You received a letter in the mail informing you that your client has filed for bankruptcy. It is this moment you realize that this bad news just became your problem.
Many of us are familiar with the recent bankruptcy filings of Evaluation Solutions and its subsidiary ES Appraisal Services. Peter Christensen, attorney and general counsel to LIA Administrators & Insurance Services, shared in his blog that the total unpaid fees to appraisers, agents, and brokers as listed in bankruptcy documents is $11,048,411.97! This is a remarkable amount. Evaluation Solutions’ bankruptcy documents accounted for $9,349,612.97 of the total amount and a separate filing of its subsidiary was for $1,698,799.
I Received A Notice… Now What?
If you received a notice regarding Evaluation Solutions/ES Appraisal Services’ (I will refer to them as ES) bankruptcy you may be wondering what the next step is to try and recover money owed to you. Yes, a client’s bankruptcy can be costly for you, but most importantly, not adhering to the rules of the bankruptcy process can cost you significantly more.
Knowing the types of bankruptcy, how to play by the rules, and what you can (or can’t do) will help you understand the scope of your problem and ensure you don’t get in trouble.
Types of Bankruptcy
There are lots of information you can gather from the bankruptcy notice from ES to help you understand the nature of this problem. But first you must recognize the type of bankruptcy ES is filing.
Chapter 7 – This type of bankruptcy is the liquidation of remaining assets to distribute among its creditors. Chapter 11 – This a financial reorganization of a business, which allows your client to function while they follow court ordered debt repayment plans. Chapter 13 – Similar to Chapter 11, but rather than a business filing bankruptcy it is the individual reorganizing and following a debt repayment plan.
Ideally, it’s more favorable on your end if your client files for either Chapter 11 or 13. These types of bankruptcy give your client a breather until they figure out how to repay.
If your client however files for Chapter 7, which is what ES filed, not only will your chances of getting paid be reduced, but also you may be waiting a long time (even years) for this type of case to be completed.
Take A Number
At this point you are probably frustrated and would like to call someone to attempt to collect your money. Stop right there! Your actions can get you in deep waters. If you attempt to make phone calls to ES’s accounting department, send nasty letters, or try to file a lien (which some appraisers have done in other instances and is not recommended), you will face penalties.
Assuming you do get some money owed to you, you will have to wait in line. This is the second item you must understand. Here’s the payment order:
Lawyers, administrative expenses, and other professional services that are involved with the work of filing the bankruptcy.
Secured claims, including mortgage holders. Priority claims, including wages and taxes. Unsecured claims, which is where you as an appraiser may be categorized. Equity claims, including stockholders.
So curb your frustration because all you can do at this point is wait.
What Can You Do While You Wait
Sure you have to wait for ES’s bankruptcy process to take its course, but there are some things you can do in the interim. Since this case can drag for a long period of time, you can do the following:
Consult with your CPA about taking a deduction on your taxes for the bad debt. If you manage to receive some money owed to you after the bankruptcy case is settled you can claim it as income at that time. See your accountant for more details. It does not apply in this case, but if you have a future instance where your client files for Chapter 11 or 13 and wants to continue a working relationship, it may be to your advantage. Of course your immediate reaction is to quickly say “no way!”, but understand that Chapter 11 and 13 require debtors to stay current on all accounts moving forward. This means you can add a fee to your appraisal fees to recover what was lost, stricter payment time frames, and maybe exclusivity as other appraisers may not take another chance. Keep in mind that the best way to reduce or eliminate risks is to get paid up front.
Improve And Move On
Now that you’re somewhat familiar with the types of bankruptcy, payment pecking order, and what you may be able to do as the bankruptcy takes its course, it is important prepare for the future. This means assessing your appraisal business and how to prevent this problem from happening again.
First, create a process on how to screen new clients by knowing their payment history. There are many tools and resources you can use online that are free or for a small fee. Second, improve your accounts receivable aging management procedures. Just because they are still “current” doesn’t mean it does not require all of your attention. Current receivables can quickly turn into problems if you don’t pay attention. Last but not least, be persistent and tough but professional with your collections.
If you have an AMC bill in your state, read it and educate yourself on how it can help your appraisal business. There are sections in most AMC bills that require AMCs to pay by a certain time frame. For example, Texas AMC bill requires AMCs to pay appraisers within 60 days.
Also consider resources available to you such as factoring your receivables where the risk of non-payment is transferred to the factoring company. In this case, you can get paid quickly without the responsibility of collecting and liability of non-payments.
No small business is immune to the unexpected, but you can certainly minimize your risks as you work towards a successful 2013.