For those dreading the possibility of bankruptcy, there's an alternative called an out-of-court settlement. Several affiliates of the Columbia, Maryland-based National Association of Credit Management (NACM) can help organize an out-of-court settlement, also known as an "adjustment" or "workout."
This alternative enables unsecured creditors to keep control outside the formalities of a bankruptcy court, tending to be less expensive, more efficient, and less cumbersome than a Chapter 11 filing.
The procedure is based on commonsense principles and communication. A creditor, debtor, or their respective attorneys can approach the NACM adjustment facilitator. The main creditors and the debtor meet, where the debtor provides financial information and answers questions. The creditors form a committee and hire an attorney. A plan is formulated, circulated, and voted upon.
Meanwhile, the NACM affiliate acts as the committee's secretary and communications liaison. It may hold a blanket security interest in all the assets of the debtor, for the benefit of the creditors, which is provided in exchange for a moratorium on collection activities. On a case-by-case basis, the amounts and schedules for disbursements are negotiated in a flexible forum, while the affiliate monitors the debtor's operations and finances. Eventually, the affiliate serves in a fiduciary role as disbursement agent.
A workout avoids the stigma, time, and expense of a bankruptcy, and speeds up the distributions to creditors. It is less labor intensive and requires no courtroom appearances and few formal documents, resulting in fewer legal and accounting fees.
Workouts also cut through red tape. In bankruptcy court, the formality of filings, motions, pleas, appearances, and lengthy documents makes for slow progress and much greater expense. A speedier resolution means that creditors receive their distributions all the sooner.
Creditors can take several avenues to pursue a workout. Often, they will initiate a dialogue with a debtor, and mention the advantages of an out-of-court adjustment. Debtors and their attorneys may not be aware of the benefits of settling out-of-court. For example, the debtor may be able to keep employees; management would be less distracted than under Chapter 11 reporting requirements; cash may be preserved for operations rather than legal expenses; and the company may be able to return to profitability. In other cases, creditors may take action and effectively organize themselves as part of a national credit group effort.
The National Association of Credit Management (NACM), headquartered in Columbia, Maryland, supports more than 25,000 business credit and financial professionals worldwide with industry services, tools and information.