of the Finance Committee, Chuck Grassley (R-IA). "I'm not off the page with him on the $500,000, but it can't be on gross income. It's got to be on net income for farmers or let's say adjusted gross income for farmers because sales do not make a determination of whether or not you're making a profit."

Obama has claimed that the proposal will only affect 3% of the nation's farms. Analysts have noted that these would primarily be larger operations dealing in cotton and rice, located in California, Texas and parts of the southeast. The budget proposal also includes a measure that would reduce subsidies for crop insurance that would have more of an effect on Middle American farms.

Jacob Barron, NACM staff writer


NACM Affiliate Collection Departments

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NACM Affiliate collection departments collect your past-due accounts, large or small, as quickly as possible. NACM collection departments are firm, but fair, with your customers, with the primary objective to collect your money.

Here's How We Do It
Usually, the first step after the account is placed is to notify your debtor and make an immediate demand for full payment. The intensity of the phone calls increases if payment is not made. If direct personal contact is appropriate, NACM Affiliates have many resources, including the ability to draw on a nationwide network of Affiliates. When necessary, NACM Affiliates will forward an account to one of the bonded attorneys in its tried and proven network. NACM Affiliates exhaust all collection possibilities before recommending litigation to you. All funds collected are placed in separate trust accounts.

NACM Affiliate collection services include:

  • Letter Services
  • 10-day Demand Service
  • Action and Litigation
  • Litigation Service
  • Status Reports

Click here to learn more about NACM's Collection Services.



Administration Pushes for Contracting Overhaul
Federal contracting has been receiving a makeover lately with E-Verify, the new mandatory disclosures in Federal Acquisition Regulations (FAR) and the Administration repeal on the ban of Project Labor Agreements (PLAs) on federal projects. And there are more on the way.

After learning that the fleet of 28 Marine One helicopters was now a staggering $11.2 billion over budget and wearing a price tag twice as high as when the Navy first began constructing them, President Barack Obama is railing for government contracting reform. Obama wants the country to get on a sustainable long-term track and has joined with Senator John McCain (R-AZ) and other Congressional leaders to strengthen the management and oversight of taxpayer dollars.

"The American people's money must be spent to advance their priorities, not to line the pockets of contractors or to maintain projects that don't work," said Obama, who added that public trust has not been kept recently and, that over the last eight years, government contract spending has doubled to over a half trillion dollars.

"Far too often, the spending is plagued by massive cost overruns, outright fraud and the absence of oversight and accountability," said Obama. "In some cases, contracts are awarded without competition. In others, contractors actually oversee other contractors."

On Wednesday, citing that money is being spent on projects the country does not need, Obama signed an order overhauling the way the government will award contracts, specifically doing away with no-bid contracts and putting an immediate stop to outsourcing to private contractors the many services that should be handled by government employees. Though he singled out defense contracting, the President said the problems cut across the entire breadth of the government. The Administration is hoping that the contracting changes will save taxpayers roughly $40 billion a year by striving towards a more competitive bidding environment.

Obama was particularly irked that a report last year by the Government Accountability Office (GAO) found that 95 major defense projects had budget overruns totaling $295 billion.

"That's $295 billion in wasteful spending," said the President. "And this wasteful spending has many sources. It comes from investments and unproven technologies. It comes from a lack of oversight. It comes from influence peddling and indefensible no-bid contracts that have cost American taxpayers billions of dollars."

Matthew Carr, NACM staff writer


Credit Management for Contractors and Suppliers

How can your company quote a project without knowing whether you are a secured or unsecured creditor? The most important question never asked is whether a project is bonded. When can you be confident that a project is bonded? How do you obtain a copy of the bond? What information do you need to collect to determine whether your company is secured? Who is protected under a bond and how do you preserve rights? Can you ever recover your costs of collection under a bond? Can you accidentally waive your rights in your contract or in progress payment waivers? How do you motivate a surety company to promptly pay claims? For the answer to these questions and many more, join Jim Fullerton, Esq., author of NACM's Construction Law Survival Manual, on March 16 from 3:00-4:00pm EST for "Credit Management for Contractors and Suppliers," a payment bond teleconference that will provide an overview of the Federal Miller Act, State Little Miller Acts and Private Bonds. For more information, or to register, click here.



IRS Ends Use of Private Debt Collectors
The Internal Revenue Service (IRS) recently opted not to renew its contracts with two private collection firms, citing a cost-effectiveness study that indicated in-house collection is more efficient than contractors, ending the agency's private debt collection program.

The program was initially aimed at shoring up the nation's nearly $350 billion tax gap, which represents the difference between taxes owed and taxes collected, but privacy and data security concerns from democratic legislators put a dark cloud over the program in the last Congress. With the advent of a new administration and a new Congress, however, support for the program evaporated.

"After a thorough review of this program, I have decided not to renew the contracts," said Shulman. "I believe this work is best done by IRS employees, and I believe we have strong support from the Administration and the Congress for increased IRS enforcement resources going forward."

In a release, the IRS noted that it anticipates hiring over a thousand new collection personnel in FY 2009 to do the work once done by the contracted collection agencies. Shulman added that the closing of the program had nothing to do with the contractors' performances and opened the door for them to reapply for the job with the IRS. "I have asked IRS officials to ensure that the ramp down is orderly, and that the IRS perform targeted outreach to any displaced contractor employees that would consider applying for positions at the IRS," he said.

Support for the program did exist in some circles on both sides of the aisle, and some cried foul after Shulman made his announcement, blaming union interests as the reason for the program's cancellation. "It's discouraging when common-sense efforts to make things fair for honest taxpayers in a way that's decent and logical all around get beat down by vested, powerful interests in Washington," said Senate Finance Committee Ranking Member Chuck Grassley (R-IA), a long-time vocal proponent of the program.

Jacob Barron, NACM staff writer


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Total Bankruptcy Filings Increase 31%, Business Filings Surge 54% in 2008
Total bankruptcy filings in the United States increased 31% in 2008 over calendar year 2007, according to data released from the Administrative Office of the U.S. Courts (AOUSC). Bankruptcy filings totaled 1,117,771 for the 12-month period ending Dec. 31, 2008, a significant increase over the previous year's total of 850,912. The 2008 filing total marks the first year since the implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) that bankruptcies have surpassed 1 million.

"Today's numbers confirm what we have reported previously, that bankruptcies are on the rise and will continue to spike upward in 2009," said ABI Executive Director Samuel Gerdano. "We expect filings to reach 1.4 million or even more this year, especially if Congress changes the law to permit homeowners to modify home mortgages via Chapter 13."

Business bankruptcies recorded the sharpest percentage increase as the 43,546 business filings during calendar year 2008 represented a 54% increase in filings from the 28,322 filings made during the 12-month period ending Dec. 31, 2007. The 12-month business filing total for 2008 was the highest since the 44,367 filings recorded for the 1998 calendar year.

The 1,074,225 consumer filings during the 2008 calendar year represented a 31% increase over the 822,590 recorded during the same period in 2007. The 714,389 consumer Chapter 7 filings during the 12-month period ending Dec. 31, 2008, comprised 67% of the total consumer filings for the 2008 calendar year, up from 61% the previous year. The consumer Chapter 7 total for 2008 represented a 43% increase over the 500,613 consumer Chapter 7 filings during 2007.

The 358,947 consumers who filed for Chapter 13 during the 12-month period ending Dec. 31, 2008, comprised 33% of the overall consumer filing total. The consumer Chapter 13 total for 2008 represents a 12% increase over the 321,359 consumer Chapter 13 filings during 2007.

The 301,317 total bankruptcies recorded during the fourth calendar quarter of 2008 (Oct.1–Dec. 31, 2008) represent a 31% increase from the 226,413 filings during the same period in 2007. The 2008 fourth calendar quarter filing total was the first time since the implementation of BAPCPA that quarterly filings have eclipsed 300,000. The fourth quarter 2008 filing total also represented a 3% increase over the third quarter (July 1–Sept. 30, 2008) total of 292,291.

The 288,416 consumer filings in the fourth quarter of 2008 represent a 32% increase in comparison to the 218,428 consumer filings for the same quarter of 2007. The consumer filing total for the fourth calendar quarter also represented a nearly 3% increase from the third quarter 2008 total of 280,787 consumer filings.

Business filings, which totaled 12,901 for the fourth calendar quarter of 2008, represented a 62% increase from the 7,985 filed in the same three-month period in 2007 (Oct. 1–Dec. 31). Business filings also rose over the previous quarter as the fourth calendar quarter represented a 12% increase over the 11,504 business filings reported during the third quarter of 2008 (July 1–Sept. 30).

The chapter breakdown of business filings for the three-month period ending Dec. 31, 2008, is 8,872 Chapter 7s, 2,941 Chapter 11s, 90 Chapter 12s and 970 Chapter 13s.

The chapter breakdown of non-business filings for the three-month period ending Dec. 31, 2008, is 193,246 Chapter 7s, 234 Chapter 11s and 94,935 Chapter 13s.

States with the highest per capita filing rate (total filings) for the 12-month period ending Dec. 31, 2008:

  1. Tennessee
  2. Nevada
  3. Georgia
  4. Alabama
  5. Indiana
  6. Michigan
  7. Ohio
  8. Kentucky
  9. Arkansas
  10. Illinois

Districts with the highest percentage increase in total filings for the 12-month period ending Dec. 31, 2008 (compared to the identical period in 2007):

  1. Central District of California: 93.5%
  2. District of Arizona: 78.9%
  3. Eastern District of California: 78.1%
  4. Southern District of California: 76.6%
  5. District of Delaware: 73.9%

Districts with the highest percentage decrease in total filings for the 12-month period ending Dec. 31, 2008 (compared to the identical period in 2007):

  1. District of the Northern Mariana Islands: -29.4%
  2. District of the Virgin Islands: -21.7%
  3. Southern District of the Texas: -6.1%
  4. Middle District of Louisiana: -3.1%
  5. Northern District of New York: -2.2%

More information will be available at  ABI's Statistics Page.

Source: American Bankruptcy Institute

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