LOAN COLLECTION

TECHNIQUES
 PREFACE
This ebook on debt recovery techniques
focuses on the non-legal way to recover past
due loans incurred in the ordinary course of
the business of banks, retailers, realty
lessors,wholesalers, traders and dealers.
Wise use of the techniques taught in this
ebook will save a creditors much time and
money at the same time avoid tedious
litigation in the recovery of bad debts.
 DISCLAIMER

Information or lessons taught in this

ebook are taken from the lessons learned
from the working experiences of the Author
as well as include researches on the
teachings of other mentors. These techniques
are amended to fit the present realities of
debt collection.
 ABOUT THE AUTHOR
Author, ANGELINA B. ESPIRITU, worked in a universal bank with
focus on remedial management for around twenty (20) years and found
success in recovering billions of peso of bad debts of corporate debtors
with secured and unsecured loans. Though part of her work included
corporate finance and court litigation, Ms. Espiritu chose to share the
fundamentals of remedial management using non-legal workouts.
Aside from saving on expensive legal expenses as well as avoiding
long and tedious court litigations in bad debt recovery, she believes the
use of her recommended non-legal workouts can easily be adopted by
creditor-companies as a “do it your own bad debt recovery strategy”.

Ms. Espiritu is a graduate of a business degree from the

University of the Philippines and a graduate of Masters of Business
Administration of De La Salle University. Both schools are reputable
schools in academic excellence in the Philippines.
DEFINITION OF REMEDIAL
MANAGEMENT
– IDENTIFICATION OF POTENTIAL PROBLEM
LOAN

– COLLECTION IN CASH OR IN KIND WHEN

DEBT BECOMES INCOLLECTIBLE

– RESTORATION OF THE DEBTOR TO GOOD

FINANCIAL HEALTH
HOW BUSINESSES
GET INTO TROUBLE
 EXTERNAL CAUSES

`
1. Currency devaluation
2. High bank interest
3. Recession
4. Property slump
5. Government laws or regulations
adversely affecting the business
 INTERNAL CAUSES
– Non-compliance with basic credit criteria or objective
assessment of character, capacity to pay, financial condition,
capital and collateral of debtor
– Lack of credit policies
– Liberal credit terms, collection procedures and credit
standards
– Excessive credit extensions
– Lack of lending competence
– Poor documentation
– Weak collateral position
– Lack of credit monitoring to identify potential problems
– Failure to recognize early warning signals
DETECTING PROBLEM ACCOUNTS:
SOME EARLY WARNING SIGNALS
 DETECTING PROBLEM ACCOUNTS:
SOME EARLY WARNING SIGNALS
 Violations of loan agreement provisions
· Waiver of certain breaches or default provisions
· Lapses in installment payments
· Dishonored checks
· Calls from existing suppliers requesting information on
additional loan releases
· Labor problem
· Poor maintenance of plant and equipment
· Unwillingness to pay
· Diversion of funds
· Failure to provide financial statements on a timely manner
· Loss of cooperation
· Disappearance of officers/assets
 DETECTING PROBLEM ACCOUNTS:
SOME EARLY WARNING SIGNALS
 · Changes in management
 · Conflict among officers and stockholders
 · Inability to meet credit commitments on schedule
 · Evidence of legal action against the debtor-company
 · Deteriorating relationship with trade suppliers
 · Loss of one or more financially sound customers
 · Too much dependence on single or few buyers
 · Poor financial housekeeping practices
 · Rising receivables, longer collection period and increasing bad
debts
 ·Sharp increase in inventory level and slowdown in inventory
turnover
 · Rising costs or expenses
 · Rising sales, falling profits
 HOW TO RESPOND TO
EARLY WARNING SIGNALS
 HOW TO RESPOND TO
EARLY WARNING SIGNALS

 React fast and be proactive to the situation.

 Set immediate meeting with top management/owner to hear their side
of the story on your collection concerns
 Be as factual as possible to preclude any bad feelings that could cause
borrower to react negatively.
 If explanation is not acceptable, discuss specific corrective measures
and timetables. If acceptable, monitor results as often as needed.
 If a plan of action is not acceptable or debtor refuses to recognize
existence of problem, be ready to impose unilateral solution and/or
intervene in operations to cure the problem.
 Possession of effective negotiation skills can harness a positive
reaction from the debtor.
 Try to preserve goodwill throughout the collection process.
 MAJOR CAUSES OF
DISTRESSED ACCOUNTS
 MAJOR CAUSES OF
DISTRESSED ACCOUNTS
 · Borrowings not consistent with business requirements
 · Hasty expansion
 · Lack of good corporate governance
 · Lack of adequate financial controls
 · Over confidence in connections
 · Lack of integrity of people running and managing the
business
 · Being in the wrong industry at the wrong time
 · Change in the nature of the business
 · Poor financial planning
WHEN TO INSTITUTE REMEDIAL
MEASURES: EVENTS OF DEFAULT
 WHEN TO INSTITUTE REMEDIAL
MEASURES: EVENTS OF DEFAULT
· Payment Default – If the borrower
fails to pay any principal, interests,
advances, service charges or any other
amount part of the foregoing when due
and demandable under the terms and
conditions in the loan agreement and of
the covering promissory notes and/or
evidences of indebtedness and
contracts, documents, etc.
 WHEN TO INSTITUTE REMEDIAL
MEASURES: EVENTS OF DEFAULT
Covenant Default – If the borrower shall fail in the
due performance or observance of any of the terms
and conditions, covenants or provisions contained in
the loan agreement and other related documents,
contracts and instrument, including amendments and
addenda and if such failure is capable of satisfactory
remedy, the borrower shall have failed to institute the
necessary remedial measure within a stipulated
period (say 15 days) after the borrower shall have
been notified in writing of such default by the lender
 WHEN TO INSTITUTE REMEDIAL
MEASURES: EVENTS OF DEFAULT
· Representation Default – If (1) there is any
misrepresentation of facts or error with respect to, or
violation of any of the representations and warranties
set forth in the loan agreement and the related
contracts, documents, and instruments executed on
connection with the loan, (2) the proceeds of the loan
has been employed, without the written approval of
the lender, for purposes other than those agreed
upon with the lender provided for in the loan
agreement.
 WHEN TO INSTITUTE REMEDIAL
MEASURES: EVENTS OF DEFAULT
Insolvency Default – If the borrower (1) becomes
insolvent, bankrupt, or if the borrower shall make
general assignment of its properties and assets for
the benefit of creditors or shall have an insolvency
petition filed by or against it or shall be put into forced
or voluntary liquidation or insolvency, (2) apply with
any court for the appointment of a receiver,
administrator, or liquidator for the borrower, (3)
unable or admit in writing its inability to pay its
indebtedness.
 WHEN TO INSTITUTE REMEDIAL
MEASURES: EVENTS OF DEFAULT
Cross Default– The borrower fails to pay any
amount due under any other agreement (whether or
not written) or document evidencing, securing,
guaranteeing or otherwise relating to any other
indebtedness of the borrower or there is default by
the borrower under such agreement or document for
borrowed money or other similar forms of financial
obligations, the effect of which is to accelerate or to
permit acceleration of the maturity of such
indebtedness.
 WHEN TO INSTITUTE REMEDIAL
MEASURES: EVENTS OF DEFAULT
Seizure Default – If any governmental
authority shall have taken any action to
condemn, seize or appropriate the borrower
or any substantial portion of the borrower’s
properties or assets or business (either with
or without payment of compensation) which
adversely affects the borrower’s ability to pay
its indebtedness
 WHEN TO INSTITUTE REMEDIAL
MEASURES: EVENTS OF DEFAULT
·
Judgment Default – Any judgment for
money/damages or fine is entered against the
borrower and is not paid, discharged or fully
bonded within certain days (e.g. 10 days)
after the date when payment of such
judgment is due under applicable laws.
 GUIDELINES/PROCEDURES IN
HANDLING PROBLEM ACCOUNTS
 GUIDELINES/PROCEDURES IN
HANDLING PROBLEM ACCOUNTS
 · Study the account
 · Review the documents
 · Review the debtor’s financial statements
 · Negotiate with the debtor
 · Review the debtor’s security position
 · Coordinate with other creditors
 · Make a plant or company visit
 · Consider the industry’s problems and prospects
 · Trace the whereabouts of debtor-owner
 · Be on the lookout for major corporate developments as
mergers or acquisition or dissolution
BASIC REMEDIAL MEASURES
OR ACTIONS
 INTRODUCTION TO
WORKOUT STRATEGIES
o Know the facts, understand the economic realities and decide
on what you want. Then move fast, preferably before other
creditors do.
o Aim for the biggest recovery within the shortest time possible.
Taking losses on problem loans is a fact of life. Sometimes,
you cannot squeeze blood out of stone
o Maximize present value recovery, cash is always preferred to
asset settlement.
o When dealing with other creditors, make sure that no one
improves on his present position ahead of others
o When moving alone, try to move ahead of other creditors
o Be flexible in dealing with other creditors. You may also need
their help in the future
 MAJOR WORKOUT STRATEGIES

 Discounted lump sum payment or compromise settlement -

involves discount on interest and penalty charges which could
include discount on the principal payable within a short period of
time, say 30 to 60 days.

 Restructuring- – includes change in the original credit terms

such as extension of grace period, reduction or waiver of
interest and penalty charges, reduction of amount to be paid per
amortization on a step ladder basis (where lower amortizations
are paid during a period of time and escalates on a gradual
basis based on the debtor’s capacity to pay) or extension of
maturity period.
 MAJOR WORKOUT STRATEGIES
· Refinancing-– this mode of settlement is thru extension of a new loan or line
with major part of proceeds to be applied to outstanding past due loan and any
remaining balance to be utilized for the borrower’s project. Prudence must be
exercised in granting refinancing to avoid throwing good money after bad.

Some considerations in refinancing:

 o Company is viable and market continues to exist.

 o Cash flows still adequate under a restructured mode.
 o Collaterals are adequate.
 o Emergency operating/financial controls are instituted.
 o Use of new loan is justified/controlled and monitored.
 o Borrower enjoys suppliers’ support, other creditors’ support, government
support.
 MAJOR WORKOUT STRATEGIES
 Sale of mortgaged assets with or without assumption of obligation – involves the
sale of the mortgaged collateral to an interested buyer and the proceeds applied
to the loan. When the buyer cannot raise the entire purchase price, the creditor
could allow the purchaser to assume the obligation and pay the creditor
accordingly. The new obligor should have the capacity to pay.

 Sale of free assets – involves sale of debtor’s other free assets and the
proceeds to be applied to the loan.

 Dacion en pago or more popularly known as payment in kind- a real estate

property or personal property such as car can be used to pay off the loan using
a mutually agreed upon value of the property to be applied to liquidate the loan.
Under this scenario, transfer of ownership and immediate possession of the
property in favor of the creditor are attained easily.
 WHEN WORKOUT IS
WORTHY TO BE PURSUED
Ø Borrower cooperates, willing to pay and accepts possible financial
sacrifice.
Ø Reason for financial difficulty is legitimate and can be remedied.
Ø Borrower submits a business and financial rehabilitation plan that
proves feasible after validation of sources of repayment and shows
adequate debt service, profitable projected operations, strong demand
for its products, capable management and adequate financial controls.
Ø Profitable past track records before financial difficulties.
Ø Adequately secured by good collateral or inadequately secured leaving
no choice position.
Ø No fraud involved.
Ø Borrower has filed for suspension of payments and SEC approved the
company’s rehabilitation.
 CALL ON A DEBT
COLLECTION AGENCY
 ADVANTAGES OF USING
A COLLECTION AGENCY
 Agencies will generally have an efficient system in place with a
trained and dedicated staff on hand to resolve debt collection
issues consistently
 Loans can get paid over in a shorter period of time and saving
the creditor or business owner time and money by allowing
him/her to concentrate on the core business
 Leaving collection to an agency may be a less stressful option
for a business owner
 Reputable debt collecting agencies have staff who are
experienced and patient at negotiating with debtors
 TIPS TO CONSIDER IN CHOOSING A
DEBT COLLECTION AGENCY
 Ask for references and check up on the
company.
 Work only with a reputable collection agency
 Take a look at the track record of the
company and its success debt collection
stories
 Request for the curriculum vitae of the
company’s management and officers
 SELLING THE BAD DEBTS
TO A COLLECTION AGENCY
Depending on the age, amount and type of
bad debts, you maybe able to recover as
much as 50% of the debt. It is advisable to
contact several collection agencies to find
the best deal. You can also write off the bad
debts and use it as a tax deductible expense.
 SELLING THE BAD DEBTS TO
ANOTHER BUSINESS OR DEBT
PURCHASERS
With this solution, the original creditor
sells the debt for a small percentage of
the total outstanding amount. The buyer
assumes the risk of being able to collect
the entire amount; while, the original
creditor can record a partial recovery of
the bad debts in its accounting records,
effectively closing the account.