Aguilar, Ma. Janyne F.

CHAPTER 8 CREDIT ANALYSIS

Credit analysis is a process that creditors use to determine whether an applicant should be permitted to borrow money, either in the form of a loan or the generation of debt. In cases where creditors are in favor of issuing credit, this process can also be used to determine how much credit to grant. Such processes are used to determine the creditworthiness of both individuals and businesses.

Any entity that is interested in receiving credit or a loan can be subject to a credit analysis. The purpose of this process is to assess whether or not a potential borrower can afford to repay the debt and whether he is likely to do so. This determination is often made by acredit analyst or a credit analysis department.

There are a number of items that are usually reviewed in a credit analysis. One of them is income. A creditor almost always wants to know about a borrower's sources of income and the amounts that are received. Even if a borrower appears to have enough income to cover the amount of the payment installments, credit can be denied. This is because the borrower may have too much existing debt.

A credit analysis also commonly considers expenditures. Creditors generally assess what debts a potential borrower is responsible for. A borrower may have a large income, but if a large portion of it is needed to make payments to existing creditors, this can be viewed as reducing the chances of repayment for other lenders.

Another reason that a credit analysis may be unfavorable despite the amount of income is due to instability. A person may have sufficient resources for repayment at the moment, but perhaps he has not been on his job for long or he has a history of changing jobs. This can cause creditors to assess the person as being at high risk for defaulting on his payments.

A credit analysis also generally looks at payment history. Creditors usually consider a potential borrower's habits when paying his bills. If the potential borrower has a history of not paying certain bills, of missing payments, or of making late payments, his credit analysismay be unfavorable.

The reason that credit or a loan is needed may also be assessed. A person may technically be able to afford payment installments, but many creditors believe that payments for certain things should not exceed a certain percentage of a person's income. For example, a person may be looking for a home loan. He may be able to afford the mortgage payments, but doing so may require 60% of his income. The potential lender may, however, have a rule of not issuing home loans when repayment exceeds 20% of a borrower's income.

When a person is planning to borrow, there are things that he can do to make himself a more favorable candidate for credit. Among other things, a borrower should make sure that all payments for existing debt are made on time and that all accounts are in good standing. Smaller debts should be paid off, if possible, to reduce the amount of debt the borrower is responsible for. Some of these things may take time and borrowing may need to be delayed, but it is possible to improve one's creditworthiness.

Credit analysis is the method by which one calculates the creditworthiness of a business or organization. In other words, It is the evaluation of the ability of a company to honor it financial obligations. The audited financial statements of a large company might be analyzed when it issues or has issued bonds. Or, a bank may analyze the financial statements of a small business before making or renewing a commercial loan. The term refers to either case, whether the business is large or small.

Credit analysis involves a wide variety of financial analysis techniques, including ratio and trend analysis as well as the creation of projections and a detailed analysis of cash flows. Credit analysis also includes an examination of collateral and other sources of repayment as well as credit history and management ability. Analysts attempt to predict the probability that a borrower will default on its debts, and also the severity of losses in the event of default. Credit spreads--the difference in interest

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rates between theoretically "risk-free" investments such as U.S. treasuries or LIBOR and investments that carry some risk of default--reflect credit analysis by financial market participants.

Before approving a commercial loan, a bank will look at all of these factors with the primary emphasis being the cash flow of the borrower. A typical measurement of repayment ability is the debt service coverage ratio. A credit analyst at a bank will measure the cash generated by a business (before interest expense and excluding depreciation and any other non-cash or extraordinary expenses). The debt service coverage ratio divides this cash flow amount by the debt service (both principal and interest payments on all loans) that will be required to be met. Commercial Bankers like to see debt service coverage of at least 120 percent. In other words, the debt service coverage ratio should be 1.2 or higher to show that an extra cushion exists and that the business can afford its debt requirements Typical education credentials often require a bachelor degree in business (to include an emphasis in accounting, finance or economics). An MBA is not required however is increasingly being held or pursued by analyst, often to become more competitive for advancement opportunities. Commercial Bankers also undergo intense credit training provided by their Bank or a third-party company.

5 C’s of Credit Analysis Regardless of where you seek funding - from a bank, a local development corporation or a relative - a prospective lender will review your creditworthiness. A complete and thoroughly documented loan request (including a business plan) will help the lender understand you and your business. The "Five C's" are the basic components of credit analysis. They are described here to help you understand what the lender looks for.

Capacity to repay is the most critical of the five factors, it is the primary source of repayment - cash. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on existing credit relationships - personal or commercial- is considered an indicator of future payment performance. Potential lenders also will want to know about other possible sources of repayment.

Capital is the money you personally have invested in the business and is an indication of how much you have at risk should the business fail. Interested lenders and investors will expect you to have contributed from your own assets and to have undertaken personal financial risk to establish the business before asking them to commit any funding.

Collateral, or guarantees, are additional forms of security you can provide the lender. Giving a lender collateral means that you pledge an asset you own, such as your home, to the lender with the agreement that it will be the repayment source in case you can't repay the loan. A guarantee, on the other hand, is just that - someone else signs a guarantee document promising to repay the loan if you can't. Some lenders may require such a guarantee in addition to collateral as security for a loan.

Conditions describe the intended purpose of the loan. Will the money be used for working capital, additional equipment or inventory? The lender will also consider local economic conditions and the overall climate, both within your industry and in other industries that could affect your business.

Character is the general impression you make on the prospective lender or investor. The lender will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company. Your educational background and experience in business and in your industry will be considered. The quality of your references and the background and experience levels of your employees will also be reviewed.

A type of analysis an investor or bond portfolio manager performs on companies or other debt issuing entities encompassing the entity's ability to meet its debt obligations. The credit analysis seeks to identify the appropriate level of default risk associated with investing in that particular entity.

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By identifying companies that are about to experience a change in debt rating, an investor or manager can speculate on that change and possibly make a profit. For example, assume a manager is considering buying junk bonds in a company, if the manager believes that the company's debt rating is about to improve, which is a signal of relatively lower default risk, then the manager can purchase the bond before the rating change takes place, and then sell the bond after the change in rating at a higher price. Agricultural Credit

Agriculture has its own inherit risks and unique characteristics. As a result, agricultural credit is different than normal consumer credit. We provide the following to aid farmers and ranchers in understanding and maintaining their credit. What is it that agricultural lenders look for, why, and what can you do to improve your standing with lenders? Due to the nature of agriculture, the following guidelines are for Ag borrowers, and due to the complexity of agriculture some of the suggestions may not apply to your situation.

Risk is any lenders primary concern. Simply put, lenders determine what the chances are that you will have late payments, and/or they will be required to liquidate collateral to collect payment, and/or they will loose some portion of the loan. All quality lenders want to make loans, but only those loans that provide assurance of timely repayment. What do we look at to determine risk?

The first thing is history – lenders believe that history is the window that allows us to see into the future. For this reason it is critically important that you manage your operation very carefully. All good ag lenders understand you will have bad years – beyond your management ability, what we look for are trends and what, if any, steps you took to mitigate losses. One bad year will not normally kill your future, but several back-to-back years can. When we examine your history – what is it that we want to see?

Accurate, complete, detailed, realistic financial statements are the first item. Financial statements tell us where you have been, where you are, and offer a small glimpse of how you got there. The next item is accurate profit & loss statements. Normally these are provided in the form of Federal Income Tax Returns. For larger and/or more complex operations, both cash and accrual Profit and Loss statements, along with production records are important additions that most lenders like to see.

A positive cash flow is the most important item for timely debt repayment. A positive cash flow is defined as cash after payment of all expenses including taxes, living expenses, and all note payments. Lenders understand depreciation, we know in most cases it is a real expense item. Rarely do equipment and other depreciable items increase in value as you use them – normally they wear out and must be replaced. If you don’t reduce the loan balance as the item depreciates, when it is worn out you will have little to no equity, and replacing the item will be difficult.

Credit underwriting is a judgment call utilizing all of the above. Good lenders will not provide credit based on the strength of a single item, but may very well deny credit based on the weakness of a single item. As an example, our largest single reason for denial is lack of collateral equity, meaning people want to borrow too high a percentage of the value of the asset provided for security.

A final note on Risk: when or if you find a lender who is willing to advance funds when the risk is above acceptable levels – most often you have found a lender who charges excessive fees and/or interest, and

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is totally focused on the collateral. These lenders are normally referred to as “hard money lenders”, they provide funds with little

to no consideration of your future, but they fully understand the concept of collateral. While most good lenders view collateral as the last source of repayment, these lenders view collateral liquidation as the first source of repayment. To accept a loan under these circumstances gambles your collateral against your chances of future success, all while minimizing its probability due to excessive interest and related costs. Record Keeping

In order to provide what you need for decision making and what your lender will look for to approve your loan request, accurate and timely records are a must. In today’s age of computers there are few excuses left for not having complete, accurate, and timely records. INTERNAL RECORDS ARE CRITICAL! If your idea of record keeping is to take 12 bank statements to your accountant at the end of the year and say “Do my taxes,” then you need to improve your internal record keeping. Internal record keeping must include all of the following: Accurate, detailed and individual listings of all assets, including: date purchased, make and model, cost, serial number or other description, expected useful life, and if pledged as security – who is the creditor. Accurate, up to date listing of all creditors, with balance outstanding, repayment terms, collateral, loan officer and complete contact information Balanced checking account, one that you know exactly how much money is in the bank, what checks have cleared, what checks are outstanding, etc. If you must access the bank via ATM and/or the Internet to find out your account balance, then your record keeping could use some serious improvement. Accurate and detailed record of all income and expenses. This must be broken down by the various categories in such a fashion that you can rapidly determine what you made from all the various sources, and what you have spent on all the various expense categories. Accurate and detailed records of all Accounts Receivable. When you sell something, until you have collected the money, it really doesn’t do you a lot of good. You must know exactly WHO purchased WHAT, WHEN, and what the terms of repayment are. It is advisable to always get invoices SIGNED! When you have Accounts Receivable, you are lending your money to the individual - it might be wise to evaluate the risk. Accurate and detailed listing of all Accounts Payable. This needs to include what the terms of repayment are. Production records. You need to know (and almost all operating lenders will ask) what you produced. This needs to include the number of acres, trees, cows etc as applicable for your operation.

There are a number of good record keeping programs available for your PC. Classes are available at many local community colleges, and your tax accountant can make recommendations on how to keep accurate records. Use whatever means are necessary to ensure you have timely and accurate records. For many small to medium sized operations, good checkbook programs like Quicken or QuickBooks, along with a spreadsheet program such as Excel will provide all the tools you need. For larger and more complex operations, integrated software designed for your particular agricultural enterprise is available and should be considered.

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Last, be sure you utilize the services of a good, reputable, knowledgeable accountant for tax

preparation. Given the complexity of today's tax laws, doing taxes by hand is like performing brain surgery on yourself. However, do NOT make purchase decisions based solely on the accountants advice that doing so will avoiding paying a few dollars of taxes by gaining the depreciation. It may be better to pay a few thousand in taxes than to have to debt service the purchase to the tune of tens of thousand for several years. Consumer Credit

The easy availability of consumer credit is a leading cause of problems with many agriculture producers. Just because a credit card company will say yes and give you a $25,000 line doesn’t mean you should immediately take a trip to Vegas and run the card up. Don’t utilize your credit cards for operating costs just because it’s so easy. The interest costs are too excessive, and thereafter, all operating lenders will be very suspect of your prior practice. Do NOT use one card to pay another card; this is a game that will ruin your credit.

If you are taking more than 90 days to pay off your credit cards (from the date of the advance to the date that advance is totally paid off), then you may want to examine your credit spending habits. If you are past due with consumer credit, the first step in finding your way out of this trap is to throw away the shovel you are using to dig your financial grave with. The next step after you stop charging is to pay more than the minimum balance. There are a number of consumer credit counseling services available, but avoid those who are going to compromise your debt. This will almost always end up with larger problems than you started with. What follows is a brief definition of how consumer credit histories (credit reports) are viewed by most lenders:

Excellent Credit – high score, NO derogatory, very limited occasional 30 day delinquency. Good Credit – NO derogatory, minor but non reoccurring occasional delinquency.

Average Credit – Any derogatory is resolved, some occasional delinquency but no reoccurring 60 or over delinquency, all of which is explainable.

Poor Credit – minor unresolved derogatory and/or multiple repeating delinquencies including accounts 60 and 90 over.

Adverse Credit – multiple and/or significant unresolved derogatory accounts (judgments, collections, tax liens, bankruptcy or other public records), and/or multiple continuing delinquencies. Excellent, Good, and Average credit history can expect to receive financing, assuming there are no other weaknesses or problems. Regardless of the collateral, if you have poor and/or adverse consumer credit history, you should not expect to receive credit under normal circumstances and terms.

Aguilar, Ma. Janyne F.

CHAPTER 9 FINANCIAL ANALYSIS

The process of evaluating businesses, projects, budgets and other finance-related entities to

determine their suitability for investment. Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to be invested in. When looking at a specific company, the financial analyst will often focus on the income statement, balance sheet, and cash flow statement. In addition, one key area of financial analysis involves extrapolating the company's past performance into an estimate of the company's future performance.

One of the most common ways of analyzing financial data is to calculate ratios from the data to compare against those of other companies or against the company's own historical performance. For example, return on assets is a common ratio used to determine how efficient a company is at using its assets and as a measure of profitability. This ratio could be calculated for several similar companies and compared as part of a larger analysis.

Financial Analysis consists of four areas—the Office of Financial Analysis, Space Analysis,

Property Control and Property Disposition.

The Office of Financial Analysis is responsible for supporting the instruction, research and public service activities of the university. This objective is accomplished by providing analytical support to the executive vice president and chief financial officer (EVPCFO) and the associate vice president for Finance (AVPF). Financial Analysis provides analytical services including annual reports and surveys, university and EVPCFO budget process, consulting services, capital planning and recharge rate approvals. Space Analysis is the official custodian of university space and location data. The unit oversees an annual inventory of all university owned and occupied space and make location, square footage, occupancy, and utilization updates as changes occur throughout the year. Space data is used for state, federal and university space utilization reporting. Many university systems, including facilities and plant operations, classroom scheduling and procurement, rely on this data.

Property Control is responsible for the tracking, tagging and inventory of all capital equipment with title vested to the university with a dollar value of $5,000 and above. The office is also responsible for the tracking, tagging and inventory of all government-owned equipment with a dollar value set by government agencies and as required by OMB Circular A21.

Property Disposition is responsible for the accountable disposal of University of Michigan property designated as surplus by university departments. Goals Financial analysts often assess the following elements of a firm: 1. Profitability - its ability to earn income and sustain growth in both the short- and long-term. A company's degree of profitability is usually based on the income statement, which reports on the company's results of operations; 2. Solvency - its ability to pay its obligation to creditors and other third parties in the long-term; 3. Liquidity - its ability to maintain positive cash flow, while satisfying immediate obligations; Both 2 and 3 are based on the company's balance sheet, which indicates the financial condition of a business as of a given point in time. 4. Stability - the firm's ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company's stability requires the use of the income statement and the balance sheet, as well as other financial and non-financial indicators. etc.

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Methods Financial analysts often compare financial ratios (of solvency, profitability, growth, etc.):

Past Performance - Across historical time periods for the same firm (the last 5 years for example), Future Performance - Using historical figures and certain mathematical and statistical techniques, including present and future values, this extrapolation method is the main source of errors in financial analysis as past statistics can be poor predictors of future prospects. Comparative Performance - Comparison between similar firms.

These ratios are calculated by dividing a (group of) account balance(s), taken from the balance sheet and / or the income statement, by another, for example :

Net income / equity = return on equity (ROE) Net income / total assets = return on assets (ROA) Stock price / earnings per share = P/E ratio

Comparing financial ratios is merely one way of conducting financial analysis. Financial ratios face several theoretical challenges:

They say little about the firm's prospects in an absolute sense. Their insights about relative performance require a reference point from other time periods or similar firms. One ratio holds little meaning. As indicators, ratios can be logically interpreted in at least two ways. One can partially overcome this problem by combining several related ratios to paint a more comprehensive picture of the firm's performance.

Seasonal factors may prevent year-end values from being representative. A ratio's values may be distorted as account balances change from the beginning to the end of an accounting period. Use average values for such accounts whenever possible.

Financial ratios are no more objective than the accounting methods employed. Changes in accounting policies or choices can yield drastically different ratio values.

Financial analysts can also use percentage analysis which involves reducing a series of figures as a percentage of some base amounts. For example, a group of items can be expressed as a percentage of net income. When proportionate changes in the same figure over a given time period expressed as a percentage is known as horizontal analysis. Vertical or common-size analysis reduces all items on a statement to a “common size” as a percentage of some base value which assists in comparability with other companies of different sizes. As a result, all Income Statement items are divided by Sales, and all Balance Sheet items are divided by Total Assets.

Comparative analysis presents the same information for two or more time periods and is presented side-by-side to allow for easy analysis.

Financial analysis using ratios Ratios are used to evaluate the performance of your business and identify potential problems. Each ratio informs you about factors such as the earning power, solvency, efficiency, and debt load of your business. They are used to measure the relationship between two or more components of the financial statements and have greater meaning when the results are compared to industry standards for businesses of similar size and activity. Ratios are effective performance indicators when results for the current period are compared to the past performance over several periods. For example, by examining the inventory turnover over more than one fiscal year, you can compare the rate at which inventory turns over to the year before. You can also determine whether or not sales of inventories are still growing and at what rate. This is referred to as horizontal or trend analysis, as data is compared for multiple consecutive periods to determine if the business's performance is following a predictable course. A dramatic upward or

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downward trend can signify areas requiring attention, permitting you to forecast future results. Following and reacting to these trends is your first line of strategic defence. The performance of the business should also be compared to that of competitors or other businesses of comparable size and activity. If your business experiences a downturn in its Net Profit Margin by 6% but the competitors experience an average downturn of 21%, this indicates that your business is performing better than the industry as a whole. Nonetheless, it is still necessary to analyze the underlying data to establish the cause of the downturn in the Net Profit Margin and to take effective measures. Interpreting financial ratios is fairly straightforward. Ratios for your business are compared to the financial statistics of the industry. For example, if the Quick Ratio for your business is 1.0 (also written as 1:1 or 1 to 1) compared to the industry standard of 2.0 for companies of similar size and activity, the conclusion is that your company has half the current asset dollars to pay current liabilities, according to the norm. Further investigation is required to determine if this deviance from industry standards is cause for alarm. When you compare ratios with those of other companies, it is important to ensure you are using the same equation in your calculation. Financial ratios are one of the many tools used in financial analysis. A ratio may vary in importance depending on the business type, the industry category it belongs to, or its location. For example, regional differences such as labour or shipping costs can affect the result of a ratio. Sound financial analysis always requires scrutinizing the data used with the ratios and examining the circumstances that generated the results.

Aguilar, Ma. Janyne F.

CHAPTER 10 INSPECTION AND APPRAISAL

Why Do I Need an Appraisal?

The basic purpose of an appraisal is to help in making a real estate decision. An appraisal could be

needed in any of the following situations:

Setting a price for buying or selling.

Setting collateral value for financing.

Assisting in a refinancing decision.

Determining just compensation in condemnation proceedings.

Assisting in real estate and personal income tax matters.

Setting rent schedules and lease provisions.

Determining the feasibility of a project.

Estimating the price for a corporation's purchase of a transferred employee's ho me.

Assisting in insurance matters.

Estimating liquidation value for forced sale or auction proceedings.

Determining supply and de ma n d trends in market.

What Is Market Value? Market value is the most probable price for which the property should sell after reasonable

exposure in a competitive market with a willing and knowledgeable buyer and seller and assuming a fair and norm al sale with no undue pressure upon either party. Is There A Difference Between Selling Price and Value?

Sometimes, every day some properties sell at a price which is above or below the normal market value. A professional appraisal is an unbiased estimate of value which includes an analysis of past and current sale prices. How Does One Determine Market Value?

Three different methods are generally used in the appraisal process. A brief description of each follows:

Cost approach: This method involves estimating building cost and deducting for wear and tear, design flaws or location problems. Land value is added to this building cost to derive a value estimate. Sales comparison approach: This method is the most commonly utilized. This approach compares the subject property with some w hat similar properties which have recently sold. Adjustments for differences such as overall square footage, condition and location lead to value indication. Income a p pro ac h: This method analyzes the value of the property based on its ability to produce net rental income. The income approach is seldom used in appraisals of single-family residences. How Long Is An Appraisal Valid?

Supply and de man d and market conditions are constantly changing, causing value to increase or decrease. In a fairly stable market, an appraisal should be valid for 60 to 90 days.

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Objectives of appraisal To evaluate the property subject to inspection and appraisement to arrive at its fair market value based on existing conditions in the locality and general economic conditions. INSPECTION Purposes of inspection are: to ascertain the actual existence of the property, determine its exact location, and to look into its actual condition. TYPES OF PROPERTIES

The vast majority of real estate agents and brokers work with three major property types. It's no coincidence that these are the three property types accounting for most of the real estate transfers. As a new agent or broker, you may want to narrow your focus and specialize in one or more property types. A study of the number of properties of each type in your area, and their relative values, would indicate the possible financial rewards of working with those types. TANGIBLE AND INTANGIBLE PROPERTY

Tangible property is property which occupies physical space. The term “tangible” means touchable and tangible property is literally touchable. People can hold it and they can also see it. This is in contrast with intangible property, which cannot be physically touched and is not corporeal in nature. Within the law, there are many categories of tangible property which may be considered for purposes of taxation, valuing an estate, and so forth.

Some simple examples of tangible property include things like furniture, cars, and houses. All of these things can be seen and touched. In the case of furniture and cars, they can also be moved, as may occur when they are sold. For legal purposes, livestock are also considered tangible property. One might think of tangible property as physical property. Something like real estate is also considered immovable property because it cannot be relocated, although people can sell their rights to it, thus transferring ownership of the property to another party.

By contrast, intangible property is something like an interest in land, a stock certificate, or a bank account. These things have value but the value is representative rather than physical in nature. Someone cannot hold interest in land, a stock certificate represents ownership rather than having intrinsic value, and a bank account is not physical in nature. Easements are another example of intangible property since they involve a concept, not an actual physical thing. Money is an interesting example of something which straddles the divide. Historically, cash currency was often viewed as intangible property, despite the fact that it could be seen and felt, because it was backed with gold or silver and thus represented value rather than having a value of its own. Today, such standards have been struck down, and currency may be considered tangible property because it is inherently valuable, rather than standing in for something sitting in a bank vault. There may be cases in which the distinction between tangible and intangible property becomes important. Likewise, the difference between categories such as movable and immovable property can become crucial. For property taxes, for example, motor homes, even if people are living in a fixed location, are taxed differently than homes which have foundations, because one is technically movable and the other is not without leaving the foundation behind; one could relocate a motor home, if desired, to another location, while a house cannot be wheeled away.

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Intangible property is property that has value but that is not tangible. In other words, you may be unable to touch the property, to physically see it, or to hold it in your hands. However, despite your inability to actually see the property, the property still has some type of actual value which the law recognizes and protects.

Common examples of intangible property include brand names and patents for ideas. For example, a brand name such as Nike or Apple has a value, even though you cannot actually see the value associated with the word. The value lies in the brand recognition, which is an intangible concept. Likewise, the ideas that are patented or copyrighted also have intangible value. Some types of property have both tangible and intangible value. The intangible value may far exceed the actual tangible value. For example, the Coca Cola companies recipe for coke is a written recipe, and that written recipe is something tangible that you can touch. However, the intangible value- the ideas that go into that recipe- are what give it its value. REAL ESTATE PROPERTY 1. Vacant Land

Farm and ranch specialists have long been quite successful in this business. Generally the property size and price is quite large, with corresponding commissions. Be sure you understand the specific buying requirements and motivations of your prospect.

In rapidly growing areas, specializing in building lots for properties can be lucrative for an agent. Just know that, as long as the spread continues, the area you have to cover will get farther out from the city and possibly your office. 2. Residential Properties

The residential type of property is by far the most popular with both new and experienced agents. That's no surprise, since the year 2000 US Census shows more than 105 million occupied housing units.

Real estate agents then further specialize in types of homes, including condominiums, separate homes, duplexes, high value homes, vacations homes, etc. There's plenty to go around. 3. Commercial Properties

Commercial property can be empty land zoned for commercial use, or an existing business building or buildings.

Commercial property valuation requires a more complex method, taking into account the income potential of the property, historical revenue, cash flow with owner perks removed and much more. Unless someone has extensive business valuation experience, it's better to enter this specialization carefully after time in the business in land or residential property markets.

Chattel is a term in the financial world which refers to personal property which can be moved; it is also known as movable property. Some examples of chattel include jewelry, cars, and furniture. The opposite of chattel is immovable property, like real estate and buildings, although in some circumstances, of course buildings can be moved. Some people just call chattel “personal property,” differentiating it from things like real estate with the term “immovable property.”

The word is derived from the Middle English chattel, which means “movable property.” It is related to the Old French chattel, meaning “cattle,” a reference to one of the most famous examples of movable property of all time. Humans have had chattel for thousands of years; movable property was probably the introduction to the concept of property for early humans, as people learned to make and use things, thereby attaching value to them.

This term has another, more sinister meaning, which dates to 1649. In the 1600s, abolitionists started calling slaves chattel, emphasizing the fact that slaves were viewed as personal property, rather than human beings. Although slave owners resisted the use of the term, it was remarkably apt and also

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correct: like inanimate chattel, slaves could be seized by the government and sold to recoup debt, for example. You may still encounter terms like “human chattel” in literature from anti-slavery organizations.

Economically, chattel is viewed differently from immovable property. As a general rule, the value of chattel drops rapidly, thanks to a process called depreciation. Anyone who has purchased a new car is probably aware of this phenomenon. Typically, the decline in value cannot be arrested with improvements to the chattel, unlike real property, which can constantly be made more valuable with the use of improvements and renovation. Because of this issue, chattel is treated differently from real estate in financial assessments like those involved in determining how much money someone owes in taxes.

You might be surprised by the value of your chattel. While an individual piece of movable property may not be that valuable, it is easy to pack a home with a substantial amount of belongings. Because replacing such belongings can be expensive and stressful, some people like to get insurance to protect their movable property from things like theft and fires, ensuring that their movable goods are protected along with their real estate and providing rapid replacements for things like cars and computers which may be vitally necessary for work.

Land valuation typically involves numerous calculations to determine how much money a plot of land is worth. Among other things, valuation requires a determination of how much the land is worth independent of any buildings, how much the neighborhood is expected to develop in future years, and the likelihood of either appreciation or depreciation. Performing land valuation is generally a very complex endeavor. Valuation assessors often use more than one method of determining land value before coming to a final number.

Knowing land value is important for a number of reasons. Prospective land purchasers often want to know how much a piece of land is worth before investing in it, for instance. Governments also have an interest in knowing how much a given piece of land is worth in order to assess property taxes. Land valuation is the process of ascertaining the actual current value of any piece of land, developed or not.

One of the most common valuation methods relies on the sale price of other, similar land. The comparable sales method surveys the recent sales of similar land within the same geographic area to get a sense of what the land would sell for on the open market. Often times, the comparable sales method requires subjective adjustments for differences in the land and surrounding area. The selling price of an enclosed lot may help determine the value of a similarly sized lot nearby, for instance, but if that lot abuts a busy street, its value will necessarily be a bit different.

Many valuation assessors also use a cost of development model. Under this method, assessors study the existing costs involved in developing similar plots of land, and consider any physical land attributes — such as streams, irrigation wells, or rocky soil — that might affect building potential. This type of valuation is typically quite exhaustive, taking many different factors into account. If buildings are already attached to the lots, things often get more complicated where valuation is concerned. In these cases, land valuation requires a calculation of how much the buildings are affecting the sale price, and what the value of the land would be without those buildings attached. There are several methods for making this calculation.

The income analysis and cost analysis methods are among the most common. In the income analysis method, land valuation assessors estimate how much money the property makes each year. Then, the agents determine how much the building is worth, and allocate a portion of the earned income to the building. The remainder is the land value.

Aguilar, Ma. Janyne F.

Assessors also look at building value under the cost analysis method, but only in terms of how much it cost to construct them. Under this method, the land value is the property value minus any construction costs. Cost analysis valuation is often criticized for not taking depreciation or upkeep costs into consideration.

Shares of stock are written articles that represent the amount of money invested in the corporation by an individual shareholder. The corporation determines, at the outset of incorporating, how many shares it shall issue and what classes of shares (No Par, Par, Common, Preferred, Participating, etc.) it will issue. In a close corporation, the number of shares are determined and sold to only one or a few investors. In other corporations the shares are sold to many investors or to the public. Each share represents ownership in the company, and it entitles the holder to certain types of rights (voting rights, dividends, etc.).

The different classes of stock determine how dividends will be paid, and how much money will be paid for each share of stock in the corporation. Each share certificate will be marked with the amount of par (the minimum amount of money that must be paid for the share). Share certificates may also be marked as no par, with no minimum amount being paid for the share. This designation must be made at the outset of incorporating and provided for in the Articles of Incorporation.

Additionally, Common stock represents the class of shareholders who shall be paid a dividend last, after the preferred shareholders are paid first (if any exist). If there are no Preferred shareholders, then the dividend amounts are split equally among the Common shareholders. What is Par Value?

A business corporation must sell shares of stock in order to capitalize the corporation, that is, provide the corporation with its own capital, separate from the money of its owners. This separation provides part of the support for shielding the shareholders from personal liability for the debts and obligations of the corporation.

Shares of stock sold by the corporation represent proportionate ownership interests held by shareholders in the corporation. “Par value” is a dollar value assigned to shares of stock which is the minimum amount for which each share may be sold. There is no minimum or maximum value that must be assigned. Shares may also have “no par value,” which means that the Board of Directors will assign a value to the stock below which the shares cannot be issued.

There is no minimum number of shares that must be authorized in the articles of incorporation. One or more shares may be authorized. However, the corporation may not sell more shares than it is authorized to issue and it must receive consideration in exchange for its shares. What are Authorized Shares?

State law specifies that shares of stock in the corporation will be issued under the direction of the board of directors. But, since the corporation is set up to benefit the shareholders, the shareholders set, or limit, the number of shares the directors are “authorized”, or allowed, to issue. Since the directors are not allowed to issue shares without authorization from the shareholders, the number of authorized shares is equal to the number of total shares. What does Capitalization Mean?

Capitalization is a term that requires a knowledge of accounting to understand, and can have different meanings. With a new corporation, the term generally refers to the amount of money that a corporation has in its “kitty” when operations begin.

Aguilar, Ma. Janyne F.

Some states have minimum capitalization requirements to insure that corporations have a bare minimum of assets before starting operations. Since shareholders are somewhat insulated from lawsuits against a corporation, these assets provide a means to pay any potential lawsuit winners. Minimum capitalization requirements also make it a little more difficult to start a corporation, and was probably started to help to keep out the “riff raff” Today, only a few states have minimum capitalization requirements. What is a Dividend?

A dividend is a special payment, usually paid at the end of each quarter, and is based on the profits made by the corporation during that quarter. Dividends are usually paid in cash or additional stock to the shareholders. This is a shareholder’s reward for investing in the corporation. It is much the same as interest on a loan except that the dividend is based on the income of the corporation, and may or may not be a regular payment. Also, dividends are not deductible by the corporation while interest payments are. Some owners pay themselves a small salary to minimize FICA withholding, and pay themselves a quarterly dividend instead.

What are Issued Shares?

Issued shares are easily confused with authorized shares. Authorized shares are the maximum number of shares that the board of directors is “authorized”, or allowed to issue. Issued shares, however, is the number of shares actually “issued”, or given out to shareholders? Only issued shares are counted for ownership purposes. How Many Shares of Stock are required?

A corporation can’t be a corporation without at least one share of stock. So you must have at least one shareholder, and one share of stock. You can have (authorize) as many shares of stock as you want, however, this may increase your filing fees in some cases. What is no Par Value Stock?

Since par value more or less means the price to be paid for the shares when purchased from the corporation, no par value stock is stock for which no fixed price is set. This is usually the case in small corporations where the owners issue themselves a number of shares and simply infuse money in the corporation when needed.

Corporations issue no par stock for flexibility. If the corporation’s stock has no par value, then there is no set “price” for the stock. In this case, the directors can raise the “price” of the stock when the corporation becomes more valuable. You see, with no par value stock, the directors decide how much must be paid for the stock each time it is issued to a shareholder. What is the difference between “par” and “no par” stock?

Par value stock has a stated value on its face. No par value stock has any stated value and its worth depends on what an investor is willing to pay.

Aguilar, Ma. Janyne F.

CHAPTER 11 SHARES OF STOCKS AS COLLATERAL

Capital stock has to do with all the shares of stock that represent the ownership of a given

company. The exact number of shares that can be issued in the way of capital stock is normally recorded in the current balance sheet for a company. Capital stock will involve all types or classes of stock that the company is authorized to issue.

The basis for issuing capital stock is normally outlined in the charter of the corporation. Often, the charter will specify not only the number of shares that can be included as part of the issuance, but also define the class or classes of stock that the corporation will release for issue. It is not unusual for a company to issue both common stocks along with preferred stock as part of the overall strategy. The common stock may be provided to hourly employees of the company as part of the benefit package, while the preferred stock is open for issue to any outside investor.

Generally, capital stock is issued at a nominal value, but may increase in value over time. There is also the possibility of additional shares of capital stock coming available as the company expands its operations and begins to realize higher profits. When this happens, it is necessary for current investors to work with board members to amend the charter of the company, making it legal to issue more shares of stock. At the same time, the company must work within the financial laws currently in place in the country of jurisdiction to determine the maximum number of shares that the company can publicly trade.

The charter of the company will also address the total value of stock that can be issued. This total value will of course impact the number of shares of capital stock that the corporation can issue under current circumstances. Generally, when the charter is amended and the Articles of Association updated, existing stockholders are notified and given the opportunity to purchase the newly issued shares on the open market. Sometimes referred to as a certificate of stock, the stock certificate is a document that establishes the ownership of a specific number of shares in a stock that is issued by a given corporation. The stock certificate provides the legal ability to perform several different tasks involving the shares of stock. Among these rights and privileges are such essential tasks as trading the shares or participating in shareholder’s meetings.

Stock certificates are generally issued in two different types or categories. The first is known as

a registered stock certificate. Registered certificates functions essentially as proof of ownership of the shares, with the name of the owner appearing in the corporation’s register of stockholders. A registered certificate of stock allows the owner to exercise all rights and privileges associated with being a shareholder in the company, including voice and vote in shareholder’s meetings.

The second form of stock certificates is known as the bearer stock certificate. Essentially, the entity that is in possession of the bearer certificate may exercise any and all privileges that are authorized by the actual registered owner of the shares. This may include trading the shares on behalf of the owner, or voting the shares at corporation stockholder meetings, if the corporation’s charter allows this type of activity.

From time to time, shareholders may choose to appoint a proxy or substitute to manage stock shares. The ability to utilize the services of a proxy is generally defined in the terms of purchase for the stock certificate and in the bylaws of the corporation that issues the share certificate. In most cases, the proxy has limited powers and will only cast votes according to the wishes of the legal owner of the shares. A proxy may also handle the sale of shares of stock on behalf of the stockholder, always working within perimeters that are set by the proper owner of the shares and in accordance with the terms of issue that govern the stock.

Aguilar, Ma. Janyne F.

Common stock is stock in a company which comes with voting rights and an opportunity to

share in the profits of the company. This type of stock is commonly issued by companies making offerings of stock and is a popular choice for people interested in buying and selling stocks. Prices for common stock vary depending on market pressures. Stock exchanges offer opportunities for people to buy, sell, and trade common stock with each other and with brokers.

This type of stock should be contrasted with preferred stock, another type of stock which works slightly differently. Preferred stock offers several advantages over common stock. The first advantage is a fixed dividend, which generates more reliable returns than common stock, although it also means that the stockholder can miss out when large profits are made because the dividend will not be adjusted. In addition, in the event of a bankruptcy, preferred stockholders are ahead of holders of common stock, as are creditors, lien holders, and so forth.

There are some advantages to holding common stock. Voting rights can be important because they allow people to vote on members of the board of directors, policy, and stock splits, which gives them a role in the governance of the company. In addition, the dividends paid out on common stock can be big when the company is making large profits. Finally, common stock also appreciates in value, allowing people to sell their stock at a higher price than they paid. Conversely, of course, the stock can also depreciate, leaving people holding stocks which are worth less than they paid.

Some issuing of common stock comes with what are known as preemptive rights. If preemptive rights are attached to the stock, in the event that a company issues more stock, holders of common stock have an opportunity to maintain their proportional share of ownership in the company by being given first choice when it comes to buying the new stock issue.

Also known as ordinary shares, common stocks are bought and sold in very high volume on stock exchanges all over the world. The common stock value can vary in response to many different factors and it is not uncommon to see volatility in value around the time that companies pay out dividends and release new products. The art of trading stocks requires a number of different skills which will allow people to identify good buys and the right time to sell so that they can maximize their trading profits.

Preferred stocks are a name given to a special category of stock which has characteristics differentiating it from the general or "common" stock of the same company. This can include advantages such as being first in line to get dividend payments or having priority over claims if the company goes into liquidation. There are some disadvantages most notably that which preferred stocks do not usually come with voting rights.

The precise characteristics of preferred stocks vary from company to company. The most common is that anyone holding preferred stocks will be higher up in the pecking order if a company is liquidated and its assets divided among creditors. Depending on the rules of the stock, holders of preferred stocks will either get back the amount they invested or the market value of their stocks when the company was liquidated. As long as there is enough money left in the company, these holders will get this amount back as a flat amount. Holders of ordinary stocks will have to wait in line with other creditors and will usually only get a portion of the money they are "owed."

Another characteristic of preferred stocks is that holders normally get paid a fixed dividend. This dividend is paid before the dividend payments to holders of ordinary stocks. The payments to ordinary stocks will be determined on a year by year basis and is usually dependent on the company's performance and cash reserves.

Aguilar, Ma. Janyne F.

There is usually no guarantee that holders of preferred stocks will get a dividend payment. If they do, it must be paid at the agreed rate. This payment must be made before any dividend payment to other stockholders. The result of this is that it is impossible for a firm to make a dividend payment to ordinary stock holders without making one to preferred stock holders.

If a preferred stock is classed as cumulative, then whenever the company opts not to make a dividend payment, the amount it would have paid to preferred stock holders is carried over. For example, if the company makes no dividend payments whatsoever for two years, then in the third year it must pay preferred stock holders three years' worth of dividends before it is allowed to pay anything to holders of ordinary stocks. The alternative to this is known as non-cumulative. In this situation, if a company doesn't pay dividends one year, the holders of the preferred stock will never get any dividend for that year.

Sometimes known simply as preferred stock, redeemable preferred stock is a type of stock option that carries the possibility of being returned by the investor to the issuing entity after certain provisions within the terms and conditions of the original sale have been fulfilled. Typically, this means that the shares can be redeemed once the unit price of the shares reaches a certain level, or once a specific date after the sale date has passed. In some cases, there is a need for the holder of the redeemable preferred stock to notify the issuing entity ahead of time of the intent to cash in the shares in order for the transaction to actually take place.

Due to the structure of redeemable preferred stock, many companies that issue this type of offering will include some incentives for investors to hold onto those shares for an extended period of time. One of the more common incentives is the inclusion of a higher rate of interest with the issue, in comparison to other types of preferred stock currently issued by the company. When coupled with an attractive schedule for providing dividend payments to shareholders, there is a very good chance that investors will prefer to hold onto the shares over the long-term, rather than make use of any provisions to cash in the shares as soon as the basic terms related to the sale of the shares have been met. Cumulative preferred stock is a form of preferred stock that allows the issuer of the stock to withhold or omit the payment of dividends under certain conditions. While the payment date for the dividends may pass, this does not mean the investor loses the dividend altogether. Instead, the dividend payments will accumulate until such time as the issuer determines circumstances have changed and the dividends may be distributed to the shareholders.

One of the more common reasons for delaying a dividend payment on cumulative preferred stock is poor performance of the corporation that issued the stock. When the earnings generated during the period are not up to projections, the company may shortly experience a period where available cash is low. Depending on the terms and conditions connected with the issuance of the stock, the company may inform shareholders that the dividend payments scheduled for the upcoming quarter will be omitted.

Shareholders who own shares of cumulative preferred stock have a couple of advantages over investors who hold shares of common stock. When the company begins to issue dividend payments again, every investor holding shares of cumulative preferred stock will receive past and present dividend payments before any dividend payments are issued to shareholders with common stock.

Convertible preferred stock is a type of preferred stock that has the option of being converted into common shares issued by the same company. The terms and conditions that apply to the stock normally set the conditions that must apply before the conversion can take place. Generally, the terms outlined at the time of purchase also define the ratio of conversion from the convertible preferred stock to shares of common stock.

Aguilar, Ma. Janyne F.

Convertible preferred stock is one of the less commonly employed approaches of issuing shares of stock. Usually there are some underlying factors that preclude the issuing of straight common stock. One scenario that often applies to the issuing of convertible preferred stock is that the company is currently considered to be in a high risk situation, and needs to raise capital quickly. Within this scenario, the company finds that raising money through equity or through the accumulation of temporary debt will not adequately address the current circumstances.

Preferred stock, also known as non-participating preferred stock, is a type of stock that pays the investor a specific dividend only. Generally, preferred stockholders do not receive any extra dividends that are paid to common stockholders. When a provision is added allowing preferred stockholders to share in additional dividends, the stock is known as participating preferred stock. Participating preferred stock dividends are usually a fixed percentage of the par value of the stock. Sometimes, an adjustable rate provision exists with a certain stock. In this case, the payout is usually based on the movement of benchmarks, such as U.S. Treasury interest rates.

Participating preferred stock owners usually do not have any voting rights at stockholder meetings. Owners of common stock do have voting rights. A provision is sometimes added to allow preferred stockholders to have voting rights for a specific period of time. This usually happens when dividends are not paid.

Typically, participating preferred stock dividends are paid only when the company is doing well and making a profit. If the company is not doing well, dividends may or may not be owed to the investor. Cumulative participating preferred stock can accrue dividends that will be paid to the investor once the company’s performance improves.

In finance, par value is the least amount that a share of stock can be sold for, according to the terms and conditions that are found in the regulations of the issuing company. In most cases, the par value will also be the initial trading price for the stock when it is introduced in the market place. However, the expectation is that the par value for the stock will shortly be exceeded by a higher market price.

It is important to remember that the establishment of a par value for a stock offering is essential to the basic structure of any stock. By establishing the minimum amount or price that a stock can be traded, the company makes places a limit on how far the stock can fall before being removed from active trading. This helps protect the company from any attempts to devalue the stock below a certain point and thus make it possible for raiders to acquire cheap stock and a controlling interest in the corporation. At the same time, the designation of a par value does not in any way inhibit the upward price that the stock can command in an investment market. This is an important point for investors to keep in mind, since the par value is also understood to be the face value as well. This means that the investor will want to look at three factors when considering a stock purchase.

Book value per share is a type of evaluation or measure of the worth of shares of stock issued by a specific company. The calculation makes it possible to identify the specific monetary amount that the investor would receive for each share in the event that the company’s assets had to be liquidated and all outstanding debts settled. This particular measure normally focuses on the book value of common shares rather than the value of preferred shares.

While there is sometimes confusion by what is meant by the market value per share and the book value per share, it is important to realize that the two figures are very different. The market value per share has to do with how much the share would sell for at today’s market prices, and is subject to constant change as the desirability of those shares shifts in the marketplace. In contrast, the book value

Aguilar, Ma. Janyne F.

per share is a figure that is carried on the company’s balance sheet, and is affected by the current outstanding debts that the company owes. Typically, the book value will be less than the current market value.

Monitoring the changes in book value per share from one accounting period to another can provide insights into the financial condition of the company. When that value increases, which is a sign that the business is managing its debt efficiently and that in the event of a business sale and liquidation, investors would receive a higher amount per share. At the same time, if the book value remains stagnant or is reduced over successive periods, this may point toward impending financial problems for the company, especially if the debt load is continuing to increase due to a reduction in income. Investors may also want to consider the book value per share when making decisions about buying, holding, or selling those shares. This is especially true if there are some indications that the issuing company is facing an upcoming period of financial difficulty that could result in bankruptcy and eventual liquidation. In this scenario, investors would want to establish some benchmark for that book value per share, selling off the shares just before that figure is reached. Since many companies include the book value per share in the financial information released to investors in periodic reports and earnings meetings, tracking the current book value of the shares is a relatively simple task that requires very little in the way of time or effort.

Aguilar, Ma. Janyne F.

CHAPTER 12 LAND AS COLLATERAL

Collateral is borrowing funds often requires the designation of collateral on the part of the

recipient of the loan. Collateral is simply assets that have been pledged by the recipient as security on the value of the loan. In the event that circumstances make it impossible for the recipient to repay the loan, ownership of the collateral is transferred to the entity that issued the loan in order to settle the debt. Here is some information about the different types of assets that may be used as collateral in different situations.

One of the most common examples of a collateral loan is with real estate purchases. In many cases, the property that is being purchased with the mortgage is held as collateral for the duration of the loan. Essentially, the financial institution that grants the loan retains interest in the property until the mortgage is paid in full by the homeowner. The mortgage holder must approve any changes in ownership of the property as long as there is an outstanding balance on the loan. Once the debt obligation is discharged, the mortgage holder considers the business arrangement to be concluded and releases all claims to the property.

In like manner, many finance companies will use a newly purchased vehicle as the collateral on the loan used to purchase the car. This provides the finance company with the right to take possession of the vehicle if the owner defaults on the loan for any reason. Generally, companies that finance car loans will only finance what is understood to be the current market value of the vehicle. This helps to ensure that the collateral held on the property is sufficient to recoup any losses that result from the default.

Other assets can also be used as collateral on cash loans. For example, jewelry and securities that have a certified value may be held as collateral until the loan is repaid. In some cases, rare antiques may be accepted as collateral. Depending on the circumstances, just about any asset that is clearly owned by an individual may be used as collateral, as long as the entity that makes the loan is willing to accept the asset as being sufficient to guarantee the loan amount.

Providing collateral usually does not mean surrendering possession of the asset that is used as collateral. However, the borrower is covenanting to retain control of the asset for as long as it takes to repay the loan. This helps to provide the lender with a reasonable amount of confidence that the investment made in the borrower will be recouped, either through the systematic repayment of the loan, or by taking possession of the collateral. Function of Land It provides “standing room”. Inspite of the fact man has learned to fly, and to dive under the surface of the water in submersible ships, we are still bound pretty close to the surface of the earth. Modes of acquiring title:

Public grant

Private grant

Involuntary grant

Inheritance

Reclamation

Accretion

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Zonal valuation Different approaches to valuation of properties have been introduced in this country. In the case

of land, not only it its price dictated by the interplay of supply and demand but moreover by the concept of zonal valuation instituted by the government. Government agencies like the Office of the Register of Deeds under the Department of Justice. IMPORTANT FACTORS IN OWNERSHIP PEACE AND ORDER

The prevailing peace and order affects the value of the land. Today, a number of areas in the country are infested by the presence of bandits and other lawless elements like the NPAs for instance. They are known to have been exacting be so-called “revolutionary tax” on business establishment in such areas. Such deplorable conditions inhibit buyers from any interest. In buying such land or even in locating their business establishments.

Aguilar, Ma. Janyne F.

CHAPTER13 COLLECTION POLICIES AND PROCEDURES

Collections are a part of a process in the "accounts receivable" or billing department. It means that, at some point in time, a company extended to another company or an individual credit terms for goods or services, or a cash loan advance of some kind that was to be paid or repaid at a certain time. If that bill is not paid when it is due, or within an agreed upon grace period, the collection process begins.

Collection procedures usually consist of a set of in-house company policies that are written in a manual or guidebook of some kind, though smaller companies may not have a manual. Usually, law firms that engage in collection practices will have manuals and training classes for their employees before they make their first collection call to a debtor. Most of the time, large corporations and small companies have a collection manager or collection department that will go through certain "housekeeping" procedures before an unpaid debt is turned over to a lawyer. Laws and Regulations

The laws that cover collection policies and procedures are mandated by federal and state governments. On the federal level, the Federal Trade Commission regulates what is called the Fair Debt Collection Practices Act (FDCPA). In the case of a conflict between state and federal law, federal law prevails. Those who extend credit to others should be aware of the legal rules about how to collect money that is past due, particularly as those rules apply to bankruptcy. Special federal laws are in place for debtors who file for consumer protection under bankruptcy law.

Under the collection procedure, debtors need to receive notices providing information about the debt, any applicable interest and fees, and where to direct payment. If they respond, the company can enter the next phase, of collecting the debt in full or creating a payment plan. When debtors do not respond to requests for payment, the company may be able to pursue action in court to collect the funds. It can also conduct an investigation to locate missing debtors and identify assets that might be eligible for seizure, if it is authorized to engage in seizure activity.

Clearly established collection procedures can protect a company from legal liability. If it treats all debtors equally, it cannot be accused of discriminatory practices. Having set policies in place allows employees to follow them carefully and neutrally with all debtors, rather than using their own best judgment. The documentation can also be useful in the event of a dispute, as the company can show that it obeyed the law and followed internal procedures when it handled a matter.

Those with questions about collection procedure can ask to see documentation and may request an explanation of any components they have difficulty understanding. Before taking on a debt, it can be advisable to review all terms and conditions, including the collection procedure disclosures. This can provide important information about what people should do when they worry they may not be able to pay.

Aguilar, Ma. Janyne F.

A collection policy is a set of business practices and procedures that outline the way a company goes about collecting money owed to it as a result of an extension of credit. Companies often allow their best business customers to establish payment terms that give the customer an extended amount of time, such as 30, 60 or 90 days, to pay an outstanding invoice. Other companies extend credit to individual consumers and implement a collection policy to control the process of obtaining payment on the credit account.

Companies build their businesses by developing relationships with their customers. One of the ways to build a relationship is to allow customers to take goods when needed but pay for them later. This extension of credit enables business customers to manage their cash flow by giving them time to resell product before having to pay the supplier.

Credit extensions allow individual consumers to obtain needed merchandise upfront but pay for purchase over time. In the case of business-to-business transactions, the extension of credit is carried on the supplier's book under accounts receivable. Extensions of consumer credit are typically carried on the books under a separate consumer credit category that is also a type of receivable.

Accounts receivable is a company's list of outstanding extensions of credit to customers. The company's collection policy establishes how the accounts receivable or collections department should go about reminding customers that payments are due and how the department should handle delinquent accounts or accounts that are not paid as agreed. This policy is critical to a company's relationship with its customers. A relationship can be irreparably damaged by miscommunication about amounts owed or aggressive collection tactics, undermining the goodwill that was generated by the initial extension of credit.

Typically, a collection policy is comprised of a set of rules that govern the acceptable actions by people assigned to work to collect payments on credit extensions. The policy addresses issues such as when and how to contact customers, when to place a hold on an account, how to resolve payment disputes and when to send an account to an outside collections agency. Establishing a collection policy makes the process consistent and fair. If an account is delinquent and requires more aggressive tactics, such as suspending a customer's buying privileges, the existence of a collection policy ensures that the customer is treated in the same way as any other customer under the same circumstances.

Bad debt can cover a wide variety of definitions. The most common meaning is money owed which is unlikely to be recovered. This form of bad debt may be written off by a company or may ultimately lead to the person with bad debt finding him unable to gain anymore credit. Many companies have a bad debt allowance, as it is unlikely that all bad debts will be recovered. Companies make an estimate of the bad debt that may be incurred within a current time period. This estimate is based on past records and used in the process to estimate overall earnings.

Major banks have a strange way of looking at bad debt. A bank can make a profit of 10 billion US dollars (USD) while stating that they have 4 billion USD in bad debt. Most of a bank's profit is made from the interest on loans, credit cards and bank charges from their customers. If a customer falls into debt with a bank, the interest payments and late charges make the bank money. It seems to be in the bank's interest to have customers who eventually end up with bad debt.

If a person falls into debt, it can sometimes be extremely difficult to climb out. Credit card payments, mortgage payments and loan repayments can spiral out of control. If they are not dealt with, the results can cause extreme worry, break up families and end in bankruptcy or imprisonment. Regardless of this, banks and other lending establishments continue giving high interest credit cards and loans to people who have seriously bad debt, compounding the problem.

Aguilar, Ma. Janyne F.

If you find yourself in debt, there are a number of avenues available in order to find help. Do not under any circumstances bury your head in the sand and hope the problem will go away. There are debt counseling and debt consolidation companies that will do their best to help with your problem. You can work towards financial freedom by consulting these companies on ways of reducing your monthly payments. Some of these companies charge a fee, but many are run with government approval or are voluntary. Most communities have their own debt counseling offices, and it is best to approach them before trying anyone else.

Beware of companies that advertise on television or in newspapers. They are there to make a profit from your bad debt situation and may not be regulated financial advisors. They may end up doing more harm than good to your credit score. Remember, these firms have to recoup their advertising costs somewhere, and it is usually at the expense of the customer. If a company makes promises that sound too good to be true, they usually are. Types of Bad Debt Buyers

Also known as junk debt buyers, bad debt buyers are firms that purchase unpaid debts from different types of creditors at rates that are below the actual face value of the debts, then attempt to collect the full amount plus interest and penalties from the debtor. Bad debt buyers sometimes specialize on securing and collecting specific types of debt, including credit card debt, business debt, or loan debt.

Credit card bad debt buyers are one of the more common types of junk debt buyers. Here, the buyer purchases old credit card accounts with outstanding balances that the originator was unable to collect. Typically, the buyer offers the originator up to 50% of the face value of the debt, with the amount of the offer depending on the degree of risk associated with eventually collecting the total debt owed. In many cases, the purchase may be as low as 10% of the actual debt if the risk level is considered somewhat higher. The originator is then able to close the account and write off a partial loss. When successful, the buyer is able to collect not only the face amount, but also any penalties or interest that apply during the repayment period.

A similar approach is used when it comes to bad debt buyers who focus on taking over outstanding business debt. As with the unpaid credit card debt, the originator sells the delinquent account to buyer at a price that is less than the actual amount of the debt. The buyer in turn attempts to arrange repayment terms with the debtor, often making a significant profit in the interim.

Bad debt buyers sometimes specialize in purchasing outstanding loans that have fallen into default for one reason or another. This includes delinquent mortgages that may be currently held by investment companies. The debts may be sold in blocks that are sometimes identified as debt pool, with a discounted price negotiated for the collection of bad debts. Once the buyer has control of the debts, the process of debt collection begins, with the expectation that enough of the face value of those debts will be recovered to make the effort profitable.

It is important to note that bad debt buyers are different from debt collection agencies. When an agency is involved, the original owner of the debt still retains control and ultimately receives the funds recovered by the collection agency, less a percentage that is withheld by the agency for services rendered. In contrast, bad debt buyers purchase debt outright, becoming the new owners of that debt. When this is the case, the debtor no longer has the opportunity to work with the originator and must work directly with the bad debt buyer to settle the balance of the delinquent account.

Aguilar, Ma. Janyne F.

CHAPTER 14 BANKRUPTCY

Bankruptcy is the process where a person legally declares himself or his business unable to pay outstanding debts. Depending upon the type filed, one meets with a judge to determine a payment schedule, or have a legal bankruptcy discharge most if not all debts. Businesses also may declare bankruptcy, which either means the business will close, or that the business will continue to operate with reduced payments to debtors. Each country has its own designations, but this explanation will focus on the most common types in the US.

The time it takes a person to file for bankruptcy and have his or her debts discharged varies greatly. It depends on what type the person intends to file, and also how quickly he or she can gather together information about his or her income and debts.

Bankruptcy is the most common proceeding, and it is usually filed when a person doesn’t have a large number of assets that he or she needs to protect. Generally, the person uses a lawyer who specializes in bankruptcy to help file all the papers required. The part that typically requires the most amount of time when someone is preparing to file bankruptcy is gathering all the required information for the form. If a person owes money to numerous creditors, and these creditors have sold their accounts to collection agencies, it may be challenging to figure out who exactly is owed money. Usually, a person must also provide statements about income, any assets, and tax reports as part of a bankruptcy filing. If a person has not kept meticulous records of income or debt, it can be challenging to find out all this information. A lawyer may do some of the legwork by tracking down parties who have purchased the debt. All this information needs to be gathered prior to filing, when possible, so the bankruptcy is declared without complications.

Usually, once the bankruptcy papers are officially filed, it takes a month or two, for a court date to be set. At that time, providing that all papers are in order, the court will declare the person bankrupt. This is the end of most debts, but some, like student loans, court feeds, and recent taxes owed, are not discharged. At minimum, the process takes about a month, and often takes longer. Once a person hires a lawyer, however, any calls from creditors can be referred to the legal professional, which may end harassment by creditors. Bankruptcy is meant to protect a person with a significant number of assets that go beyond normal living requirements. Instead of discharging debts, Chapter 13 works with creditors to reduce debts and come up with reasonable payments. Payment schedules can be constructed on a 3 to 5 year basis, which means that a person can expect to make payments monthly for this length of time. In this sense, though bankruptcy has been declared, the actual process last for several years. Financial distress

As it relates to businesses, financial distress is an economic situation where a corporation is undergoing increasing difficulty in honoring its debt obligations in a timely manner. If left unchecked, the distress can eventually reach a point at which the business is unable to meet those obligations. At that point, the company is likely to take several different measures to relieve the stress, including selling off assets or possibly declaring bankruptcy.

There are a number of reasons why a business may experience financial distress. In some cases, the problem is poor management of assets, leading to situations where the revenue generated by the business is diverted into projects that ultimately do not generate any type of return. At other times, the management may be due to overestimating projected income and functioning with an operating budget that is not realistic. With these types of causes for financial distress, reworking the budget and

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eliminating waste will often help the company move out of the crisis and be able to pay bills on time without a great deal of hardship.

Financial distress may also occur due to unforeseen factors that have an adverse effect on the different revenue streams that the corporation enjoys. For example, an unfavorable outcome in a political election or the occurrence of a natural disaster may undermine the value of securities held by the business. This effectively reduces the revenue stream that the corporation may have depended on to cover its expenses. When situations of this type arise, trimming expenses as much as possible will often ease the financial distress and allow the company to avoid bankruptcy, or even the need to sell off distressed securities that are likely to increase in value in a reasonable amount of time. In some situations, the financial distress may be so great that the business must either liquidate or undergo bankruptcy as a way of relieving the stress. The bankruptcy action may be necessary to protect the business from creditors while the company is reorganized under the direction of the courts, allowing the corporation to at least have a chance of getting back on a firm financial foundation. Liquidation may be partial or complete, depending on the amount of debt involved. With a partial liquidation, the business sells off assets, including divisions of the business that are not needed for the continued operation of the core businesses. A complete liquidation means the selling of all assets and the eventual dismantling of the company as a business entity.

Insolvency is the inability of a person to meet his obligations as they mature (Equity sense). It

refers to the excess of liabilities, in the case of corporation, excluding capital stock over assets.

(Bankruptcy sense)

Two types of Insolvency

Voluntary Insolvency

Under voluntary insolvency, an insolvent debtor, owing debts exceeding in amount the sum of P

1,000.00 may apply to be discharged from his debts and liabilities by filing a petition with the Court of

First Instance of the province or city which is the domicile of the petitioner for six months preceding the

petition.

In his petition, he shall set forth his place of residence, therein immediately prior to filing said petition,

his inability to pay all his debts in full, his willingness to surrender all his property, estate, and effects not

exempt from execution for the benefit of his creditors., and an application to be adjudged insolvent. He

shall moreover annex to his petition a schedule and inventory in the form as prescribed under the

Declaration of Insolvency

Upon receipt of such petition, together with the schedule and inventory, the court or the judge

thereof in vacation, shall make an order declaring the petitioner insolvent. The said order shall further

forbid the payment to the debtor of any debts due to him and the delivery to the debtor or to any

person for him, of any property belonging to him, and the transfer of any property by him, and shall

further appoint a time and place for a meeting of the creditors to choose an assignee of the estate.

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Said order shall designate a newspaper of general circulation published in the province or city in

which the petition is filed, if there be one, and if there be none, in a newspaper which, in the opinion of

the judge, will best give notice to the creditors.

Involuntary Insolvency

In the case of involuntary insolvency, an adjudication of insolvency may be made on the petition

of three or more creditors, residents of the Philippines, whose credits or demands accrued in the

Philippines, and the amount of which credits or demands are in the aggregate of not less than one

thousand pesos. Provided, that none of the said creditors has become a creditor by assignment,

however made, within 30 days prior to the filing of said petition.

Petition. The petition must be filed in the Court of First Instance of the province or city in which

the debtor resides or has his principal place of business, and must be verified by at least three of the

petitioners.

The following shall be considered acts of insolvency, and the petition for insolvency shall set

forth one or more of such acts:

1. That such person is about to depart or has departed from the Philippines, with intend to

defraud his creditors;

2. That being absent from the Philippines, with intend to defraud his creditors, he remains

absent;

3. That he conceals himself to avoid the service if legal process for the purpose of hindering or

delaying or defrauding his creditors;

4. That he conceals, or removing, any of his property to avoid its being attached or taken in

legal process;

5. That he has suffered his property to remain under attachment or legal process for 3 days for

the purpose of hindering or delaying or defrauding his creditors;

6. That he has confessed or offered to allow judgment in favor of any creditor or claimant for

the purpose of hindering or delaying or defrauding his creditors or claimant;

7. That he is willfully suffered judgment to be taken against him by default purpose of

hindering or delaying or defrauding his creditors or claimant;

8. That he has suffered or procured his property to be taken on legal process with the intent to

give a preference to one or more of his creditors and thereby hinder, delay or defraud any

of his creditor;

9. That he has made any assignment, gift, sale, conveyance, or transfer of his estate, property,

rights, or credits for purpose of hindering or delaying or defrauding his creditors or claimant;

10. That he has, in contemplation of insolvency, made any payment, gift, grant, sale,

conveyance, or transfer of his estate, property, rights, or credits;

11. That being a merchant or tradesman has generally defaulted in the payment of his current

obligations for period of 30 days;

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12. That for a period of 30 says he has failed after demand, to pay any money deposited with

him or received by him in a fiduciary capacity; and

13. That an execution having been issued against him on final judgment for money, he shall

have been found to be without sufficient property to execution to satisfy the judgment.

The petitioners may, from time to time, by leave of court, ament and correct the petition, so

that same shall conform to the facts, such amendment or amendments un the on the original petition.

The said petition shall be accompanied by a bond, approved by the court, with at least 2

sureties, in such penal sum as the court shall direct, conditioned that if the petition in insolvency be

dismissed by the court, or withdrawn by the petitioners, of if the debtor shall not be declared an

insolvent, the petitioners will pay to the debtor alleged in the petition to be insolvent all costs,

expenses, and damages occasioned by the proceedings in insolvency, together with a reasonable

counsel fee to be fixed by the court. The court may, upon motion, direct the filing of an additional bond,

with different sureties when deemed necessary.

Creditors Petition. Upon the filing of such creditors’ petition, the court or judge shall issue an

order requiring such debtor to show cause, at a time and place to be fixes by said court or judge, why he

should not be adjudged an insolvent debtor. At the same time or thereafter, upon good cause shown

therefore, said court or judge may make an order for bidding the payment if any debts, and delivery of

any other persons for his use or benefit or the transfer of any property by him.

A copy of said petition, with a copy of order to show cause, shall be served in the debtor, in the

same manner as is provided by law of device of summons in civil actions, but such service shall be made

at least 5 days before the time fixed for hearing. However, if for any reason, the service is not made, the

order may be renewed, and the time and place of hearing changed by supplemental order of the court,

whenever the debtor on whom the service is to be made resides out of the Philippines or cannot, after

due diligence, be found within the Philippines or conceals himself to avoid the service of the order to

show cause, or any other process or order in the matter, or is a foreign corporation having no managing

or business agent, cashier, or secretary within the Philippines upon whom service can be made, and

such facts are shown to the court or a judge thereof, by affidavit, such court or judge thereof shall make

an order that the service of such order, or other process, be made by publication, in the same manner,

and with same effect, as service of summons by publication in ordinary civil actions.

The debtor must answer the petition at the time fixed for the hearing, or may demur for the

same caused as are provided for the demurrer in other cases by the Code if Civil Procedure. If the

demurs and the demurrer* be overruled. The debtor shall immediately answer the petition. Such

answer shall contain a specific denial of the material allegations of the petition controverted by him, and

shall be sworn to; and the issues raised thereon shall issues are found in the favor of the respondent,

the proceedings shall be dismissed, and the respondents shall be allowed all costs, counsel fees, and

damages sustained by reason of proceedings therein.

Aguilar, Ma. Janyne F.

Presence of Creditors

Only creditors included in the schedule filed by the debtor shall be cited to appear and take part

in the meeting called for by the court of competent jurisdiction.

Creditors may be represented at the meeting by one or more lawyers or by any person dully

authorized by the power of attorney, which documents shall be presented and attached to the record.

Persons appearing for more than one creditor shall have only one personal vote, but the claims

presented by them shall be taken into consideration for the purpose of arriving at the majority of the

amount represented.

The presence of the creditors representing at least 3/5 of the liabilities shall be necessary for

holding a meeting. The meeting shall be held on the day and at the hour and place designated. The

judge or commissioner deputized by him when he is absent from the province where the meeting is

held, acting as president and the clerk as secretary thereof, shall be subject to the following rules.

a. The clerk shall prepare for the insertion in the minutes of the meeting a statement of the

person present and their claims; the judge, or, in default thereof, the commissioner, shall

examine the written evidences of the claims and the power of attorneys, if any. If the

persons present who have complied with the foregoing ruled represent at least 3/5 of the

liabilities, the judge or commissioner shall declare the meeting open for business.

b. The petition of the debtor, the schedule of debts and of property, the statement of assets

and liabilities and the proposed agreement filed therewith shall be read forthwith by the

clerk, and the discussion shall be opened.

c. The debtor may modify his propositions in the view of the result of the debate, or insists

upon the once already made, and the judge or commissioner, without further discussions,

shall clearly and succinctly place these several propositions before the meeting for a vote

thereupon.

d. The vote shall be taken by a call of names and shall be inserted in the minutes; a majority

vote shall rule.

e. To form a majority, it is necessary:

1. That 2/3 of the creditors voting unites upon the same proposition.

2. That the claims represented by majority vote amount or at least 3/5 of the total

liabilities of the debtor mention the petition.

f. After the result of the voting has been announced, all protest made against the majority

vote shall be admitted and stated on the record, and meeting shall be closed.

g. The minutes of the meeting, containing succinct statement of all proceeding has therein,

shall be drawn up, and there shall be inserted therein the proposition or proposition voted

upon, which after having been read and approved, shall be signed by the judge or

commissioner together will all persons taking part in the voting; if any such persons present

shall sign, at their requests, and the clerk shall certify to all of the above.

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Persons having claims for personal labor, maintenance, expenses, of last illness and funeral of

the wife or children of the debtor, incurred in the 60 days immediately preceding the filing of the

petition, and the persons having legal or contractual mortgages, may refrain from attending the meeting

and from voting therein. Such persons shall not be bound by any agreement determined upon at such

meeting but if they should join in the voting they shall be bound in the same manner as are the other

creditors.

Objections. The causes for which objections may be made to the decisions of the meeting shall

be:

a. Defects in the call for the meeting in the holding thereof, and in the deliberations had there

at which prejudice the rights if the creditors;

b. Fraudulent connivance between one or more creditors and the debtor to vote in the favor

of the proposed amendment.

c. Fraudulent conveyance of claims for the purpose of obtaining a majority.

Discharge in Insolvency. A discharge in insolvency relieves the debtor from the obligation to pay

most of his previously incurred debts. There are, a few exceptions, however. His discharge does not

relieve him from the payment if taxes. In the United States, it includes non-exemption from the

payment of alimony. Neither does it relieve the debtor for liability for money obtained under false

pretenses, malicious injury to person or property. It does not relieve him from liability for debts created

by fraud, embezzlement, or misappropriations while acting in some fiduciary capacity. Nor does the

discharge operate to relive him from the partment of certain unscheduled claim unless the creditor had

notice or knowledge of the proceedings.

Furthermore, the insolvent is still under the obligation to pay the wages which have been

earned by employees within 3 mos. from the date of the commencement in insolvency.

Findings of Insolvency. If however, the respondent shall make default or, if after trial, the issues

are found in favor of the petitioners, the court shall issue and order to declaring such respondent named

un the petition guilty of the acts and things charged and thus is an insolvent debtor. The court shall

require the said debtor, within such time as the court may designate which shall not exceed 3 days, to

file in court the schedule and inventory provided for in Section 15 and 16 of the Insolvency Law, duly

verified as required of a petitioning debtor.

Said order shall further direct the sheriff of the province or city were the insolvency petition is

filed, or the receiver , if one has been thereof appointed, to take position if and safety keep, until the

appointment of an assignee, all the deeds, vouchers, books of account, papers, notes, bills, bonds, and

securities of the debtor, and all his real and personal property, estate and effects, except such as may be

by law exempt from execution.

Said order shall further forbid the payment to the debtor of any debts due to him, and the

delivery to the debtor, or to any person for him, of any property belonging to him, and the transfer of

any property by him, and shall further appoint a time and place for meeting of the creditors to choose

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and assignee of the estate. Said order shall designate a newspaper of general circulation published in

the province or city in which the petition is filed, if there be one, and if there be none, in a news pare

which, in the opinion of the judge, will best give notice to the creditors of the said insolvent, and in the

newspaper so designated said in order shall be published as often as may be prescribed by the court.

The time appointed for the election of and assignee shall not be less than two nor more than eight

weeks from the date of the order of adjudication. Upon the granting of said odder, all civil proceeding

against the solvent shall suspended.

Duties and Powers of an Assignee. As soon as an assignee is elected or appointed and qualified,

the clerk of court shall convey and transfer to him all the real and personal property, estate, and effects

of the debtor will all his deed, books and papers relating thereto. He shall, within one month after the

making of the assignment to him have them recorded in every province or city within the Philippines

where any real estate owned by the debtor is situated and prepare and file a schedule and inventory of

the same, if they have not been filed by the debtor previously.

He shall enjoy the power to sue and recover all the estate, debts and claims, belonging to r due

to such debtor and as such take into his possession all the estate of such debtor except those exempt by

law execution.

Among others, he shall offer to sell at public auction, after advertisement upon order of the

court, any of the real estate, real and personal, which has come into his possession as well as settle all

matters of accounts between the debtor and his creditors, subject to the approval of the court.

Classification of Credits

With respect to specific movable property of the debtor, among others, the following claims or

liens shall be preferred: a. duties, taxes and fees due thereon to the State or any subdivision thereof; b.

claims arising from misappropriation, breach of trust, or malfeasance by public officials committed in

the performance of their duties, on the movables, money or securities obtained by them; c. claims for

the unpaid price of movables sold; d. claims for the laborer’s wages, on the goods manufactured or the

work done and other.

With respect to the specific immovable property and real rights of the debtor, the following

claims, mortgages and liens, among others, shall constitute an encumbrance on the immovable or real

right:

a. Taxes due upon the land or building;

b. For the unpaid price of real property sold, upon the immovable sold;

c. Claims of the laborers, mason, mechanics and other workmen, as well as architects, engineers,

and contractors, engages in the construction, reconstruction or repair of buildings, etc.; and

other.

Aguilar, Ma. Janyne F.

Suspension of payments

The debtor who, possessing sufficient property, cover all his debts, be it an individual person, be

it a sociedad or corporation, foresees the impossibility of meeting them when they respectively fall due,

may petition that he be declared in-the state of suspension of payments by the court attaching in his

petition a schedule and an inventory of his assets of his creditors, Upon receipt thereof, the court shall

make an order calling a meeting of creditors and at the same time issue an absolute injunction

forbidding the petitioning debtor from disposing in any manner of his property, except insofar as

concerns the ordinary operations of commerce or if insert in which the petitioner is engaged, and

furthermore, from making any payments outside of the necessary of legitimate expenses of his business

or industry, as long as the proceedings relative to the suspension of payments are pending.

Discharge

At any time after the expiration of 3 moths from the adjudication of insolvency, but not later

than one year from such adjudication, unless the property of the insolvent has not been converted into

money, the debtor may apply to the court of a discharge from his debts and the court shall thereupon

order notice to be given to all creditors to appear on a day appointed for the that purpose and show

cause why a discharge should be granted to the debtor.

No discharge shall be granted, or if granted shall be valid if the debtor has committed fraud in

his affidavit as for instance, having concealed any party of his estate or effects, destroyed, mutilated,

altered or falsified his books, etc.

Effect of Discharge. A Discharge, duly granted nude the Insolvency Law, shall release the debtor

from all claims, debts, liabilities, and demands set forth in his schedule filed with the court.

However, he shall not be exempt from payment of any tax or assessment due the government

as well as those debts created by him through fraud or embezzlement.