Ben H Blanton.

Credit, its principles and practice; online

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the professions none offers so many chances for dishonesty
without technical offense, as the law. Not infrequently the
lawyer has the property and reputation of his client abso-
lutely at his mercy, but the instances of a lawyer betraying
his trust are so few that the legal profession as a whole is
deserving of the highest commendation. It is incumbent on
the credit man to assist the legal profession to maintain its
high principles of ethics and honor ; and he must absolutely
refuse to place claims with any attorney who does not adhere
in the strictest sense to all the rules and regulations of
common practice.

The lawyers' opportunities for "graft" are many. Often
an estate can be wound up expeditiously and at a minimum
expense in a state court without resorting to bankruptcy
measures. If there is no evidence of fraud, it is manifestly
not only foolish but dishonest for an attorney to file an in^
voluntary petition in bankruptcy against such an estate,
purely for the purpose of obtaining the filing fees. Often
credit men are led to join in such proceedings through the
misrepresentations of attorneys, and they should make
thorough investigation before placing a claim with an
attorney who solicits it with such an object in view.

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The Commercial Law League of America has made
splendid progress in bringing practice in all lines of com-
mercial law to a high standard. An attorney of standing,
such as a member of the Commercial Law League, will
always set forth in detail all the facts upon which he might
advise the filing of a bankruptcy petition ; and such a lawyer
is never found in the ranks of the "ambulance chasers." A
credit man must respect the respect with which lawyers as
a class regard their profession, and he must never be guilty
of allowing an attorney to violate its principles even though
it might save a loss. The calling of the credit man is just
as honorable as that of the legal profession, and it is better
to stand a loss than to enter into a doubtful league with a
"shyster" lawyer.

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What Adjustment Implies

The word adjustment commonly signifies an amicable
settlement of an account through an adjuster, as opposed to
collection at the hands of an attorney. The adjustment of
a single account where the debtor is solvent is merely good
collecting; the debtor is persuaded into settling, or he may
be shown how to realize on his assets or provide security
for the account. For the adjuster the real test of ability
comes when the debtor is badly involved, and where the
assets hardly exceed the liabilities, or where these are so
badly proportioned that the quick assets form only a small
share of the whole, while the merchandise liabilities are
for the most part due and pressing for payment,

A personal adjustment implies a friendly settlement.
The adjuster, representing the creditor, comes as a personal
visitor from the house, armed with authority to settle any
points in dispute; to smooth over difficulties; to keep the
creditor friendly; and, above all else, to get the money or
security. If after a thorough investigation he finds that
the creditor is solvent and that his temporary embarrass-
ment can be relieved, a customer may be saved for the house.
In such a case the adjuster asstunes the part of a construc-
tive collector or a builder of business, as opposed to the
attorney by whom the relations between debtor and creditor
are abruptly severed.

The Adjuster

The adjuster must be a bom collector of infinite tact and
patience, yet capable of quick decision. He must be ah


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expert accountant, for his investigations frequently reveal
conditions in the books of which the debtor never dreamed.
He must be a merchandise man, able to appraise a stock of
goods and to estimate its quality without making a detailed
inventory. He must have sufficient knowledge of the law to
keep within its limitations, and must know how to draw his
papers when securing an account, so that they will stand
the test of a lawsuit.

An adjuster should be equipped with a complete credit
file relating to the account and all correspondence in point,
together with an itemized statement of the account properly
attested as required by law. In brief, the adjuster is to
bring the credit office face to face with the debtor, and work
out with him a plan for the settlement of the account. Be-
cause of the expense of such a personal visit, it is assumed
that the account is of sufficient size to warrant the invest-
ment of expense money.

One disadvantage in placing an account with a profes-
sional adjuster must always be borne in mind. The filing
of the claim necessarily notifies the adjuster of the condition
of the debtor. Usually the contracts of professional adjust-
ers are so drawn that they may accept other accounts at the
same time; otherwise it would not be possible for them to
pay expenses and make a profit. Hence, when a claim is
filed it is only natural for the adjuster to call up other clients
and announce his contemplated trip and its purpose.

Elements of an Adjustment

In adjusting an account, a thorough knowledge of the
debtor's financial condition must be obtained at the outset.
This knowledge can be gained only through the co-operation
of the debtor himself. The adjuster has a perfect right to
demand absolute frankness from the debtor, and he owes
it to the credit office which employs him to furnish indis-

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putable evidence of his examination into the debtor's affairs.
The duties of the expert accountant devolve upon the ad-
juster, who, if the debtor keeps an accurate set of books, can
draw up a financial statement which might well be of assis-
tance to the debtor himself.

In making up his statement of assets and liabilities, the
adjuster examines closely the various items, and from the
asset sheet he prepares a further detailed statement setting
forth the approximate realizable value of each item, with
the book value placed against it for purposes of comparison.
The one important feature in the valuation of the assets is
the proving of the actual existence of such assets as cash in
bank, securities, notes, and accounts, and determining the
realizable value of the last-named item. In the list of
liabilities the adjuster should show the items with due dates
against each, as well as the names and addresses of all

Assuming a readiness on the part of the debtor to fur-
nish security against a deferred settlement of the account,
the adjuster must know not only the value of this security
and its safety as such, but must so arrange as not to create
a preference for, or be detrimental to, other creditors. Here
comes into play the knowledge of law — ^the most important
feature in the equipment of the expert adjuster. The
creation of a preference may make void all the good that
has been accomplished in the adjustment. What constitutes
a preference is now generally understood by credit men, and
is fully explained in the National Bankruptcy Act.*

The Credit Man as an Adjuster

Such an adjustment as outlined, representing the collec-
tion of an involved account, can be made by almost any
credit man. In this connection, too much stress cannot be

* Sec Appendix.

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laid upon the importance of frequent personal visits to the
field by the credit man, either alone or in company with
the road salesmen.

The time has passed when the credit man held himself
aloof with a view to impressing upon customers the im-
portance, or, as one writer puts it, the "majesty" of the
credit office. The visits of the credit man bring him into
friendly relations with the customers, and this can be de-
veloped to a point where the customer looks upon the
credit man as his confidential adviser in all matters pertain-
ing to his business. Where such relations exist, the
customer sticks to the house with a loyalty that is truly
gratifying, and the credit man becomes possessed of inside
facts, and is kept so fully apprized of the condition of the
customer that the credit line on the account can be raised
to the limit and held there — and this is done with more
safety than if the line of credit had been restricted and the
customer thereby forced to scatter his purchases among
many houses in order to procure the necessary stock.

Details and Advantages of a ''Real'' Adjustment

An occasion often arises where a merchant becomes in-
volved to such an extent that an adjustment, in the real
sense, is necessary. The theory of such "real" adjustment
is simply this : the debtor, realizing his condition, turns over
all his assets to a representative of the creditors. This rep-
resentative — the adjuster — ^becomes a trustee in the interest
of all the creditors, and through co-operation with the
debtor works out the situation with a view to realizing the
full value from the assets of a going concern. If the
creditors can be paid in full, the business name and reputa-
tion and possibly the business itself can be saved for the
debtor. Through this spirit of co-operation, the assets and
good-will of the debtor become active instruments of

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tangible value; and where the debtor was formerly strug-
gling along by himself, making mistakes due to inexperience
or incapacity, there is now placed at his disposal through
the trustee the business experience, financial assistance, and
combined judgment of a body of expert and efficient credit

Such is the riature of adjustments effected by the adjust-
ment bureaus of the local branches of the National Asso-
ciation of Credit Men. The local bureau is organized under
the direction of the members of the Association, and the
active manager or director is an expert adjuster who
handles the details. Such a bureau is intended primarily to
handle adjustments within the market territory of its mem-
bers, presuming that these members are creditors of the
debtor involved.

When it becomes known that such a bureau is to take
charge of an adjustment, a spirit of co-operation obtains,
and interested members of the Association in distant mar-
kets as well as other adjustment bureaus in nearer markets,
place their accounts with the bureau in charge. In this
way a co-operation of creditors is assured, and the first
victory in the adjustment is scored for the creditors. Mani-
festly, the success of a real adjustment depends upon such
co-operation, for it then becomes an easy matter to secure
co-operation on the part of the debtor also. But should he
remain obdurate and force the adjuster to resort to legal
measures, these are simplified because all the creditors are
now cemented by a common interest and act as an individual
through the adjuster. If, however, as is usually the case,
the debtor is glad to work in concert with the adjuster, a
happy condition obtains whereby the values realized from
the assets are almost as high as in the ordinary course of
trade, and the expenses in winding up the estate are merely

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The ''Good Samaritan'' View

If all merchants were honest or would remain honest
when they become financially involved, and would turn over
all their assets to their creditors, adjustments such as just
discussed would prove the ideal way of settling an insolvent
estate. It is only when preferences are created or assets
concealed, that bankruptcy proceedings are necessary and
eminently proper.

Assuming that a merchant debtor is behind in his pay-
ments, that an examination discloses that his assets exceed
his liabilities by a reasonable margin, and that the debtor
is a man of character and ability, it is not unreasonable
that he should desire to continue the business which he has
started. Usually he may succeed if given a chance. It is
such a condition as this that is handled so ably by the
adjustment bureaus of the National Association. The con-
servation of a man's business and the saving of his name
and honor are what the Association strives for, and, when
it succeeds, constitute an achievement as praiseworthy from
an ethical standpoint as the saving of money for the
creditors would be commendable from a cold-blooded busi-
ness view.

The constant aim of the National Association is to bring
before every credit man the moral duty he owes his fellow
being. It is the helping hand of the Good Samaritan
adapted to modern business ideas. The lesson is so far-
reaching, with so many interminable branches and side
issues bearing on the credit business, that this one feature
might of itself form a book of golden deeds. The ideal
adjustment, then, is but an embodiment of all the best that
is taught in the life of the Association.

Bankruptcy Method of Settlement

As an example of the application of the principles out-

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lined above, as compared with the bankruptcy method of
adjusting a business which is in difficulty, the following
illustration is given.

A merchant of excellent character and integrity exhibits
the following conditions :


Stock $5,500.00

Notes and accounts 1,500.00

Furniture and fixtures.. . 300.00

Real estate. 2,500.00



Bank loan $1,000.00

Loan from friend 500.00

Merchandise creditors. . . 2,500.00
Owing wages, taxes,
etc 200.00

Apparent surplus $5,600.00

The principal part of the merchandise debts are due, and
some claims are in the hands of attorneys for collection. A
drought has ruined surnmer trade and no money can be
expected until farmers market the late crops.

Now, with an apparent surplus of $5,600, it would
appear at first glance that the merchant was amply solvent ;
but the bank loan is secured by mortgage on the real estate,
and the merchant's statutory exemptions take up the re-
mainder, for the real estate at a forced sale in bankruptcy
would not bring the mortgage plus the exemptions. At a
forced sale with few bidders present, a general stock in a
country store would bring about fifty cents on the dollar,
and the accounts would dwindle down to about 60 per cent
of the total; while the fixtures at a forced sale would bring
whatever a bidder might offer.

If matters are allowed to take their usual course, the
attorney takes judgment and an execution is levied; the
merchant makes an assignment; and then, determined to
get all there is in it, the attorney files an involuntary petition
in bankruptcy for the benefit of the creditors. After the

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legal proceedings and the reduction of assets to a cash basis,
this is how the new balance sheet appears :


Stock, 50% $2,750.00

Accounts, 60% 900.00

Furniture and fixtures... 100.00



Expense, state courts. . . . $50.00
Attorney's fees, state

courts 50.00

Expenses, bankruptcy... 450.00

Debts preferred by law. . 200.00

Leaving apparently.... $3,000.00

The $750 expenses are apparently the maximum allowed
under the law, although by skillful handling a good
attorney and a friendly receiver might make more for each
other and still remain within the law. The balance sheet
figures out, apparently, a payment in full for the $3,000
debts — merchandise creditors, $2,500, and the $500 loan —
but while there is apparently 100 per cent in sight, fevery
credit man knows that a 75 per cent settlement is nearer
to what he will get. The debtor is left with apparently
$1,500 equity in his real estate; but when the proceedings
are ended, the bank forecloses the mortgage and is forced to
bid in the property to save its debt. The bank stands to
make a little profit when it can sell the property again.
Thus it will be seen that in a perfectly legal manner there
has been wasted $5,600 in assets, and a good man has been
financially ruined for life. He is not likely to get back on
his feet unless he is young and of unusual ability.

Credit Association Method

To illustrate a better settlement of this same case, let
us suppose that the manager of one of the adjustment
bureaus arrives on the scene and takes charge. He may
represent only a few creditors at the start, but soon he has

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a majority in number and amount of claims — the moral in-
fluence of the Credit Men's Association is at work. The
claims are either withdrawn from the hands of the at-
torneys, or the latter capitulate and work in accord with the
adjuster. There must be full co-operation on the part of
the merchant, which is readily obtained when the bright
ray of hope strikes him. The bank is persuaded to lengthen
the time of its loan, for it is amply secured and the average
country bank is usually most accommodating to its patrons.
The friendly loan of $500 may be taken care of by a second
mortgage on the equity of the debtor in his real estate,
which otherwise would form his exemptions. The stock of
goods and the accounts become live assets to the now "going
concern," and are worth nearly one hundred cents on the
dollar. The small debts outstanding are adjusted, being
either paid off or gotten into such shape that no trouble will
be caused by a creditor whose interest is small and whose
patierice is short-lived.

The adjuster then proceeds to work on his statement
sheet which he makes up at the earliest possible moment.
His knowledge of merchandise and store methods is now
brought into play. The stock is replenished by the largest
creditors, and possibly "a special sale" may be arranged.
The adjuster supervises the arrangement of the store, writes
the sales circulars and advertisements, and starts the new
business with a big boost In the meantime he is helping
the merchant with his collections, frequently making per-
sonal visits to the largest debtors, explaining the situation,
and turning these slow accounts into cash, produce, or
good notes which can be sold without recourse. The ad-
juster is a good trader; and a fine beef steer, a young cow
and calf, or a fat shoat, looks better to him than a poor
account a year old on the books. He shows the merchant
a few tricks in the collecting business that open his eyes.

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When the proceeds of the collections are converted into
money, and the cash sales have accumulated for a few
days, there is a substantial cash dividend to be distributed
among the creditors.

While all this is going on, the adjuster has heard from
the various credit men on the subject; and their advice is
practical and good. Each one points out whatever weak-
nesses he has noticed in the merchant, and how he thinks
these can be corrected. In a very few days the adjuster
knows more about the merchant and his business than the
latter himself knows. The adjuster digs into the books
and into the business to ascertain why the merchant has not
been successful. Every conceivable excuse is investigated,
every theory is tested and proved. If the merchant has
shown any ability whatever — ^and practically every mer-
chant who has accumulated as much as $5,000 must have
shown some signs of ability — ^the adjuster starts along the
lines of a business educator, correcting the faults that are
most apparent. Very frequently the cause of a merchant's
failure can be traced to theft by an employee. In fact,
stealing by employees is so common that a skilled adjuster
investigates this condition as soon as he takes charge of
the business.

The time of the adjuster is valuable; he must work night
and day, as if fighting fire. When he is ready to return to
his office, all plans are carefully laid and the merchant
simply has to follow them out to the letter. In the end the
merchant works out from under the trusteeship of the ad-
justment. The lessons he has learned are numerous; in
brief, the experience is such that he is almost sure of success
in his future business. The wholesale houses save their
accounts in full and make of this merchant a desirable
customer for life.

The ideals of this adjustment feature of the Association

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work are set on a high level. A premium has teen placed
on honesty and integrity, and the business world generally
has benefited. The outside houses which share in such an
adjustment are quick to perceive the needlessness and folly
of so-called legal methods in closings up an estate at a loss,
that might just as well be allowed to nm along and work
itself out at a profit, and they are generally aroused to the
need of a perm'anent adjustment bureau.

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Part IV — Insolvency




Analysis of Failures

Bradstreet's defines a business failure as "one that in-
volves some loss to creditors or individuals, firms, o^ cor-
porations engaged in ordinary commercial operations" ; and
the very interesting and instructive statistics compiled,
covering a period of about thirty years, deal with strictly
commercial insolvencies, excluding insolvencies of non-
commercial individuals, bucket-shops, and professional men.

In order to emphasize the importance of securing full
and complete information on a credit risk, particularly as
bearing upon the capabilities of the customer or individuals
of the firm, it is well to consider the causes of failure.
These causes, with the percentages of failures due to each,
are as follows, according to the Bradstreet tables :

Class A — Due to Faults of Those Failing
Incompetence (irrespective of other causes).. . 29.4%
Inexperience (without other incompetence) . . . 4.8%

Lack of capital 29.5%

Unwise credits 2.3%

Neglect of business (due to doubtful habits) . . 2.0%

Speculation (outside of regular business) 1.0%

Personal extravagance. 7%

Fraudulent disposition of property 10.79&

Total 80.4%



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Class B — Not Due to Faults of Those Failing

Specific conditions (disaster, etc.) i5-9%

Competition 2.1%

Failure of others (of apparently solvent debtors) 1.6%

Total 19.6%


It is interesting to observe that for the six years from
1908 to 1913 inclusive, with very slight variations,* about
80 per cent of the failures are attributed to the "faults of
those failing," while about 20 per cent are classed under
causes apparently beyond their control. It also appears
that for a period of four years, of the average number fail-
ing about 95 per cent had very moderate credit or none at
all, and about 4.3 per cent had good credit, and but 7/10
of I per cent had very good credit or higher.

Thus, to express the situation in a compact form, 95
per cent of those failing are "off-rated," and 80 per cent of
those who fail, do so on account of their own faults or


In the consideration of a credit, one should keep in
mind the causes of failures. It would appear that the
credit man can, to some extent, avoid a loss by securing
complete and accurate information regarding the faults of
the average debtor as outlined under Class A ; or at least he
can procure such information as will enable him to judge to
what extent a risk is menaced by the faults showing the
larger percentages. For example, incompetence is shown
in overbuying and unwise selections of stock; carelessness
in keeping or displaying stock; the perverse adherence to
antiquated ideas, and an unwillingness to adopt modern
merchandige methods of approved efficiency; and in care-

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lessness in handling employees, thereby encouraging theft.
If any of these factors of failure exist, they may be ascer-
tained by personal interviews with the merchant, or through
the salesman, or by correspondence with the proper persons
in the vicinity. The credit man may therefore protect him-
self in the first place as thoroughly as possible, and then by
watching the clearance reports of the agencies and noting
constantly the changes due to such faults, he may be able
to get from under a risk before the ultimate failure.

Lack of Capital

Lack of capital, although it stands high in the percentage
table, is not by any means the greatest single cause of fail-

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Online LibraryBen H BlantonCredit, its principles and practice; → online text (page 13 of 24)