Whenever a seller extends credit, it faces the risk that the buyer may not be able to pay for the product or services provided. So what can a seller do to increase the odds that it will be paid back, and what rights does it have if the buyer doesn’t pay?
“There are some pretty good remedies for creditors, depending on the circumstances,” says Cherie Macdonald, an attorney at Greensfelder, Hemker & Gale, P.C.
Smart Business spoke with Macdonald about your rights as a creditor and the current state of the economy.
What rights do creditors have in today’s tough economy?
First, we must distinguish between secured and unsecured creditors. Secured creditors may take action allowed by their loan documents. For example, a creditor holding a security interest in a car may repossess the car. A commercial creditor holding a security interest in equipment or real estate may be able to recover and sell the equipment and foreclose on the property. Secured creditors have rights that unsecured creditors simply don’t possess.
But unsecured creditors also have rights. Under certain circumstances, when sellers of goods believe their customers are insolvent or in default on their payment obligations, they can stop their delivery trucks that are in transport to their customers’ facilities.
If the seller of goods has a reasonable basis for believing the buyer is insolvent or unable to pay for the goods, the seller may suspend its performance (i.e., refuse to deliver or further manufacture specialty ordered products) until the seller receives adequate assurance of future performance from the buyer (i.e., adequate assurance the buyer will pay for the goods upon delivery).
Sellers of goods also possess a remedy called ‘reclamation.’ If a seller has delivered goods to a buyer that the seller later finds out is insolvent, the seller may reclaim the goods within 10 days after the buyer has received such goods. In order to reclaim goods, they must still be in the buyer’s possession when it receives the seller’s reclamation demand.
Under the new bankruptcy law, the right of reclamation is expanded. In a bankruptcy case, a seller of goods to the buyer has the right to seek payment under 11 U.S.C. Section 503(b)(9). This section of the bankruptcy code allows creditors who have delivered goods within 20 days of a buyer’s bankruptcy filing to receive payment for the value of such goods as an administrative expense claim rather than just an unsecured claim.
In addition, the normal 10-day reclamation period is expanded to goods delivered within 45 days before the date of the bankruptcy case.
What can creditors do to lessen their risk?
Creditors need to do due diligence at the onset of the relationship rather than at the back end. When considering working with an unfamiliar or new company or individuals with whom the creditors have never worked, the creditors should consider obtaining information on the companies’/individuals’ assets and liabilities. Has the company or individual been in this business for a long time, or is it just getting into the area? What is its payment history with other creditors?
If the buyer’s credit history or financial picture is weak or if the seller is concerned about extending credit to the buyer for other reasons, then it may require collateral or personal guarantees until the seller is convinced of the buyer’s abilities.
Are creditors extending less credit today than in the past?
It depends on the area. For example, it’s tough to get new credit terms on maturing car dealer loans. Lenders see the car industry in distress and are worried about dealers and their ability to continue in operation. This same difficulty exists in the area of real estate development loans and interest-only loans.
On the other hand, obtaining a home loan is pretty easy, so long as the borrower is employed, has a fairly good credit rating and is able to make the payments. And lenders will extend credit for loans secured by multifamily property where the property has cash flow.
Depending upon the area, most businesses must still provide credit terms to their customers to facilitate sales.
What changes are on the horizon that could affect those purchasing property?
There are two bills presently pending in Missouri. MO House Bill 836 requires notice to be given to a tenant occupying residential property after a foreclosure sale. If the tenant is not in violation of the lease agreement, then the person purchasing the property at foreclosure may not file an eviction action until the new owner provides notice to the tenant of ownership that the tenant has 10 days to vacate the property.
MO Senate Bill 469 requires a lender to provide at least 20 days’ notice of a foreclosure sale to the mortgagors and tenants residing on the property.
If the tenant is not in violation of lease terms, then the new owner after the foreclosure sale may not evict the tenant until 45 days after the date the tenant is given notice that the foreclosure sale occurred.
Would there have been any kind of reform had the economy stayed strong?
Probably not. Our elected officials are keenly aware of problems in the economy and the effect of foreclosures on the state’s residents and are trying to help.
In addition to the difficulties facing homeowners being foreclosed upon, our elected officials are aware of the impact of foreclosures on tenants who are unable to control a foreclosure and on neighborhoods that, instead of having homes filled with residents, face empty homes with overgrown lawns.