By Ramir Rodriguez
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 you risks as work towards a successful 2013.
Guest blogger: Ramir Rodriguez represents Treasure Valley Factors in Fruitland, Idaho. He has helped real estate appraisers understand how factoring can can help their business since 2009. For more questions about factoring accounts receivables, please email him at rrodriguez@treasurevalleyfactors.com or visit his blog Factoring Helps or website www.treasurevalleyfactors.com. Twitter: @RamirRodriguez "Like" Treasure Valley Factors on Facebook!
I would have never written about factoring in my paid newsletter prior to HVCC. There are way too many problems and payment uncertainty now with AMCs. Prior to HVCC, it was COD (cash at the door by the borrower) and payments without many problems from regulated lenders.
I don’t recall any major lenders, or even minor lenders declaring bankrupty and not paying appraisers.
FYI, non-recourse factoring, such as Treasure Valley Factors, is not a collection agency. They pay you when you send them the invoice.
Many newer appraisers had no experience with collecting billings. A non-recourse factor buys their invoices and sends them a check ASAP. I wrote about it in my last paid Appraisal Today newsletter, including lots of tips for appraisers to decide who to extend credit to. I have also been writing about how to collect your own billings for over 20 years.
It’s usually illegal to attempt to continue to collect a debt once you receive a notice of the bankruptcy. However, I’m not sure if you can try to collect from the homeowner so long as you don’t attempt to collect from the company that filed bankruptcy. Check with your attorney because being able to place a lien on a property is a powerful way to collect an appraisal fee.
Liens for appraisal fees are possible in some states, but not most states. But, it may help getting paid if you tell a non-bankrupt lender you will file a lien if you are not paid. Check with your attorney. I have written about this issue a lot in my paid Appraisal Today newsletter.
The lenders are to blame for this, although they say they monitor the AMCs that they use, but they really cant. I did three appraisals for ES, they did not pay in 60 days and they continued to order appraisals, which I declined to do. Chase Bank should take some responsibility.
There is a solution and its up to the lenders to fix it. Why not have the lenders pay the AMC for their services only and then directly pay the appraiser, this eliminates the appraisers beng hung out to dry. My name and address is on each appraisal, the lenders can easily send me a check for my services.
I really like your suggestion!!
Since I read this over on Appraisal Scoop I think I’m pretty solidified in my thinking about hiring a factor. They are pretty much bill collectors so their usefullness is best when you give them delinquent accounts based only on a percentage of what they collect. Why would you want to give them money to collect fees that are going to be paid anyway?
But then trusting an AMC for anything is pretty dumb given the track record of most. They certainly haven’t demonstrated that the financial health of the appraisal industry is of high priority to them.