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Disadvantages of Selling to A Debtor in Possession It has become relatively common for companies that file voluntarily for Chapter 11 bankruptcy to ask creditors to sell the company (the Debtor in Possession) on open account terms. There are advantages as well as risks of doing so. The advantages include the ability to recoup some of the losses associated with the bankruptcy. The most serious risk associated with selling to a DIP is the possibility that the customer's business will fail while the customer is still in bankruptcy. If the creditor is selling to a customer that fails to navigate its way out of bankruptcy, the creditor may lose both its pre-petition balance and the post petition balance owed. One sobering statistic is that less than 50% of companies that enter Chapter 11 bankruptcy (either voluntarily or involuntarily) end up successfully completed the process, having a plan of reorganization confirmed, and having the case closed. One final
thought: A significant problem associated with selling on open account
terms to a debtor in possession is the possibility that the company may
fail and the credit manager will have to explain how it is that the company
has an another bad debt loss to the same customer. Edited
by Michael Dennis, author of "Credit and Collection Handbook"
available at the NACM
Bookstore. |
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