Minimize bankruptcy losses

RMA Journal, The, March, 2003 by Abraham Wax, Charles McConnell

Sloppy handling of a bankruptcy can lead to huge, unnecessary losses. The same holds true in the case of an acquisition. While this article uses the case of a health care company, some of the rules offered may be appropriate to use with any insolvent company.

We were recently retained by a bank to which the trustee in bankruptcy had turned over all the accounts receivable, as the lending institution had a security interest in all the receivables. The receivables were turned over to us as having a value of $335,000. The bank, following good accounting practice, had aged the receivables and wrote them down, leaving only the amounts they expected to collect, which was the $335,000 figure.

The company's former president, however, showed us that the value of the receivables was actually in excess of $5 million. Because he had personally guaranteed the loan and the receivables were collateral for the loan, the $335,000 value would have resulted in staggering losses that the president, as guarantor, would have been expected to make good. At our request, the bank was able to locate its earliest printout, which showed that the receivables were worth $5 million, and that was the figure we worked with.

In an acquisition, the acquiring company presumably has a system in place to handle the reimbursement of receivables, although the company must be sure to gain immediate control of the receivables and start the process of reimbursement. In a bankruptcy, however, there is no such system in place, no money, no income, and no qualified personnel. The trustee in bankruptcy probably has no experience in the field, and he does not even know where the files are. The lead lender may have collection experience, but often not in the health care field. Furthermore, lenders often write off all or part of each receivable after different periods of time, which can have an adverse effect on health care receivables.

To help bankers and their customers, we offer some rules to use as a guide in dealing with health care receivables (see box). The officers of the company should be charged with carrying out these rules, but when the bankruptcy is imminent, all the employees will be seeking other employment and will be gone at the time when they are needed most. So it is up to the officer who issued the personal guaranty of the loans to take charge of all the files. If he abdicates his authority to the lending institution, his losses will be great--and unnecessary. The lending institution will probably have a lien on all the assets, including the accounts receivable and the patient and receivable files. The institution will not be able to focus, or will not be willing to focus, on the files that will be necessary to collect the receivables. The institution will be happy to allow the guaranteeing officer to assume that job. He must take that job seriously, because if he allows the chaos to continue he will be unable to assist i n collecting the receivables, and his guaranty will have to make up any losses due to failure to collect the receivables. He should immediately arrange a system so that any monies that come in by mail are properly detailed and recorded. He must immediately retain an attorney knowledgeable in the field to begin the legal collection process. Only that way will he be assured that the collection effort will succeed, so as to minimize the amount he will have to make good on his guaranty.

Contact Wax at ABEW9@aol.com

RELATED ARTICLE: Mitigating Loss from Receivables After Bankruptcy

1. As soon as possible, retain an attorney familiar with reimbursement. A collection agency is not equipped to collect health care receivables and in many states may not even recommend an attorney. Consulting companies are better suited to deal with operational problems and rarely are they better able to collect receivables than company personnel were.

2. Collect all the receivables files immediately and segregate them from the treatment files.

3. Classify all patient files according to the payor and also according to Medicare and Medicaid.

4. Keep records of every payment, the patient for whom payment was made, and the dates of treatment covered by the payment.

5. Collect all accounts receivable printouts.

6. Collect all telephone logs.

7. Collect all company agreements with payors.

8. Pay no attention to bookkeeping write-offs, as they are only estimates of what the company thinks it can collect. The patient files will show the amounts that should be collected.

[c] 2003 by RMA. Abraham Wax is an attorney in New York who specializes in health care cases and medicare appeals, representing health care providers on a national level. Charles McConnell, a CPA formerly with Price Waterhouse, is also a consultant for health care providers and other public companies needing assistance in refinancing or in liquidation.