! '^! ! !' r, ,.; t'jt ij> sn \ ifelW } i Jii i'ii .^!l,'Vl'l,.',' lAi',. .,,.=1 i fit !iii"i.i iii'ii/' kl, !i;K.i' iji, l^^l Digitized by the Internet Archive in 2007 with funding from IVIicrosoft Corporation http://www.archive.org/details/credititsprincipOOblanrich Credit, Its Principles and Practice A Practical Work for Credit Men^ Present- ing the Principles and Practice Involved in Modern Credits andCollections^ together with an Rxpla- nation of Bankruptcy Proceedings By ben H. BLANTON NEW YORK THE RONALD PRESS COMPANY 1915 Hf,^|f COPYRIGHT 1915 BY THE RONALD PRESS COMPANY *.*?*. William G. Hewitt Press, Brooklyn, Printers J. F. Tapley Co., New York, Binders PREFACE It is not to be supposed that any set of rules can l^e drawn up that will apply equally well to all classes of credit. At the same time it is evident that the underlying principles of credit must in all cases be the same and that the methods developed in the credit department of one line of business may be easily adapted to the requirements of a line entirely different. For this reason the principles developed in the following pages and the plans suggested for the handling of credit problems, which are the result of twenty years of actual experience in the credit office, will, the author trusts, be found generally available. There is but little literature on the subject of credits. The situation is one not unusual in connection with intense business activities — the experienced credit men have found no leisure to write down the results of their experience for the benefit of others and books are few and far between. The present volume, therefore, requires no apology, and while it is intended primarily for younger members of the profession, the author believes that the experienced credit men will find in it much that is helpful. The methods of credit-granting have undergone radical changes during recent years, due to the influence of com- mercial agencies, trade bureaus, the National Association of Credit Men, and the revision of business laws. The prin- ciples and methods discussed in the present volume will, the author trusts, be found in accordance with the most recent practice. But little attention has been paid to systems, to methods of preserving records, and other similar mat- ters of routine. Every credit man has his own plans and iii ^r%A A K/=i iv PREFACE methods, and the author has only gone far enough to give the general principles which must govern in all such cases. Part IV, which deals with insolvency, is the only part of the book at all technical. Here the author has drawn largely upon his own experience. The point of view is for the most part that of the layman, for it was felt that the average reader is unfamiliar with legal technicalities. Fre- quent reference has been made to the leading authorities on bankruptcy law, such as Remington, Loveland, and Collier, and to these writers the author wishes to express his obliga- tion. The careful study of their works will well repay the active credit man. In conclusion, the author wishes to express his obligation to the large number of credit men who have so kindly supplied him with illustrative forms, and to the National Association of Credit Men and particularly to J. H. Tregoe, its Secretary and Treasurer, for material help and assistance given. ' Ben H. Blanton March i, 1915 CONTENTS PART I— CREDIT OFFICE ROUTINE CHAPTER r- PAGE I The Credit Department . . . 13 Old Methods and New The Work of the Credit Man Relations with Other Departments Expense Allowance of Credit Department Determining a Policy Liberal Policy Toward Customers Relations with Competitors II The Credit Man 22 Selecting the Right Man Special Qualifications of the Credit Man The Test of Results Attitude of the Credit Man Importance of Full Information Ethics of Bad Risks The Credit Man as a Business Advisor Tact the Credit Man's Asset All Men Presumptively Honest Caution a Requisite Watching the Accounts III The Credit Office Machinery . . 36 The Office Force The Credit Brief Office Methods and Equipment Forms and Blanks Sources of Information Banks as Sources of Information Salesmen's Reports The Customer's References IV Credit-Granting — The Customer . 44 Confidence and Credit V vi CONTENTS CHAPTER PAGE IV Credit-Granting — The Customer — Continued The Basis of Credit-Granting The Customer's Ability Integrity Essential to Credit-Granting Investigation of Habits Appraising the New Customer Capital and Expenses Assets Liabilities Insurance Local Conditions General Business Conditions V Credit-Granting — ^The House . . 54 Classification of Business as to Credit 1. The Local Jobbing House Credit Conditions Credit Precautions Constructive Credits 2. The Large lobbing House Large Jobber's Advantages Rating the Large Buyer 3. The Manufacturer Credit Conditions Effect of Mill Conditions on Credit The Responsibilities of the Credit Man Favorable Conditions of Manufacturer's Credits The Instalment Trade VI Bank Credits . . . . . 66 Basis of Bank Credit Bank Credits and Mercantile Credits The Bank Credit Man ^ Functions of the Bank Credit Department Credit Information A **Live" Report — French Method Practical Uses of Bank Records Bankers Promote Sound Business CONTENTS vii CHAPTER PAGE VI Bank Credits — Continued Stock and Bond Investments Commercial Paper Relation of Banker and Broker Rating Commercial Paper Indorsed Paper Desirable Mutual Interests of the Bank and Its Customers PART II— CREDIT INFORMATION AND PROTECTION VII The Commercial Agency . . . 8o The Rise of the Commercial Agency Agency Publications The Agency Organization The District Reporter Agency Information Agency Contracts VIII The National Association of Credit Men . 88 Purpose of the Association Origin and Ideals Practical Work of the Association Working Committees Benefits of the Association IX Interchange oe Ledger Experience . 95 The Interchange or Trade Bureau Interchange of Ledger Experience The Credit Clearing House Clearing House Methods — the District Ofl&ce Compiling a Local Report Compiling a General Report Advantages of the Clearing House Method The Clearing House and Commercial Agency Compared X Checking Orders for Credit . . 107 Incoming Orders Investigation of Orders Commercial Agency Reports viii CONTENTS CHAPTER PAGE X Checking Orders for Credit — Continued Analysis of the Report Credit Clearing House Report Conclusions from Reports Collateral Data Handling the Order XI Safety Appliances in the Credit Depart- ment ii8 The Signed Statement — Verbal Statement The "Container" Getting the Statement Investigating the Statement False Statement Laws Prosecutions — State Courts Prosecutions — Federal Courts Ethics vs. Prudence Recoveries Replevin Reclamations XII Credit Insurance 127 The Function of Credit Insurance Origin and Methods of Insurance Insurance a Precautionary Measure . Scope of Credit Insurance Work of the Credit Insurance Agent Limitations of the Insurance Bond A Wrong View of Credit Insurance Advantages of Credit Insurance A False Objection to Credit Insurance The Credit Man Indispensable Credit Insurance and Fire Insurance \y XIII Incidental Problems of the Credit Man 139 Credit Diplomacy 1. Failure to Pay Interest 2. Excessive or Unjust Discounts 3. Unjust Claims 4. Returned Merchandise 5. Cancellations Effect of Trade Abuses on Credit Standing CONTENTS ix PART III— THE COLLECTION DEPARTMENT CHAPTER - PAGE XIV The Collector and His Methods . . 147 Qualifications of the Collector Relations of the Credit and Collection Departments The Collector and the Customer Delinquent Debtors 1. The "Collection Agency" Method 2. The Draft Method 3. The Collection Agency 4. Legal Proceedings The Collection Attorney Collector and Attorney XV Collection and Credit Correspondence 156 Power of Expression Attitude Toward the Customer The Cost of Making a Customer • Collection Correspondence Form Letters Requests for Credit Information Requests for Security Importance of Notes as Evidence Refusal of an Order Answers to Complaints XVI Collection Agencies . . . .163 Collection Nomenclature Dun's and the Clearing House The Work of the Collection Agency Advance Fee Collection Agencies Adjustments Collection Attorneys XVII Adjustments and Adjustment Bureaus 170 What Adjustment Implies The Adjuster Elements of an Adjustment The Credit Man as an Adjuster Details and Advantages of a "Real" Adjustment The "Good Samaritan" View Bankruptcy Method of Settlement Credit Association Method CONTENTS PART IV— INSOLVENCY CHAPTER v/ XVIII Causes of Failure . Analysis of Failures Incompetence Lack of Capital Neglect, Speculation, and Extravagance Fraud Failures from Disaster and Competition XIX Bankruptcy Law and Proceedings The National Bankruptcy Law State Bankruptcy Laws Bankruptcy Jurisprudence The Credit Man and the Bankruptcy Law Involuntary Bankruptcy Procedure in Bankruptcy The Petition in Bankruptcy Filing the Petition The Referee in Bankruptcy XX Proceedings of Creditors The Bankruptcy Court Filing Creditors' Claims Creditors' Meetings Election of Trustee Duties and Prerogatives of the Trustee XXI Claims Proof of Claim The Affidavit Consideration for Claim Secured Claims Assigned Claims Who May Make Affidavit and Claims Affidavit to Corporation Claim What Debts May Be Proved? Filing Claims XXII The Bankrupt .... Examination of the Bankrupt Rights of the Bankrupt PAGE l8l 187 196 204 211 CONTENTS XI CHAPTER PAGE XXII The Bankrupt — Continued Duty of the Bankrupt Fraudulent Statements Settlement by Composition Procedure in Composition Settlement False Claims and Extortion of Property from Bankrupt XXIII Discharge in Bankruptcy . Discharge of Bankrupts Opposition to Discharge Acts Barring Discharge Concealment of Financial Condition False Statement as a Bar to Discharge Fraudulent Conveyance of Property Refusal to Obey Court The Act and the Credit Man 221 APPENDIX Forms 1. 2. 3-9. 10. 11. 12, 13. 14. 15. 16. 17. 18-20. 21. 22. 23. 24. 25. 26. 27. 231 Salesman's Report Salesman's New Customer Report Trade Inquiry Blanks General Inquiry Blank Inquiry Blank for Bank Attorney's Reports Property Statement — Individual or Partnership Property Statement — Corporation Property Statement — Individual or Partnership "Self-contained" Property Statement — Individual, Partner- ship, or Corporation Financial Statements Financial Statement — Introduction Guarantee Letter Guaranty Form for Classification of Information Credit Clearing House Report Petition in Bankruptcy Claim in Bankruptcy and Power of Attorney The Bankruptcy Act 270 Credit, Its Principles and Practice Part I— Credit Office Routine CHAPTER I THE CREDIT DEPARTMENT Old Methods and New It is only within late years that the granting of credit has been placed upon what may properly be called a scien- tific basis; and though it may not yet have assumed the dignity of a full-fledged science, it will be admitted that the work of a well-managed credit department is now conducted with a thoroughness of method and a certainty of results which characterize scientific processes in other lines of activity. One of the most important factors entering into the profitable management of any business is the rapidity with which capital can be turned, and this is mainly dependent upon the soundness of credits and promptness of collections. In the old days of the hit-or-miss policy of gambling on human nature, it was impossible to forecast the results of business with any degree of certainty; but the scientific methods and clean-cut principles and practices of the credit office of today have changed this, and have made it possible to conduct a business with a precision that forecasts gains or losses in per cents, and thus gives confidence to managers and investors. In the good old days of long profits, and before the ad- 13 14 CREDIT OFFICE ROUTINE vent of the highly specialized salesman, credit was largely dependent on the personal acquaintance of buyer and seller. If on being introduced to the head of the firm the buyer made a good impression, an account might be opened on the spot. It is true that large houses used the commercial agencies and made investigations after a fashion, but not as it is done under the stimulus of the razor-edge competition of today, when business is conducted on a continually decreas- ing margin of profit, goods sold on definite terms, and payments expected promptly at maturity of the bills. Sales are no longer made on long datings, and the rates of dis- count have been reduced; in fact, a strong agitation is on foot looking toward a net basis of payment and the entire elimination of discount for payment of bills before they fall due. The Work of the Credit Man The importance of the credit man's work is recognized in his own immediate sphere, and more broadly as a factor in the improvement of conditions which affect the credit interests of the country as a whole. Through the organized effort of credit men many of the states have enacted better credit and collection laws, and national laws have also con- tributed to the improvement of our entire credit system. The credit men of the country are leading in the fight for better fire protection, whereby our excessive fire losses, which are regarded as criminal by the insurance authorities of the old world, may be reduced and our resources thereby conserved. The insurance world has recognized the im- portance of the credit man in this field by enlisting his services to assist in both the passing of laws and in the educating of the small merchant in matters of insurance. Not only as a member of an organized body, but as an individual, the credit man of today is found among the THE CREDIT DEPARTMENT 15 leaders in every movement for the betterment of business conditions and in extending influences for good among his fellow men in all walks of life. One has only to glance over a list of the various committees of the National As- sociation of Credit Men, to realize how important a place the credit man fills in the general scheme of business life in these early years of the twentieth century. From this it will be seen that the position of a credit man is invested with dignity and responsibility, and that the credit department is, or should be, one of the strong bul- warks of any business. Not only does it guard a large part of the assets of the business in the form of outstanding accounts, but the credit man furnishes the sales manager with information concerning business conditions in various parts of the country, thus enabling the latter to outline his selling campaign with a view to covering the localities where business may be had with the least effort and expense. The credit man furnishes information of equal importance to the advertising department of the business; and through his study of fundamental business conditions he also supplies the financier with the statistics necessary to an intelligent study of the money market and the profitable placing of loans. Relations with Other Departments While the functions of the credit department are thus of prime importance, the department must not be assertive, but must rather remain in the background, and work in close harmony with the other departments in the upbuilding of the business structure. Particularly in its relation with the heads of the business, should there be a feeling of har- monious sympathy. It is easy to criticize; and the credit department, from its peculiar position in the business or- ganization, sometimes receives more criticism from other l5 CREDIT OFFICE ROUTINE departments than is justifiable. If the credit man tries to eliminate hazardous risks, he is criticized by the sales de- partment. If he makes an unwise credit and sustains a loss, he is censured by heads of the firm. While the constant aim of the credit man should be to approve only such accounts as may be sold with safety, he may occasionally go wild on some risk. Bad accounts will inevitably arise ; they are the left-overs, the remnants of the credit department, similar to the hard stock and unsalable merchandise of the purchas- ing department. In any event, it is only fair that the credit department should receive the same sympathetic encourage- ment and support as is accorded to the other departments. The credit man's position is, at the best, a difficult one. He has a heavy weight of responsibility on his shoulders; and under a pressure of work demanding every minute of his time, it is not unusual for him to be "high-strung," his nerves being sufficiently in evidence to make him smart under unjust criticism. The head of the business may not know all the facts which the credit man took into considera- tion in forming his opinion, nor the conditions which set at naught his calculations in determining the advisability of the credit, but the criticism comes just the same. The "flare-up" that sometimes follows is not always unjustified. On the other hand, while a change in the management of the credit department is always attended with more or less interruption to its work, and is to be avoided if possible, it should still be borne in mind that the demands of the busi- ness are above personal considerations, and if the conduct of the credit department provokes constant criticism, whether just or unjust, it is best for the business that the offending party be removed, and at once. Expense Allowance of Credit Department A feature of the credit department not generally under- THE CREDIT DEPARTMENT 17 stood by the executive heads, is the expense connected with procuring information. In a later chapter it will be shown that it is vitally necessary to procure all the information possible regarding the financial worth of a customer in order that the decision of the credit man may be correct. This involves a very considerable expenditure in the course of a year; but when it is taken into consideration that one loss which might have been avoided through this service will often equal the entire annual expenditure for agency in- formation, the advisability of spending money liberally for it can hardly be questioned. This is not an argument in favor of giving a credit man full power to buy agency service without any regard for expense, but rather, a plea for a liberal allowance. It will be found that such an in- vestment will pay handsome dividends. The same argument applies equally to the policy of furnishing the credit department with a thoroughly efficient force to carry on its detail work. The liberal salary paid to the credit man is supposed to be a reward for the use of his brains, not for the work of his hands. He cannot bring to bear upon his credit decisions a clear and accurate judgment if his mind is crowded with items of petty detail which should be relegated to minor clerks. Determining a Policy At the moment of organization of the credit department it is essential that a definite policy for its conduct be de- termined. This policy is usually elaborated by means of conferences among the executives, and is the natural out- come of certain fundamental conditions. It is admitted that the chief reason for carrying on a business is the making of a profit for those who contribute the capital. The credit department is not, therefore, a mere machine to pass on credits and collect the accounts, but is, beyond this, the 1 8 CREDIT OFFICE ROUTINE agency for carrying out the general policy of the house as to terms on which the goods are sold; as to discounts for cash or payment of accounts before maturity, and in fixing a safe margin for accounts receivable ; or, more properly, for that part of the capital which can be safely invested in the book accounts for merchandise sold. The manufacturing or the purchasing department will naturally determine the prices of goods and the discounts to be allowed, as such conditions are regulated by the cost, the usages of the trade in that line, competition, the financial condition of the customer, and the size of the order. All these factors enter into the making of the terms of sale; and when considered in connection with the amount of capital invested, and the firm's credit, or borrowing capacity, they determine the volume which the business may reach with safety and the amount in dollars and cents which may safely be invested in accounts receivable. No attempt will be made to discuss this phase of the business, as it is largely a matter of theory and of particular conditions. The idea here is to emphasize the necessity of fixing a policy for the credit department. We shall pass, therefore, at once to a discussion of the attitude of the house toward its customers, or, more properly, the attitude of the house through its credit department toward such customers. Liberal Policy toward Customeri Whatever the kind of business, whether manufacturing, jobbing, retailing, or banking, or the character of the trans- action in which the item of "accounts receivable" originates, it is a fact that a liberal policy is necessary to growth. Do not confuse a "liberal" policy with a loose policy. A liberal policy is not necessarily an easy-going policy. A liberal policy in the granting of credits should always be backed up by what may be termed a "close" policy in th( ' 11" lion of THE CREDIT DEPARTMENT 19 accounts. A broad, liberal policy toward customers means much more than the mere granting of credit and taking a chance on undesirable risks. At no time is the indiscriminate granting of credit to be approved. On the contrary, this form of gambling should be eliminated through the granting of credit on scientific principles. A new house entering the field of competition against well-established concerns is usually forced to sell to mer- chants that are not freely solicited by the older houses. This is especially the case with the small jobber operating in a restricted territory ; and until he gets on his feet, he is forced to content himself with whatever business he can pick up. A credit man for such a concern is obliged to pass credits that contain an element of risk, in order that his house may attain the volume of business necessary to move its mer- chandise on a profitable basis. He realizes that such credits are undesirable, and he ships the bills with the intention of discarding the accounts as soon as his house becomes estab- lished. His investigations are usually very thorough ; and, while the account is outstanding, he watches it closely, fol- lows it up to the date of maturity, and then proceeds to collect as vigorously as possible. His attitude toward the customers in handling complaints and in adjusting the differences which are constantly arising, is as liberal as prudence will permit in order to gain their confidence and to assure them of a square deal in all their transactions with his house. At the same time he must know just where to draw the line to prevent a customer from imposing on the house; and this discrimination is one of the finer points of judgment which enter into the making of a good credit man. Relations with Competitors In the attitude of his department toward competitors, the credit man should lose sight of the selling end entirely 20 CREDIT OFFICE ROUTINE when it comes to the interchange of credit experience. The jealousies of the sales departments should never interfere with a harmonious and even friendly feeling between credit departments. It should be the aim of the credit department to give the credit man of a competing house any exact in- formation at its command in regard to an account of com- mon interest; and it should serve this competitor with as much courtesy as it would grant to a credit department in a non-competing line. If a credit man conducts himself in this way he has a right to expect and demand the same treatment; and right here it might be well to remark that the interchange of credit ideas and experiences is entirely a reciprocal affair, and that a credit man gets out of the competitor just as much as he gives. Human nature is strong, and in recent years credit men have become very clannish, as they realize how dependent they are on one another and how much good can be accomplished by mutual kindness and genuine human fellowship. In order tO' judge intelligently of a credit it is necessary to know as far as possible the names of other houses selling the customer — not only those in the same line, but in all lines that the customer carries. Such investigations naturally throw the credit department into contact with the same departments of other houses involved ; and, as they im- part their experience with the customer in question, the courtesy ought to be returned with as much care when in- quiries are received from them. Even in dealing with strangers a similar policy is the part of wisdom. Some years ago, when it was the custom simply to in- quire regarding a risk, the answer would come back "O K" or "Good as Wheat," or some like comment; but now, a credit man wants definite information as to the exact stand- ing of the customer. This includes not only the ledger ex- perience, but some comments which indicate the degree of THE CREDIT DEPARTMENT 2 1 confidence with which his brother credit man regards the risk. Every credit man today can give numerous instances where he has been saved from loss by the courtesy of another credit man — an absolute stranger, who instead of giving merely the ledger experience, stops his work to dictate a letter of comment or even mails his entire credit file for inspection. Just as there has been a wonderful improvement in the handling of credits, so also has there been an equally wonderful change in late years in the attitude of credit de- partments toward each other. CHAPTER II THE CREDIT MAN Selecting the Right Man The object of this chapter is to state the indispensable quaHfications of the credit man, quahfications without which it would be impossible for him to aspire to the ranks of those who are endeavoring to put credit-granting on a scientific basis. At the outset it is necessary to lay down a rule which may provoke adverse criticism, but which from the practical standpoint is sound. The credit man should be an employee — not a member of the firm nor an officer of the corpora- tion. An inspection of the personnel of our business houses, and particularly of the medium and smaller concerns, will show that the credit man is in most cases an officer, or a partner, or is otherwise financially interested. Recognizing the importance of the work, the direction of the credit and collection departments is assigned to that officer, or mem- ber of the firm, who shows aptitude for office work and the handling of finances. There is often a feeling that it is not s^fe to intrust to an outsider — to a mere employee — the handling of a class of assets of the business which often exceed all others com- bined. While this feeling is entirely proper, it overlooks the important fact that the handling of credits in late years has developed into a scientific process which should be entirely separate and apart from the detail office work, and which should be handled on a purely business basis. If a member of the firm assumes the conduct of the credit department and proves unable to cope with its problems, the business 22 THE CREDIT MAN 23 will suffer to the extent of his inefficiency, as it is not pos- sible to discharge him and employ a more efficient man. The delegation of the work of credit-granting to an employee leaves the proprietor or officer free to work for the upbuilding of the business ; and the credit man, relieved of executive details, can perfect his own organization, study individual credits, and by this specializing in one department, bring it to a high state of efficiency. Just as highly de- veloped salesmanship is the result of specialization, so the handling of credits and collections as a department in itself may, through specialization, be brought to a much higher development than generally exists. By delegating the work of the credit department to an employee, the executive may try out different men until one is found who comes up to the required standard of efficiency. While it is admitted that the changing of credit men is like swapping horses while crossing a stream, it is, as already intimated, folly to retain a man who cannot produce satisfactory results. While the writer has the greatest respect for the ambi- tion and general efficiency of the average young business man, it is rare that safe and sane business judgment exists in any man much under thirty years of age. A younger man may have "drive" and be invaluable in pushing the business forward, but — and the same may be said of a member of the firm passing on credits — in his eagerness to see the business grow he is liable to allow this desire to influence his judgment unduly when passing upon credits. A salaried credit man, on the other hand, realizes that his very living depends on his ability to produce results in his department; and this means not only the upbuilding of the business, but keeping down the percentage of losses to a figure of safety. And when it comes to taking wild chances, the man of settled judgment, in view of such responsibilities, 24 CREDIT OFFICE ROUTINE is going to think twice before making his decision. This settled judgment, or power of wise decision, can come only from years of experience in the credit office and from thoughtful study of its problems. The very young man cannot have had such experience. Special Qualifications of the Credit Man What, then, are the qualifications for a good credit man ? And by qualifications, let it be understood, is meant rather those qualities which are the essential elements of the char- acter and education of one who desires to enter upon a life career in the credit office. In the first place, he must be a student, with an aptitude for credit problems and the ability to digest and put to practice the lessons he learns. He must be a ready correspondent. By this is not meant the mere ability to frame letters, perfect from a rhetorical viewpoint, for such ability is, in fact, only one of the attributes that contribute to the highest success. So important is this mat- ter that a separate chapter has been given to its considera- tion.* A knowledge of the law is absolutely necessary to the credit man; not only a knowledge of the general laws of credits and collections, but of the statutes of the states in which he operates and which directly concern his work. He should be an expert accountant, able to analyze financial statements and to tell at a glance the true condition of the business of the prospective customer. He should also be a good collector. Even though collections are handled by a separate department, the work of collecting is so closely re- lated to the credit department that it becomes one of its special features. Above all, the credit man should be a sound business man, not only for the good of his own firm Chapter XV. THE CREDIT MAN 25 but also for the good of those on whom he is presumed to sit in judgment. According to many credit men, a quality most important to their work is an abnormal development of the sixth sense, better known as "intuition." This faculty is too subtle and too difficult a subject for discussion here. It is sufficient to say that, be it intuition or judgment, or merely the result of trained experience, it is necessary that the credit man be able to read human nature — be a judge of character. The Test of Results The credit work is the one job in the house that shows the mettle of a man. Here results count, and results come about with an inevitable regularity. There is no side-step- ping. The faker, the bluffer, the "four-flusher,'' quickly drops to his level. It takes a man of brains and energy and industry to be a successful credit man. The brilliant man is too often blinded and his judgment dimmed by his own effulgence. The man with a good ordinary brain keyed up and developed to its highest efficiency — the man who is will- ing to live, eat, and sleep with the accounts for which he is responsible — he is the man who will make good at the credit desk. Attitude of the Credit Man The foundation of credit is reasonable confidence. The credit man should therefore guard against the development of a suspicious disposition, for such an attitude in credits is as detrimental to business as its antithesis, which listens readily and believes implicitly that there is nothing but good in every risk. But even when not suspicious, the credit man is likely to fall into the habit of assuming a negative attitude regarding every risk on which he is called 26 CREDIT OFFICE ROUTINE to pass, until he is literally forced from his position by the accumulation of positive information on the subject under consideration. It is essential to a liberal poHcy that the credit man possess an open mind. He must be a builder of business — a constructive element as opposed to the negative credit man whose ideas and efforts will eventually prove damaging to the accounts receivable of the firm. If the credit man does not have these qualities, he must acquire them. The argument that it is impossible to change the nature of a human being is only true in part. Character is largely the result of daily activity and environment; and if a definite and fixed policy of liberality is determined upon at the outset and rigidly adhered to, it will go far to correct the warping of mind and the narrowed vision that views all risks with suspicion from the moment they are first brought to the attention of the man at the credit desk. On the premises so far advanced, the question may be asked : What, then, is a good credit man? If the suspicious credit man approves fifty per cent of the orders that come to his hands and loses only, say, one-half of one per cent of the volume of sales, is he not a good credit man? — not if the liberal credit man can check ninety per cent of his orders, even if he loses one per cent, figured on the basis of his net sales. The reason is obvious, for the profit on the additional shipments far exceeds the extra losses, to say nothing of the advantages which have accrued to the house through the increased volume of business, which enables it to buy its goods cheaper, and also cuts down the percentage of cost to do business. Importance of Full Information It does not require extraordinary ability to check the credits of customers with million-dollar ratings; but such THE CREDIT MAN 27 ratings are seldom, if ever, encountered by houses operating in restricted areas, and these are the concerns that transact the great volume of business done in this country. There- fore, we must necessarily consider most carefully the class of credits that such houses ordinarily encounter. The statisticians claim that ninety per cent of the business con- cerns of the country fail or are liquidated at some period of their existence. With this fact in mind, it can be seen that the position of credit man calls for the exercise of remark- able discretion and clearness of judgment. While it is hardly possible to teach an individual this power of dis- crimination, it is yet comparatively easy to show that many losses may be avoided by obtaining all the facts concern- ing the financial worth of the customer as opposed to merely a few of them. Based upon such premises, the exercise of correct judgment will prove a matter of little difficulty. In judging what may be termed a hard credit, the credit man must develop to a high degree an unfailing determination to secure facts, and continue to dig into evi- dence and accumulate more and more knowledge on any particular risk until his exercise of judgment is not mere guesswork, but a matter of figuring with some degree of mathematical precision. This bulldog tenacity in the pur- suit of facts is the foundation of the success of most credit men. Ethics of Bad Risks It is a fact that very few losses are experienced on the first bill of goods shipped to a customer. It is now possible for the credit man to procure information from so many sources that the consideration of credit risks, when the ap- plicants have bad or unfavorable records, is not a matter requiring particular shrewdness. A loss on such a risk seems almost inexcusable. It is not scientific credit-grant- 28 CREDIT OFFICE ROUTINE ing, but gambling, pure and simple. Apart from the loss that his house sustains, a credit man who takes such risks is guilty of encouraging a class of individuals that have no place in the business world. By his assistance he permits such concerns to compete with the merchant who is trying to conduct his business along legitimate lines and make a decent living. Extension of credit to a man with a known record for dishonesty is a violation of the ethics of credit- granting. The credit man owes some consideration to the great mass of honest merchants, and he has no moral right to encourage dishonesty by giving his tacit approval to the methods of the dishonest who live at the expense of the better class. It often happened in former days that a merchant would fail and his business go through liquidation, and almost immediately he would set up in business again and get on credit all the goods he wanted, usually much more than was necessary. This led to the saying that "credit is cheap." This cheapness was the result of an inordinate desire to increase the volume of sales, and the credit man who had not been "caught" by the alleged bankrupt did not hesitate to sell him when he could do so on what he thought a safe basis. The mental attitude of the small merchant when he sees such a procedure, placing, as it does, a veritable premium on dishonesty, is easily imagined. In addition to the duty which the credit man owes to his house in protecting it from these dishonest customers, he should remember his relations to other merchants, both retail and wholesale — to the former because they come into competition with the dishonest class, and to the latter be- cause if he extends credit to these unscrupulous customers, he practically forces other houses in his line to be guilty of the same unscientific and unprofitable, not to say dishonest, methods. THE CREDIT MAN 29 The Credit Man as a Business Advisor It is a moral duty of the credit man to use his influence to prevent the loss of capital by those who he knows are incapable of entering into business on their own account. He should discourage the young clerk from investing his savings in business without reckoning that the requirements are not merely capital, but, in addition, experience in that line, ability to meet competition, and other considerations which a man often fails to grasp when anxious to get into business on his owji account. Often the broader viewpoint and the experience of the credit man enable him to help a very worthy man to success by advising with him in the choice of a different location, in the acquisition of a busi- ness already established, or in the taking over of a going concern. At the same time he can further the success of a new merchant by requiring of him a certain line of action in the conduct of his business. He should be ever ready to check the tendency of such a customer to overbuy or to extend credit too freely. The latter tendency is a frequent cause of failure, particularly of the small merchant, whose ideas of whom to trust and how much to put out on his books in the aggregate are somewhat vague. Above all, the credit man should insist upon the merchant's carrying suffi- cient insurance in solvent companies, and bend his efforts at all times to educate the small merchants to a realization of the importance of so doing. If the credit man is dealing with small merchants he should have a knowledge not only of the goods of his own house, but a general knowledge of all lines handled by his customers. Each line has its own peculiar terms of sale, and, by watching closely, the credit man can figure when his customer will be pressed to take care of other bills, and then so plan the times and terms of purchases that the cus- tomer can pay the credit man's house at the due date. In 30 CREDIT OFFICE ROUTINE a restricted area of operations the credit man comes so close to the customer that he can, and in many instances will be forced to assist him in planning a profitable running of the business. The importance of keeping in this close touch with the customer's conditions is so great that the matter is considered in detail in Chapter IV. Tact the Credit Man's Asset One of the prime requisites for every credit man is tact, not only in dealing with customers, but in his relations with all those whom he meets in the course of business. He needs the support of the executive, for without such support his work is hampered, and he is robbed of all pleasure in the work itself. Nothing is truer in the credit office than the saying of Elbert Hubbard's : "Get your pleasure out of your work or you will never know what real pleasure is." If the credit man sustains a heavy loss which provokes criticism, he should be able to lay his information files open for inspec- tion and show the reasons for his action and the facts on which he granted the credit. All houses expect losses, and the average business man ought not to grumble when he sees that the credit man has exercised all the care and diligence which could be expected. It is the part of the credit man, therefore, to put himself in the right light with his em- ployers; in matters of loss he should never hesitate, when called upon, to give reasons for all his actions. He should also exhibit a tactful openness to receive advice from his superiors, and should bear in mind that they may know something about the business, even if they do happen to be the proprietors. In dealing with the selling force of the house, tact is ab- solutely essential. Salesmen as a rule have an exaggerated idea of their importance and feel that on their shoulders rests the responsibility for the success of the house. The old idea THE CREDIT MAN 31 i that a salesman's duty is to sell goods and leave the matter of credit to the office, is a fallacy which is growing more ap- parent as the times change for the better. If the credit man and the salesman will only take each other into confidence they can establish an arrangement for mutual information and help that will be of the greatest value; the credit man will gain by acquiring facts regarding his customers that no one but the salesman could give him, while the salesman can procure help in the handling of customers, a knowledge of what his competitors and other houses are doing with such customers, and information of prospective business which he could not get readily from any other source. Such an arrangement between the credit man and the salesman results in reduced losses and increased sales. If a credit man is so fortunate as to come into personal contact with customers, tact is a requisite. The credit man who possesses it is then in a position of advantage which can be appreciated only by one who has gone through the actual experience of interviewing a prospective customer or of talk- ing to one who is already a valued asset of the house. If the credit man can place himself in an attitude of friendly sym- pathy with the customer, he can draw out and obtain the in- formation he needs, and, when it is required, can give ad- vice so adroitly and so helpfully that the customer will take it and become a friend of the house. Or, if credit is refused, the customer at least leaves without resentment and with re- spect and kindly feeling for the consideration shown him. Like intuition, the ability to handle men is a quality that is inborn; but if the credit man is not naturally tactful, he can, by constant attention and study of human nature, acquire a facility in dealing with it that is a very good imitation of tact itself. True tact is based upon sincerity of purpose and genuine sympathy for one's fellow men. There must be charity for human weakness, and allowance 32 CREDIT OFFICE ROUTINE must be made for those whose station in Hfe has denied them some of the advantages that others more fortunate have enjoyed. All Men Presumptively Honest Nothing is so fatal to the success of the credit man as to adopt the attitude that all men seeking credit are pre- sumably dishonest, until evidence to the contrary has been found, or until they have proved their honesty to his satis- faction. There v^ill always be dishonest debtors, but if the credit men of the country continue their efforts they will make it harder each year for the dishonest man to stay in business, even if they cannot eliminate him entirely. Laws have been enacted which deal with fraud ; and credit men are constantly working to put a stop to practices which, if not fraudulent under the law, are, to say the least, detri- mental to a policy having honesty as its basis. As already stated, the credit man should always reject a prospective customer with a notoriously bad record. With the exception of these notoriously bad characters, it may be assumed that men in business will pay their debts if they can; this simply as an abstract proposition and with- out any reference to natural honesty. Every man must make a living, and nearly every man is ambitious to make more than a mere living. He engages in the business of selling goods and puts into it what money he has saved and often what he can borrow from relatives or friends. It is supposed that he has chosen the line for which he is best fitted and in which he can make a living with least effort. His interest in the success of this business is most vital. He simply cannot afford to fail. He knows that he can continue in business only on condition that he pay his creditors and that he do this with a reasonable degree of promptness. Honesty as a policy is not then so much the best plan of THE CREDIT MAN 33 action, as an absolute necessity. The man of dishonest in- tention must become, at least, honest within the law. The man who enters business with the avowed intention of being dishonest is so rare that he is a negligible quantity. With all this in mind, let the credit man assume the affirma- tive attitude, but with due care and caution. Caution a Requisite The idea of caution as associated with the credit depart- ment has been dinned into the ears of the credit man until there is danger of his going to the opposite extreme. But if he will take his list of losses and analyze each one, he will be surprised to see how many could have been avoided by the exercise of caution, not only in opening the account, but in its subsequent treatment until, and even after, it entered the stage known as a collection. More losses result from carelessness on the part of the credit man than from any other source. In the granting of the first credit to a cus- tomer the credit man is wont to exercise unusual care as compared with his treatment of credits to customers with whose accounts he is familiar. In the first credit he looks up references, procures reports, obtains statements, and, in fact, exercises every care. If, then, he thinks the credit un- wise, he declines the order without any of that hesitation he would feel if it were a question of breaking off existing relations with a customer who has long been on the books. It is especially the case, when an account has run a long time and good credit has been established by a succession of prompt payments, that the usual alertness of the credit man lapses and carelessness gets in its work. If the credit man is overwhelmed with work and pressed for time, or is trying to do work outside of his department, which takes his mind from his credits, he will allow an order to slip through here and there without careful revision. In fact, about all the 34 CREDIT OFFICE ROUTINE consideration he gives it is the reflection that the customer has been on the books and must be all right, as he has not had any particular trouble in collecting previous bills. It is just such accounts as these that deceive the credit man and cause most of his losses. Another frequent cause of loss is found in the special or "pet" accounts of the firm — the merchant who buys liberally, if not exclusively, from the house, who is indulged in his payments and allowed to lap bills or pay by notes and gen- erally run his accounts to suit himself. Such a customer is usually a friend of the star salesman, or head of the house, and therefore is designated as a "pet" account. A great percentage of them go wrong, and the house itself is largely to blame. Watching the Accounts When credit has been granted and a new account has been opened, the real work of the credit man begins. He must watch every account on his books, and to do this he must necessarily have ready access to the books and records of the office. Watching an account means that he is to know the size of every order the customer sends in; the amount already owing ; the amount, if any, due or overdue ; the promptness in paying; the general condition of the cus- tomer; and the fundamental conditions in the customer's immediate territory. This may seem like an endless task, involving an immense amount of detail; but if the credit office is properly systematized, the clerk who looks after the detail work will lay all these facts before the credit man whenever an order is to be passed upon, and with practically no loss of time. By keeping in touch with accounts in this way, the credit man can foresee trouble long before it is realized by the merchant himself. If through his investigations he finds THE CREDIT MAN 35 that a merchant is going down hill, then and thereupon the credit man should proceed to get from under the risk by col- lecting the account as speedily as possible. This does not mean that he should be too easily frightened, but it is sup- posed that when his suspicions are aroused he will begin a line of thorough investigations, which will either confirm or allay these suspicions, and that if they are confirmed he will act with promptness and decision. Lack of decision in the credit man is fatal. In a busy season, with orders coming over his desk like an endless belt, he is forced to act promptly, but he must not act carelessly. He should con- stantly practice the faculty of making quick decisions and concentrating upon the one particular risk to be passed upon until such action becomes second nature. Again let it be said that delay and carelessness are akin, and are the credit man's worst enemies. In the collection department these faults are worse than inexcusable. CHAPTER III THE CREDIT OFFICE MACHINERY The Office Force Having considered the credit man and his quahfications, we pass to what may be called the machinery of the credit office. It need scarcely be said that the successful conduct of the office requires that it shall have a head who must be manager in fact as well as in name, and whose personality, while dominating the office, does not domineer over it. The assistants should respect the head, and his treatment of them should be such as to merit respect. The decisions of the manager must be final, his judgment deferred to, and the results accepted as predestined. The same carefulness which has been exercised in the choice of the credit man should be shown in the choice of his assistants in order to bring the entire department up to the same high plane. In dealing with his assistants the credit man should en- courage them to independent thought and action. The more efficient he can make them as a thinking element, the more detail he can shift to their shoulders, thereby lessening his own burdens and leaving his mind free for more important problems. It is a great help to the head to discuss with his assistants the customers and their accounts, and in this way awaken interest and pride in the success of the department. The courteous and liberal attitude of the credit man toward the customers should be the attitude of the office force. The customers have a right to demand this consideration from the office force when they might not look for so much from the head of the department. The credit man cannot possibly be in the office every 36 THE CREDIT OFFICE MACHINERY 37 minute, but his work must go on continuously, and if his assistants are properly trained in the policy of the depart- ment they will be able to assume the responsibility when he is absent. The Credit Brief In the mass of material that comes to the credit desk there must necessarily be much that is superfluous or merely repetition. All the reports on any risk under consideration should be classified and arranged by a clerk, and the credit man should then make a summary, or brief of the facts and his own deductions. This can be dictated, and transcribed on the folder in which the reports are held, or be made up as a separate sheet and filed on top of all the other matter. Sometimes a printed form is used for this brief, which when filled in shows at a glance the combined result of all reports. Such a form practically forces the office to procure suffiaent information to fill it, and thus automatically maintains the office efficiency. A further advantage of the brief is found in the fact that it requires an analysis of each account, so that the manager becomes thoroughly familiar with it. The credit brief is valuable also to the collection department, as it gives the facts and the opinion of the credit man on any particular ac- count, and outlines the policy of the credit office in the future handling of the account. In the credit office every important fact or conclusion should be reduced to writing; for, while a good memory is an invaluable asset, the matter of credits is too serious to intrust to memory alone. If the office records are kept full and complete, the credit manager may leave the office at any time, but the entire results of his work remain, and his as- sistants or his successor may carry it on without serious interruption. 38 CREDIT OFFICE ROUTINE Office Methods and Equipment Many devices for the handling of office details are con- stantly appearing, and the credit man must keep informed on such matters and be ready to adopt any method or device which will enable the office to accomplish its work more quickly and accurately. Antiquated office methods are pro- ductive of waste both of time and money. The large manu- facturers of filing cabinets and office furniture have trained systematizers who will give personal advice and assistance to their customers. Unless the new credit man has already had experience in equipping an office, it is well to put the selection of filing de- vices, folders, and such matters in the hands of a reliable spe- cialist. In most offices the vertical filing system is em- ployed. Important letters, reports, and credit data must be retained securely in the files, and are therefore pasted in the credit folders instead of being filed loosely like the regular correspondence. The usual credit folder is specially made, being some- what smaller than the correspondence folder ; but as it is de- sirable that supplies be purchased in quantities, it may be well for a small office to use the ordinary letter folders, pro- vided the credit information is securely fastened. This large folder will be found convenient also — as there is ample space — for making memoranda upon the folder itself. Forms and Blanks The forms and blanks used in the credit office should be of such a character that all information can be systematically recorded, and should be so arranged that any important fact can be quickly ascertained. The mistake should not be made of preparing a credit form with too long a list of questions regarding the subject under investigation. The National Association of Credit Men has prepared simple standard THE CREDIT OFFICE MACHINERY 39 forms* which will be found convenient and sufficiently com- prehensive for all practical purposes. The credit man should provide the proper blanks upon which to make investigations among the trade and through banks and attorneys. A typewritten form letter would do, but printed blanks are preferable for the reason that they can be handled more quickly and the answers be filled in more readily. Such forms should omit useless questions, as banks and attorneys will rarely do more than give a brief expression of opinion as to the desirability of the risk, and, as a matter of courtesy, nothing more should be asked or ex- pected. Some houses, particularly medicine factories, cheap jewelry concerns, and some crockery houses, have a habit of employing credit-inquiry blanks containing dozens of ques- tions. As a consequence, such blanks are usually returned with but the briefest comments scrawled across the face. In the credit-inquiry forms submitted in the Appendix of the present volume, it will be noticed that it is usually left to the recipient to use his own judgment as to how much he will say in regard to the credit risk. This "narrative form" of inquiry blank is popular and often leads to very excellent reports, as information is frequently given which would not have been obtained in the answers to a series of questions. With the trade-inquiry blanks the object is to obtain a brief record of ledger experience and whatever other in- formation the answering credit man may volunteer. The various commercial agencies have printed forms upon which applications to them for reports may be made, and which, when the reports are furnished, serve as receipts and can be checked against the number of reports to be fur- nished the applicant under the yearly contract. * Appendix, Forms 3, 14-171 40 CREDIT OFFICE ROUTINE Sources of Information As the basis for granting" credit is information concern- ing a customer, the sources of this information are of the utmost importance. The first and most generally available source of informa- tion is found in the two great commercial agencies. These agencies deal with every class of business and are preferable to the smaller specialized agencies which deal with only one particular line, and which may more properly be designated as trade bureaus. If the appropriation for the expenses of the credit department is sufficient, by all means take a sub- scription with both Dun's and Bradstreet's, principally for the purpose of checking the information of one against the other. The work of the commercial agency is considered more fully in Chapter VII. As a further source of credit information and of help in collections, a subscription should be taken out with one of the leading bonding companies which make a specialty of guaranteeing the faithful accounting of all claims sent to the attorneys on their lists. Such companies furnish their sub- scribers with a book containing the name of a good collec- tion lawyer in almost every town in the entire country, as well as the names of banks to which drafts may be sent for collection, or correspondence addressed for the purpose of procuring information. Accompanying the books are blanks for making inquiries of the affiliated attorneys, who will make free reports on the credit standing of the customer. The lawyer in a small town is personally acquainted with the customer and with his business, and hence these reports often contain inside facts known only to the lawyer himself. Many losses are avoided by withholding credit on the basis of such reports, even when other reports are favorable. If a letter accompanies the inquiry blank requesting certain specific facts to supplement the information already at hand, THE CREDIT OFFICE MACHINERY 41 the report assumes additional value in that it is personal and to the point. Banks as Sources of Information The value of information furnished by a bank depends largely on the form of the request.* If the credit man is operating over a small radius, he may become acquainted with the lawyers and bankers in his territory — an acquaint- ance which cannot be appraised too highly. If, however, a request is addressed to a bank at a distance, it might be well to mention the fact that information has been obtained from the usual sources in the way of commercial reports. Just as when applying to a lawyer, the request should be of a spe- cific nature, and along lines strictly within the scope of the bank and consonant with the relations existing between the bank and the customer. It should be remembered that the cashier of a bank has his own business to attend to. He is not a bureau of gen- eral information, and is under no obHgations to report to a stranger on the financial condition of his customer. The credit man should ask only for such information as he can- not obtain from other sources, and should not ask the bank to make up a general report in order to save the expense of buying reports from the agencies. Among queries pertinent under the circumstances would be: the frequency or reg- ularity of the customer's deposits, his standing at the bank, his reputation for honesty and ability, his manner of settling bills as shown by the notations on the bank checks, whether he allows drafts to be made, and whether they are paid when presented. Another question which should be asked is whether the customer owes the bank, how much, and if se- cured. The answers to this series will mean more than an entire general report, for if the customer has credit with the *See Appendix, Form 11. 42 CREDIT OFFICE ROUTINE bank and is able to borrow money with or without security, it indicates a healthy moral condition of the risk. The amount owing can be checked against the general statement of liabilities obtained with the reports of the commercial agencies, or against the statement of the customer himself. Some credit men regard reports from a bank with sus- picion; but when one considers the general reliability of banks there is no reason to think that they would deliberately make a report that would put the customer in any other than the true light as they see it. Every bank desires that its de- positors obtain credit and maintain it when procured. A depositor's success is of mutual advantage; and while the judgment of the bank may be wrong in regard to its de- positor, it is not probable that a bank would intentionally give a false impression. It is not wise to inquire about a customer from his brother merchant in town, unless the credit man is on inti- mate terms with such merchant and can write him on per- sonal grounds. The average merchant does not like to be put in the attitude of passing judgment on the credit of a neighbor. Salesmen's Reports ^^ E^ch salesman should be furnished with a blank to be filled out and attached to each order he sends in. The blanks shown in the Appendix* provide for such information as the salesman can gather from the customer and from per- sonal observation. If a house is selling within a small radius, it is supposed that many orders will be taken from merchants of limited means. Such merchants are safe risks when the credit man has full information regarding their financial affairs. Within such a limited area, the traveling salesmen can be of untold help to the credit man. When a •Forms i and THE CREDIT OFFICE MACHINERY 43 careful salesman fills out his credit blank he takes not only the references given by the customer, but he looks through the stock and takes the names of the houses whose goods are on the shelves. He may also make estimates of the value and size of the stock, the general character and condition of the business, and secure other items of information that will be of value. It is well for the credit man to be thoroughly informed on the causes of failure,* in order that the salesman may supply the credit office with the important facts upon which to base an estimate of the ability, character, and gen- eral business reputation of the customer. The Customer's References Another valuable source of information is found in the references furnished by the credit prospect. Care must be exercised with respect to these, for it is only human for a merchant to give the names of the houses with which he is in good standing. Such references should be checked up against the salesman's report, and the credit man can then write to other houses with which the customer deals. The information to be sought from the trade consists principally of ledger experience, which includes: "How long sold," "Highest credit extended," .."Amount owing," "Amount due" or "past due," and any other items of general informa- tion which the house may care to volunteer as a courtesy. These specific requests constitute the form which is adopted and recommended by the National Association of Credit Men. If the house is a member of that body, it will be fur- nished at cost with a supply of suitable blanks on which to make requests for information. ►See Chapter XVIII. CHAPTER IV CREDIT-GRANTING— THE CUSTOMER Confidence and Credit It is significant that the word from which "credit" is de- rived has for its meaning confidence, trust, or belief. Credit may be defined as the confidence reposed in the abiHty and intention of the purchaser to pay. The seller believes in the solvency or probity of the purchaser, and such belief is the basis on which any credit transaction is made. If goods are delivered on the strength of approved security taken by the seller before shipment, the transaction is not one of credit in the strict sense of the word. The confidence giving rise to credit is, among credit men, based on a knowle<:lge of the purchaser's financial resources, and promptness in paying his debts ; to which may be added as still more important, his known character and integrity. To go further into the subject, the credit man must have con- fidence in the permanency of the purchaser's business and in his ability to conduct the business successfully. The object of the credit man is practically the same as that of the sales- man — to sell all the goods he can at a profit, with due regard for safety. Losses come from taking chances — but so does volume of sales; and a good credit man will make a con- scientious effort, within the bounds of safety, to ship every order that comes over his desk. If it cannot be arranged on credit terms, a shipment may be made for cash or on ap- proved security. The Basis of Credit-Granting The basis for credit varies according to the factors con- 44 CREDIT-GRANTING— THE CUSTOMER 45 stituting the business structure of the firm which the credit man represents. Such factors are: the location of the house itself, the line of goods it carries or manufactures, class of customers, the particular form of credit ordinarily extended with reference to terms, size of orders, and the margin of profit on which its goods must be sold. The gen- eral principles which form the basis of credit are the same for all lines of business; but in the discussion of its indi- vidual factors or elements, we encounter the special problems incident to any particular line; and, therefore, where credit- granting assumes different aspects dependent, say, upon the size or extent of territory covered, it becomes subject to a separate consideration. The Customer's Ability Credit men differ as to what constitutes the most essen- tial basis of credit. Each man puts a different emphasis on one or more elements, according to his knowledge and ex- perience. One may lay stress on ability, another on char- acter, while still another may judge a risk solely on the finan- cial responsibility of the purchaser — whether he is legally "good," and may therefore be compelled by law to pay his debts. By ability is not meant merely the capacity to conduct a business properly. It also includes age, health, business experience, education,- and capacity and inclination to work. It should go even further, including an inquiry into the cus- tomer's knowledge of the particular business or the lines of goods he is selling. While ability is necessary to success, it must be remembered that there are large numbers of mer- chants obtaining credit and paying their bills who cannot be said to be of marked ability ; and still they are looked upon by close acquaintances in their own community as successful nierchants. 46 CREDIT OFFICE ROUTINE Integrity Essential to Credit-Granting Ability may therefore be considered as a desirable at- tribute, but it cannot be compared with integrity when judging the credit of a customer. Integrity is absolutely essential. A man may possess ability and ample assets, but if his character and reputation are subject to question, then from a credit standpoint he is a "risk" in every sense of the word. As tangible assets form the chief basis of financial worth, so integrity is the real and indispensable basis of credit. If a credit man can be assured of his customer's honesty, all other considerations are merely relative. When it comes to a choice between the honest man of small means and the man of large resources but of doubtful integrity, the honest man should be entitled to credit, while to the man of doubtful honesty credit should be denied. Investigation of Habits The busy credit man is too apt to accept without ques- tion the brief remarks in the commercial reports as to the general character of the prospective purchaser; and if these state that the subject is of "good habits and fair ability" he checks the item and passes it up. An investigation might reveal the fact that while the subject's habits may be good most of the time, he is addicted to occasional sprees during which his business suffers. Drinking is not the only dan- gerous habit, but is mentioned simply by way of illustration. When interviewed by the reporter for a commercial agency, a merchant's associates and commercial neighbors, desiring to do him justice in regard to his financial affairs, usually report very accurately in this respect; but when it comes to speaking of his failings and bad habits they do not consider this an important part of the report, and try to take a charitable view of the case. The reporter himself is schooled to be very careful in dealing with information CREDIT-GRANTING— THE CUSTOMER 47 which might be damaging in character and which must be supported by evidence from a man's home town. Even a loose character can often obtain witnesses to vouch for him, and when adverse information is obtained by a commercial agency it is usually handled with great care, and the report in which it is embodied is sent to the inquirer under seal or else held in the office and shown only to the inquirer in per- son for his exclusive use. Thus, considering the difficulties under which character investigations are made, and how hard it is for agencies to procure absolutely correct informa- tion, it is always well to make this matter of habits the sub- ject of a specific confidential question when writing local authorities. In this connection, also, the business history of a pros- pective customer should be carefully investigated. Such in- quiry should consider not merely his past record regarding fires and failures, but his previous business connections and occupations, and his personal record at his various places of residence. Appraising the New Customer The first step in investigating a new customer is to con- sult the rate books of the commercial agencies. The second source of information is the detailed report from the com- mercial agency, giving a brief history of the business and often a copy of a signed financial statement. This report furnishes a basis of request for certain specific information from attorneys and banks. Such reports show the names and ages of partners and whether married or single. The latter is important, as it determines the amount of exemp- tions to which individuals are entitled, and such exemptions reduce the net worth in accordance with the laws of the vari- ous states. It is of vital importance that the name and address on 48 CREDIT OFFICE ROUTINE the report agree exactly with the name and address of the request, especially in large cities and inaccessible country dis- tricts. Mistakes are often made, not only in the credit de- partment in calling for reports, but by the clerks of the com- mercial agencies, who are not supposed to be mind-readers, and who fill carelessly worded requests as completely as they can. The chief objection to the reports of commercial agencies is that they are not always up-to-date. Their custom is to revise twice a year; but if a merchant submits a statement in January, it is not probable that he will make another dur- ing the same year unless there has been a material change in the business. The average merchant takes inventory only once a year (if then), and any figures taken six months later can be only guesswork. It is seldom that a statement from a small merchant deals with the actual inventory figures. He thinks that his estimate should be given in round num- bers, and from this the credit man naturally concludes that the whole statement is purely guesswork. Capital and Expenses The question of capital as affecting credit should con- sider the way in which the customer uses it ; whether he ties it up in hard accounts or hard stock, or whether he restricts both of these and turns his capital frequently. In judging a credit one should therefore consider his information incomplete until he- has definite knowledge of the volume of business transacted yearly by the customer and the amount of his expenses. If the credit man uses his own form for taking a property statement he should provide spaces for an- nual rent and clerk hire. With these two items he can easily approximate the merchant's total expenses. A small mer- chant may not keep close track of his yearly expense, but he can always tell what he spends for rent and clerk hire ; and CREDIT-GRANTING— THE CUSTOMER 49 the size of the business will indicate what amount should be allowed for other operating expenses. If the total given by the merchant's report shows a wide variation from what it ought to approximate, an inquiry should be made into the reasons for the discrepancy. If the credit man will make a practice of such investigations he will soon learn to tell at a glance just how the expense item should stand. It becomes second nature, like estimating an order by running over the order sheets. Assets In reading the asset statement of a report on a merchant, due allowance should be made for shrinkage, even though the report states that this allowance has already been made. A stock of goods under the hammer is never worth what a merchant can obtain in the ordinary course of trade. Ac- counts receivable will likewise suffer considerable shrinkage if the merchant should for any cause discontinue business. The item of furniture and fixtures, except in a large business house, is mainly valuable in connection with the business as a going concern. The small merchant usually lists his fur- niture and fixtures at first cost, and the credit man in his mind eliminates a cash register and the computing scales. He feels that they are there, at full value, but perhaps with a lien retained by the manufacturers until all the lien notes are paid. The merchant may. not have them, and also he may not have a big stock of patent medicines, but the chances are that he has both. In this class of report, such items as live stock, farming implements, and household goods must be looked at with suspicion, for in many cases all are exempt. Any other assets which can be transferred or readily dis- posed of must receive their share of attention from the credit man. The item of real estate in a report should be noted and 50 CREDIT OFFICE ROUTINE carefully investigated. The agencies exercise great care in this particular, investigating the court records as well as fol- lowing up transfers, mortgages, and other changes affecting title. Real estate may be made the basis of a specific request when writing to banks or lawyers. It is better to spend a dollar or two establishing facts regarding real estate than to see this item vanish when the business is taken in hand by a trustee or assignee. Along with the laws of exemptions the credit man should read the various statutes governing the rights and titles to real estate, as every state has its own laws on these matters. Liabilities An equally careful study should be made of the liabil- ities. The loans from banks and individuals should be checked up and investigated by means of letters to the banks and lawyers. If it is a very small concern which is being investigated, both of these sources should be asked to give a list of other inquiries which they may have received recently. It is important to establish the item of merchandise indebt- edness as far as possible, and this leads to a consideration of the information to be derived from the trade through an exchange of ledger experiences. This is so broad and im- portant a subject, applying as it does to the million-dollar house as well as to the cross-roads store, that it is specially treated in Chapter IX. If satisfactory information regarding liabilities cannot be obtained from the reports of the commercial agencies, it is well to ask the customer for a signed statement on a blank specially printed for this purpose. Very often the small mer- chant does not realize the purpose of a statement until it is explained to him. He does not know how to fill out a blank properly, and he usually regards the representative of the commercial agency with suspicion. A tactful and friendly CREDIT-GRANTING— THE CUSTOMER 51 letter, however, will in most cases bring" the desired in- formation. When the statement is received the post-marked envelope should be carefully preserved, and on this should be placed the signatures of at least two responsible parties who can testify to the receipt of the letter through the mail. This point is covered more specifically in Chapter XL Insurance Another consideration of vital importance in granting credit is insurance, for insurance — or the lack of it — is the reef on which many ventures have come to grief. The great majority of merchants are careless about insurance. Even if they are amply covered, few ever read their policies to see whether they are written alike. So profound and so widespread is the ignorance regarding insurance matters, that practically all the states have passed laws throwing cer- tain restrictions about agents and companies. Fortunately, these laws in great measure protect the insured against "wildcat" insurance, but there are no laws which protect the merchant against his own carelessness and ignorance. Credit men have long recognized the necessity for bring- ing merchants, especially small merchants, to realize not only the importance of carrying ample insurance, but also the advantage of reducing the hazard of their own risks and thus making their property acceptable to the insurance com- panies. Country stores are known as special hazards, and are underwritten by very few companies ; and these few have been able to show but little profit on this class of insurance. Unless a merchant shows enough outside assets to cover a possible loss by fire, the credit man takes a long chance when he ships to an uninsured store. Local Conditions In connection with the investigation of the prospective 52 CREDIT OFFICE ROUTINE customer, local conditions should be considered. This has reference to crops, labor, and employment, both in local in- dustries and on public works in the customer's immediate vicinity. Competition is an important factor when consid- ering the ability of the customer to succeed'. Reports on these conditions may be obtained by direct inquiry from au- thorities and from the traveling salesman, especially if the customer is in the country or in one of the smaller cities. If the order is from one of the trade centers — that is, a city of considerable size — late information regarding local condi- tions may be obtained from the weekly papers issued by the commercial agencies. General Business Conditions To dismiss the subject of granting credit would hardly be advisable without a few words as to the general conditions which affect business as a whole. The credit man for a small grocery concern may ask what he has to do with the fluctuations in stocks or the price of pig iron. He has his opinions as to whether business will be good or bad during the next few months, and he relies on his ability as a col- lector to retrieve his errors in crediting in case of a general financial panic. On what does he base his opinion as to the future? Doubtless on the newspapers, which are usually optimistic in regard to business, and report the conditions existing from day to day. It is a common saying that a panic comes out of a clear sky at the time of seeming great- est prosperity. When the panic does come the man who has been "guessing" usually helps to keep up the percentage of the ninety per cent who are born to fail. Fundamental conditions can be analyzed with arithmetical precision. The daily papers report bank clearings, crop conditions, commodity prices, and other important items. These reports mean little to the average man, who usually CREDIT-GRANTING— THE CUSTOMER 53 makes no attempt at tabulating and comparing them from week to week or through the year. To compile such records would require more time and money than the average busi- ness can afford. While the commercial agencies supply some records, they have not gone into the subject of tabulating and forecasting like the statistical organizations which are now developing this into a business. CHAPTER V CREDIT-GRANTING— THE HOUSE Classification of Business as to Credit In the preceding chapter it was brought out that the basis for credit varies according to the factors which enter into the business structure of the house. Having briefly considered these factors, and discussed credit from the standpoint of the customer, we will now consider the application of the principles of credit-granting to a business in operation. For this purpose it may be well to divide the various classes of business into three groups : 1. The local jobber who operates in a restricted ter- ritory and sends his salesmen in all directions, covering the surrounding territory within a radius of a hundred miles or possibly two hundred miles from the home base. 2. The large wholesale and specialty house, the mill agent, and the commission house; all of which operate over the entire country. 3. The manufacturer, who might be included in the sec- ond division, as he sells from coast to coast; but as manufacturing credits are somewhat different from the credits of the regular jobber, they will form the third division. 1. THE LOCAL JOBBING HOUSE Credit Conditions The jobbing houses which are included in this first divi- sion are principally concerned in supplying staple goods, 54 CREDIT-GRANTING— THE HOUSE 55 such as groceries, dry goods and notions, shoes, clothing, hardware, hats, and milHnery. These jobbers work thor- oughly, selling goods on credit to almost every store in their territory. They bear the burden of selling the very small trade, which is not solicited by the big houses of the large trade centers. It is a peculiar fact that the larger and better stores in such restricted territories almost invariably refuse to buy from their local jobbers, preferring to go to distant markets for practically everything except groceries. The proprietor feels that he must take a long trip to a large city as a matter of advertisement. His customers are probably occasional visitors themselves at the nearest jobbing center, and they like to feel that they are getting their merchandise from a distant city which, they imagine, sets the fashion. In this way the cream of the trade is in large measure taken away from the local jobber, purely through ignorance and prejudice on the part of the buying public. In order to increase the volume of his business, the local jobber usually takes long chances and sells many merchants who are not technically deserving of credit. These are the cross-roads stores, which do not carry insurance and would not do so even if they could get it — stores which sell on credit to neighbors and strangers alike, and collect their ac- counts, not "every little while," but "some time perhaps." They have as assets but little more than a small stock, some farming land, and perhaps their store buildings. With such conditions, why are these merchants sold? What excuse have they for being allowed to remain in busi- ness ? Simply that they are "long" on that valuable asset — integrity. Such merchants will always make a desperate effort to pay some time, and the jobber may be said to fur- nish them the capital with which to run their business. The credits granted by the local jobber might properly be styled the "hard job of the credit man who does every- 56 CREDIT OFFICE ROUTINE thing." In the local jobber's business the credit man is usually one of the firm, and has not only the responsibilities of the credits and collections, but often has the finances to look after also, and, it may be, the supervision of the of- fice as well. It seems useless to speak of avoiding detail work in such a case, but just as sure as the credit man with a heavy burden already on his shoulders attempts to do de- tail work in addition, to just that extent is he lessening his value as a producer of results. The heavier the burden, the more time does he require for thinking and planning. It is poor economy to save in office wages and lose accounts on the books from inability to give them proper attention at the right time — which means all the time. The weaker the customer financially, the more informa- tion should the credit man accumulate for his file. This is a case in which all the information must be obtained. Not only must credit reports be had from all sources, but the traveling men must be trained to gather every possible item of information that might indicate success or failure. Here it might be added that with the grocery jobbers, while the credit lines are large, the terms are short, and the salesman is usually a collector. The small profits on sales should be an incentive to keep losses through the credit department down to a minimum. By covering a small territory thoroughly, the credit man comes in personal contact with the lawyers and banks, and is enabled to procure their assistance and co-operation in his work. He has also a better opportunity to meet his cus- tomers face to face, and there is nothing like a personal heart-to-heart talk in getting a purchaser to reveal his true condition. This calls for tact, as no man likes to be taken into a private office and put through an inquisitorial process, or be told how he must run his business if he wishes to re- ceive credit from the house. CREDIT-GRANTING— THE HOUSE 57 When the credit man approaches a customer with sym- pathetic interest and succeeds in getting him to talk about his own affairs, he will in most cases obtain more informa- tion than if he conducted an exhaustive cross-examination. If the customer does the talking he will often drop items that are of vital importance, and which would not be thought of by the credit man himself. The personal element enters strongly into business of a local nature, and the small mer- chant wants to feel that he has placed himself in the hands of friends to whom he can look for aid if he requires it. If such a mutual interest is created, the merchant may be con- sidered a permanent customer to whom a certain amount of goods can be sold each season. Where the scope of its op- erations is limited by the extent of its territory, the house must depend on these permanent customers for the volume of its business. Credit Precautions In dealing with a small merchant the credit man must know the houses from which the customer buys other lines of goods. He must know their attitude toward him and their general policy toward customers. The reason for this is apparent. If, for example, a concern is carrying the mer- chant for a liberal credit on clothing, and this merchant is also dealing with a grocery house which has a reputation for close collections and harsh methods in cases of weakness or trouble, it is well to watch the account very closely and always to keep an anchor to windward, as it were. In such a case it would be well for the credit man to confer with the largest creditors in staple lines and learn whether they would co-operate, if necessary, to carry the debtor over any rough places. If the debtor cannot depend on such assistance, it is well for the credit man to reject the risk. As mentioned in connection with the investigation of the 58 CREDIT OFFICE ROUTINE customer, in Chapter IV, local conditions which might have an influence on the credit of the house must be carefully con- sidered. The credit man must have information constantly regarding crops, weather, and labor conditions; also any- thing else that would be likely to affect credit conditions in the neighborhood of his customers. Constructive Credits Taking up again the advantage of a close personal knowledge of customers, a house is sometimes able to adopt a liberal attitude toward a merchant who is to all appear- ances financially weak, because of its intimate knowledge of the conditions. Bill Jones of Cedar Grove may show little in the way of tangible assets, but some Saturday night when the credit man is going over the accounts with the salesman in that territory the latter may tell of a personal conversation he has had with a relative of Jones, who is much interested in his success, and who has expressed a willingness to help Jones whenever called upon. When Jones gets behind in his payments this relative indorses a note, and the country bank discounts it and thus helps the local jobber with whom Jones is dealing, to carry him until he collects his accounts or sells the produce taken in exchange for goods. Such in- formation as this is of the greatest practical value to the credit man. In a restricted territory the credit man must be construc- tive — a builder of business, and never its antithesis. There are hundreds of jobbers throughout the country who have grown rich with many customers like Jones on their books. In the case of the local jobber, the country merchant fur- nishes integrity, a part of the capital, and the ability to con- duct the business, while the jobber provides the remainder of the capital by carrying the account and extending liberal credits. CREDIT-GRANTING— THE HOUSE 59 2. THE LARGE JOBBING HOUSE Large Jobber's Advantages The jobber who covers the entire country is able to solicit a much better class of trade than the local jobber, be- cause the line of goods he carries is far more extensive, and because his establishment in one of the large trade centers gives himi an advantage of location. As the large jobber is able to fill every v^ant of the customer in his line, his credits run large; but his customers are in better financial condi- tion and realize that good credit standing results from prompt attention to business obligations. In the .matter of collections he can insist upon his bills being met at maturity, because the stronger a merchant becomes financially, the more attention he gives to his credit standing. It must not be thought, however, that the work of the credit man for the large jobber is so much easier than that of a similar official in restricted territory. His credits being larger, individual losses are necessarily far greater, and continual care must be exercised in opening new accounts and in watching these accounts after they are opened. Another thing to- be given consideration is that the large jobber encounters in occa- sional accounts in the large towns and cities, forms of dis- honesty which are not practiced in the rural districts. Rating the Large Buyer Mill agents and commission houses sell to those mer- chants who are able to use goods in solid cases shipped direct from the mills. As a rule such shipments are billed on short time, and the margin of profit is very close; con- sequently, such credits should be treated as in a class by themselves. One loss of considerable size will absorb the profits on sales running into many thousands of dollars. The credit man can afford to take little chance in such cases. 6o CREDIT OFFICE ROUTINE and must know that the customer is not only sound finan- cially, but that he has a reputation for discounting or pay- ing promptly at maturity. In checking through a com- mercial report it should be noted whether purchasers of this class show a proper ratio in quick assets; that is, whether a reasonably large proportion of their assets can be quickly converted into cash. Many credit men consider that two-thirds of the assets must be thus quickly con- vertible. Of course, there must be an ample excess of assets over liabilities to establish the financial rating which is given by the agencies. But the mere matter of safety is not the only consideration in this class of credits, for the credit man is also looking for a quick turnover in his own business. In judging credit he must look to the agency report for evidence of the customer's ability to pay promptly ; and he must establish the facts of such paying record by trade information and interchange of credit experience with other houses selling the customer. S. THE MANUFACTURER Credit Conditions The subject of credit-granting by the manufacturer should be considered on the basis of the classes of trade solicited by this branch of business. In former days the manufacturer sold his output to an agent or to the large wholesale houses, and on such a basis that the matter of credit gave him little cause for worry. Under changed conditions it is now the custom for some of the largest factories to go direct to the small merchant, and in some instances to ignore all middle men such as mill agents, com- mission houses, and even the small jobber. The credits of a manufacturer are similar in many re- spects to those of the wholesale house. If the mill sells the CREDIT-GRANTING— THE HOUSE 6l jobber, and the jobber in turn sells the small trade, it would appear that the credit man for the mill had practically the same work to perform as the credit man for the wholesale house, only on a larger scale. His sources of information and the methods of procuring it are also about the same ; but the credits, being much larger, must be handled with corre- sponding care in order to keep down the percentage of loss. With the mill there is another point of view to be con- sidered. If it is putting on the market an article, either staple or in the class of luxuries, the object is to cover thoroughly every point in the country that can be reached in an advertising campaign. An order from a far distant point or even from a foreign country is greeted with satis- faction as indicating that the public is responding to the advertising and that a demand is being created. The local jobber, on the other hand, views with suspicion an order from beyond the immediate limits of his territory. A further distinction between jobber and manufacturer is that the jobber covers his territory thoroughly, while the manufacturer touches only those cities in which he can find choice accounts, which will in turn fill the small orders com- ing from that section. The field of the manufacturer is un- limited, and, as a rule, he can select the choice risks among the distributing houses, or the most desirable large retail stores. This is not always true, however, for sometimes the manufacturer introduces a line of goods that is heavily ad- vertised, and the sales department must make strenuous efforts to distribute the goods so that they will be con- veniently at hand when the demand is created. Then, in order to secure a representative, the credit man is sometimes forced to accept a risk that he does not want, and which he must watch with infinite pains as long as the account stands open. 62 CREDIT OFFICE ROUTINE Effect of Mill Conditions on Credit Another feature that the credit man of a manufacturing house must consider is the importance of keeping the mill going steadily at an even output, and without the spurts or shut-downs which are so disorganizing to a business. The mill may be making an article that is used only during the cold months, but it must manufacture and sell this article every month in the year. The retailer buys just before the cold weather sets in, but since it is manifestly impossible for the mill to "do all its manufacturing and shipping in two months, the credit man, by making long terms to the best jobbers, makes sales in the other months of the year, and thus enables the mill to make up its orders and case the goods on a somewhat even schedule. Thus, shipping in- structions may be received for the early summer and even the last month of spring. The smaller orders and those from weaker firms can be held up until near the time for actual consumption. Here there must be the closest co- operation between the sales and advertising departments and the credit department. The Responsibilities of the Credit Man The credit man must be a student of fundamental con- ditions, not only for an intelligent handling of credits, but also as the statistician of the factory, to whom the depart- ments look for both buying and selling information. If the outlook for cotton is poor he directs the advertising and sell- ing campaign into the wheat belt or to some other section of the country where conditions are better. His weekly re- ports on fundamental conditions show where business is to be had and where credit conditions are good or bad. A most excellent territory in early spring may in the autumn be a veritable valley of dry bones from a credit standpoint ; and the credit man must know when and how to contract his CREDIT-GRANTING— THE HOUSE 63 sales and credits and withdraw before the trouble begins. In planning a selling campaign the credit man should care- fully look up the credit ratings of the prospects along the route of each traveling man or set a standard of just what ratings he will allow on his customers' list. By acting in conjunction with other departments the work of all can be made much easier and the expense ratio materially reduced. The credit man for a manufacturing house must have an expert knowledge of the line ; that is, not only of the goods themselves, but the various costs, values, and margins of profit of each article, and also the stock of each article on hand. If the factory is overloaded with a line that bears a liberal profit, it goes without saying that the credit man can afford to take chances that he would not take otherwise. This is not so much scientific credit-granting as common sense. Favorable Conditions of Manufacturer's Credits In one particular the credit man of a manufacturing establishment has an advantage over the same official in the wholesale house. Orders are usually taken before the goods are made, and the credit office has opportunity to investigate and pass on the orders long before the shipping date ; while with the wholesale house the majority of orders are for im- mediate shipment, and the work of investigation must be conducted with little delay. When a factory order has been received it can be listed and reported to the various agencies and interchange bureaus, and much valuable information often accumulates automatically through the answers to in- quiries. This is discussed more fully in Chapter IX. Another advantage enjoyed by the large manufacturer is in the collection of accounts. If the mill is selling large customers, they expect to pay promptly, and if remittance is not received on the due date the credit man feels no hesi- 64 CREDIT OFFICE ROUTINE tancy in pursuing the matter till payment is made. A state- ment is mailed on the day the bill is due, calling attention to the fact. If not paid by return mail the second statement is an advance notice of a draft through the bank. Instead of waiting and worrying with the debtor, as must the small jobber, the manufacturer is in position to demand prompt payment when his bills are due. On the other hand, if he is dealing with the very small trade and selling direct to the dealer instead of to the large houses, the credit man has all of the troubles of the small jobber added to those which come to him rightfully by nature of his line of business. The course to be pursued in collections, in this event, is practically the same as with the jobber. The Instalment Trade One particular branch of trade which has grown to enormous proportions in recent years, and which is sold by jobber and manufacturer alike, is the instalment business. The houses engaged in this trade carry a stock and sell on the plan of a cash payment on delivery and a stated sum each week or month, the title to the goods being retained until full payment is made. When the instalment house carries a fair stock the credits are similar to those of a house of the same size in the regular lines. Among the instalment merchants there is a class known as "the soft-goods trade." These dealers usually sell blankets, bedspreads, rugs, carpets, curtains, and such merchandise. The business is done through agents or house-to-house canvassers, who are practically high-class peddlers. Such houses carry only enough stock to keep the agents supplied for a few days, and shipments are made at frequent intervals from the source of supply — the jobber or manufacturer. A financial statement of such a house shows a few hundred dollars in goods, possibly the same CREDIT-GRANTING— THE HOUSE 65 amount in fixtures, such as horses and wagons, and then, as a surprise, many thousand dollars in accounts receivable. These accounts are secured by liens, and the purchasers pay if they can ; but if the goods must be taken back by the dealer there is some loss in selling them again at second hand. Un- der these circumstances the accounts admit of considerable shading to get at a true basis for valuation ; often they are cut from one-third to a half; and even then these accounts are valuable as assets only to a going concern. In judging instalment house credits, one must consider character and integrity above everything. The credit man must know beyond a doubt that the dealer is honest and in- tends to pay over his collections to his creditors. After this fact is established, the rest depends on the ability of the dealer to pay promptly. He sells his goods at an enormous profit, but of course there is a heavy expense in his method of doing business, as the canvassers work on a high rate of commission. One advantage in instalment house credits lies in the fact that the instalment houses confine their purchases to a very few concerns, usually selecting one source of supply for each line carried. Under such circumstances the credit must necessarily be large, but if care is exercised in looking up the record of the dealer and he is proved honest beyond ques- tion and remains so, there is not much chance for loss. So long as local conditions remain satisfactory, the instalment collections are good and the dealer pays ; but if strikes, lock- outs, bad weather, or other misfortunes interfere with work among the laboring class, then the dealer suspends his selling and devotes all his time to collections, which fall off in pro- portion to the amount of trouble existing in the locality. This spells trouble for the houses which are carrying the dealer's accounts, and the credit man or collection manager will have need of all his skill to avoid a loss. CHAPTER VI BANK CREDITS Basis of Bank Credit The banks have been somewhat slow to follow mercantile institutions in establishing independent credit departments to assist the officers in making loans. This is due to the fact that bank credits were formerly confined almost entirely to local propositions well known to the bank, and there was no need for a special credit department. The smaller banks, whose loans are purely local, still depend upon a personal acquaintance with the borrowers. In the smaller cities, also, it is possible for the president or cashier of a bank, or even for the directors, to obtain an intimate knowledge of the affairs of its customers, and transactions are based largely upon such personal knowledge. There is no occasion to gather the mass of credit information necessary for the banks of large cities, which carry on their books great num- bers of customers widely scattered over the country. Many institutions in these days find it convenient and profitable to invest surplus funds in both industrial and rail- way bonds for long-time investments ; also to buy, through brokerage firms, commercial paper made by concerns located in distant cities. The investigation in all these cases must be thorough and searching, and it is the duty of the credit man of the bank to make them. It is also his duty to analyze the various financial statements that come to his desk, and to prepare condensed reports for the convenience of the loan- ing officers. Bank Credits and Mercantile Credits While the system of banking credits is based upon the 66 BANK CREDITS 67 same theory as mercantile credits, and while the methods of accumulating information may be similar, there is still some distinction between the two. A house dealing in merchan- dise is permitted a wider scope and can deal on more liberal terms than the bank, which deals purely in financial credits, because it has a wider margin of profit and can therefore stand heavier losses. Nor will such losses materially affect its financial standing, for they are expected and arranged for in the general course of business. On the other hand, losses met by a bank through mistaken credits not only mean a loss of money, but may seriously affect the standing of the bank in the minds of its depositors. This is the more apt to be the case, because bank deposits come from' all sorts and con- ditions of men, and these depositors do not always under- stand that when they put their money in the bank they ex- tend to the bank the privilege of loaning this money on commercial risks. One of the most important distinctions between the work of the mercantile credit man and the same official in a bank, lies in the fact that the former concentrates his efforts on learning one particular line of merchandise, while the credit man of the bank must know as many different lines as are carried by the various customers of the bank. In a whole- sale dry-goods house the credit man has only to base his credits on dry-goods values ; but the credit man of the bank must have a general comprehension of the values of all mer- cantile assets. The Bank Credit Man The credit man of the bank must be able to analyze the financial statements submitted to him, to separate the fixed assets from the quick assets and to place a correct valuation upon each class. He must also understand how to arrive at a correct valuation of all such assets when sold under the 68 CREDIT OFFICE ROUTINE hammer. He must understand not only the trade conditions which affect credits of a purely local nature, but he must also be a student of fundamental trade conditions throughout the country. Beyond everything else he must be absolutely loyal to his bank and must appreciate to the fullest extent the confidential relations existing between the bank and its cus- tomers. Functions of the Bank Credit Department Nothing better illustrates the wonderful development of business in recent years than the numerous securities offered from' day to day by the larger investment bankers and brokers, and the degree to which the great banking establish- ments have expanded their operations through syndicate banking and various forms of business alliances. In this the credit departments of these banks have played an important part, not only in assisting their customers in establishing credit in distant trade centers, but also in assisting the smaller banks in the purchase of commercial paper or in making other investments through brokers, and in obtaining informa- tion concerning various credit matters. They also serve as a medium for exchanging credit information with other banking institutions and commercial agencies. Collections and other business for out-of-town houses are frequently the result of courtesies extended by the credit departments of such banks, and it sometimes happens that valuable business comes to the banks themselves through these services of their credit departments. In mercantile credits the credit man is responsible not only for gathering correct information, but also for the actual granting of credit. In a bank, owing to its peculiar organization, the actual making of loans comes under the province of a special officer, and such loans are passed upon by a committee of directors. The credit department there- BANK CREDITS 69 fore furnishes its information to the loaning officer, who must then treat each risk upon its individual merits. Credit Information Very full information is essential for the proper granting of bank credits. In order to have this more readily acces- sible, some banks have a card index on which is kept a great deal of information condensed from the larger files. This would, however, seem merely a duplication of work already done and may well be dispensed with. As to the information to be collected and filed for credit purposes it is well, first, to tabulate for each customer on a properly ruled sheet the following data, which is drawn from the books of the bank itself : Balance Maximum and minimum loans by month and year Accounts which are influenced Securities pledged with the bank Dates of overdrafts Checks returned for any cause Trade references and inquiries In the case of a new account with a commercial concern, the information file should be started as soon as the account is opened. For this, complete data should be obtained in the form of commercial agency reports and other credit in- formation, in order to be prepared to begin negotiations with the customer should he desire to borrow money from the bank. Such information is also useful in answering credit inquiries sent to the bank by firms from which the customer may desire to obtain credit. It is presumed that when the customer desires to borrow money from the bank he will be prepared to show a statement of his financial affairs made up from his own books, which will supplement the informa- 70 CREDIT OFFICE ROUTINE tion on file and which can be used to check against such in- formation. Many of the smaller banks depend on the judgment of one officer or a few officers who, by daily contact, are in the habit of acquiring all the information necessary on the bor- rowing customers of the banks. This information would be much more complete, however, if regular files were opened and one man in the bank were designated to place credit in- formation in these files as a part of his daily routine work. An important credit sheet may be compiled by tabulat- ing a comparison of statements furnished at regular inter- vals by the customer. This sheet should cover : Fixed resources Quick assets Net worth Current liabilities for merchandise Short-term notes Long-time liabilities Ratio of quick assets to liabilities Volume of business transacted Expenses (classified) Such other information as would be obtained on a mer- cantile account should also be obtained along lines that would apply to the financial resources of the customer, his manner of conducting business; if a corporation, the standing and worth of its officers; and other items that would tend to influence the credit of the bank. Having gathered the necessary details, comparison can be made from year to year showing with what degree of ability the merchant is conducting his affairs. The form itself may be so arranged that fluctuations in the various items of the statement will be readily shown. Usually the customer brings the statement to the bank in person, and an BANK CREDITS 71 Opportunity is thereby afforded to go over it with him and to discuss its features and review the operations of the busi- ness since the date of the last statement. In this way much information is gained which could hardly be obtained in a report or statement from the customer. Should the customer be interested in any concerns which are borrowers from the bank, there should be some form of report to show the aggregate borrowings of all these com- panies, as well as the aggregate sum against which the cus- tomer is held as indorser. This record is similar to the line sheet of a fire insurance company, which shows the amounts of all the policies of the company in a certain block or dis- trict subject to the same fire hazard. No matter how wealthy an indorser of this kind may be it is good policy to know the aggregate amount of his indorsements. The credit departments of many banks maintain follow- up records in soliciting new accounts, both mercantile and banking. This is a natural precaution, as the bank would hardly want to open negotiations with any concern that might, on investigation, prove to be undesirable. When the customers of a bank are brought to realize that true and exact information is the basis of confidence, and when they see that their own frankness will bring about liberal treatment from the bank, they will readily supply the information. Thus customers and officials will be brought closer together on a foundation of mutual trust and con- fidence. A "Live" Report — French Method The files should be kept alive by brief notations from time to time concerning borrowing arrangements, trade informa- tion, and various data affecting the credit or financial ability of the customer. If a report has been obtained from a com- mercial agency, such agency will furnish on pink slips the 72 CREDIT OFFICE ROUTINE records of suits and of judgments, mortgages, and such data as would appear on record in a county clerk's office. Such information can also be obtained from newspapers and other sources and verified before filing. In France the bankers carry much fuller information files, which are more completely systematized than in this country. Each customer of a French bank is assigned a large envelope (le dossier), and every scrap of information about the customer that can be obtained during his business life time is placed therein. Newspaper clippings, records of gossip among business men, impressions obtained by the officer of the bank from conversations either with the cus- tomer or his neighbors and business associates, are all in- cluded ; in fact, the bank "dossier" could almost be compared to the records in a foreign detective office. Practical Uses of Bank Records An important feature in the practical operation of the credit department is the daily conference of the loaning of- ficers. For this purpose the credit man prepares a state- ment showing a list of all maturing bills, and against each name he shows the average balance and other items regard- ing the account of the customer which the loaning officers might need to keep before them to show how the customer is handling his account. The various files are also kept at hand so that all the credit information may be laid before the officers. A file is likewise kept of the country banks or corre- spondents, of whom it is desirable to have a complete record brought down to date, in order to facilitate the handling of all business with the institution. This comparison sheet for a bank will exhibit many of the particulars found on a reg- ular customer's sheet, such as the date of opening the ac- count, by whom introduced or solicited, the average balance, BANK CREDITS 73 and the maximum and minimum loans by month and year. Of course, the rulings on these sheets to show a comparison of statements will be specially adapted to banks. Bankers Promote Sound Business A banker is not concerned merely in obtaining interest on the funds of the bank; he is also a promoter of sound business principles among his clientele. He is not only a conserver but a builder of business, for by granting credit to his customers he assists in their success. Furthermore, the banks of today are not only great factors in the upbuild- ing of business, but they are taking a most important part in introducing sound credit principles among all classes of customers. Stock and Bond Investments The credit man of the bank is often called upon to pass upon the desirability of various forms of outside invest- ments, such as permanent investments in the shape of high- grade industrial and railway bonds and short-term invest- ments such as prime commercial paper. Bonds are usually bought through brokers of established reputation, who are always prepared to supply full informa- tion concerning the worth of these securities. Where the purchase of an industrial bond issue is in question a thor- ough investigation of the business itself should be made, going back of the date of the present financial statement fur- nished by the broker, to determine whether the concern has been making or losing money over a period of years. The main source, however, of information on an indus- trial corporation is an audit of the concern by a certified public accountant. When such a statement is received the credit man makes a thorough analysis, separating the fixed from the quick assets, and the general indebtedness from the 74 CREDIT OFFICE ROUTINE bonded indebtedness. If the last named comprises several different issues, the characters, rates, and dates of matur- ities of each issue are noted, together with transcripts of the by-laws or resolutions of the directors regarding the estab- lishment of a sinking fund with which to retire the bonds as they fall due. The opinion of some firm of reputable at- torneys regarding the legality of the issue may also be ob- tained. In the analysis of the accountant's statement some attention should be paid to the conditions governing the issue of preferred stock. Railroad bonds as well as state, county, and municipal bonds also offer very attractive returns as permanent invest- ments. So many books and pamphlets have been written on the subject of bonds and how to judge them that the subject will be dismissed briefly. As in the case of industrial bonds, statements concerning the financial and legal status of rail- way or municipal bonds can usually be obtained fromi the broker, as well as any other information regarding the gen- eral subject of judging the values from an investment stand- point. The advantage in buying the better class of railroad bonds is that they are listed on the stock exchanges, and usually when stocks are high, bonds are low, and some very good and safe issues can be bought at figures which will yield a good return on the money invested. Commercial Paper One of the most desirable forms of investment for banks is prime commercial paper. The selling in the open market of commercial paper through brokers is a development of comparatively recent years, and is but another illustration of the wonderful evolutiori and broadening of the basic prin- ciples of the general business of this country. Owing to a lack of elasticity in the national currency system and on account of the fact that there was no central banking insti- BANK CREDITS 75 tution to fix the rate of discount, previous to the passage of the present currency act, the rates of commercial paper fluc- tuated throughout the year almost with the irregularity of stocks and bonds; but, of course, without the same great ranges in maximum and minimum. This was the principal reason for the former small market for commercial paper. The prime requisite in banking being liquid assets, a large proportion of its assets must consist of securities which can readily be converted into money. There is no form of in- vestment which oiifers such an opportunity for quick and regular liquidation coupled with safety of investment, as high-grade paper, maturing as it usually does within a few months from the date of issue. As to the first-named ad- vantage, such paper is met at maturity, since there is no obligation on the part of the bank to renew, and the banker can choose from the broker's list just such maturities as will suit his need for money at various intervals. If at the end of such time it is necessary to use this money for other pur- poses, he can depend on the paper being taken up ; or if not needed, another purchase of paper can be made, bearing such maturity dates as would constitute another period to be reckoned with. Relation of Banker and Broker Of great assistance to the credit man of the bank is the broker himself. Purchases of securities should be made only from brokers of established reputation and integrity in the financial district. The best brokers will naturally con- trol paper from the best class of borrowers, and these brokers are often on intimate terms with the borrowers themselves. In many cases the brokers bear the same relation to the bor- rowers as do their home banks ; the brokers take care of the quick-maturing loans on the open market, and the home bank furnishes the long-time loans which are renewed throughout 7(^ CREDIT OFFICE ROUTINE the year. Therefore it is not a good idea for the buying bank to deal with the maker of commercial paper direct ; for, should an intimacy spring up from such relations, there may be an obligation on the part of the bank to renew or repur- chase paper at maturity, which would defeat the purpose of buying for quick liquidation. The broker has always at hand full and complete in- formation concerning the financial worth and integrity of the makers of the paper he handles. Before he attempts to dispose of paper he usually requires a detailed report of an audit of the books by a certified public accountant, together with a financial statement made by the concern itself for the purpose of establishing a line of credit. The several refer- ences of the concern are consulted, together with trade in- formation generally; and more important still, a thorough investigation is made by the traveling representative of the broker. As the broker virtually vouches for his client, he must be absolutely sure of his financial worth and integrity. Very frequently the broker, when taking paper to sell for a client, advances for his immediate use the proceeds of such paper based on the ruling quotation at that date and subject to adjustment when the paper is sold in open market. If the broker demonstrates his faith in his client in such man- ner the credit man of the bank can have no better assurance of that client's reliability. Rating Commercial Paper In judging the quality of the paper ofifered, the credit man looks in the statement for a healthy excess of quick as- sets over liabilities. There should be a showing in quick assets of not less than two to one and even greater. He must be sure that the concern is able and expects to meet the note at maturity. Investigation may show the borrower to be a holder of real estate of undoubted value, but that he may be BANK CREDITS 17 cramped for readly working capital. A house that borrows in the open market is supposed to do so at certain periods of the year, for the purpose of anticipating its purchases and making a profit on the transaction. As its goods are con- verted and its accounts receivable are collected, it should be in position to retire its commercial paper. A thorough in- vestigation should be made in the trade to determine whether the borrower is in the habit of discounting his bills. Of course, such a concern gives a list of references which usually embraces those houses with which it is in high credit stand- ing and from which it makes a large share of its purchases. If the bank's credit man can obtain the services of one of the interchange bureaus, he can readily ascertain how the pros- pective borrower is in the habit of handling its small pur- chases, which frequently make up the great volume of its business transactions. With no such system, of interchange at his command, the bank credit man works at a disadvan- tage when compared with the commercial credit man. He must, therefore, evolve some system by which he can obtain this very essential trade information. Integrity in banking credits is held to be as important as, if not more so than, in commercial credits ; this should therefore be included in the investigation. A buyer of paper must also consider the business in which the issuing concern is engaged. Naturally, a concern which handles or manufactures staples can convert its assets much more readily than the importer or dealer in luxuries, the sale of which depends on healthy fundamental conditions throughout the country, or even on the whims of fashion. Indorsed Paper Desirable It has been shown that the bank has a choice of paper from all kinds of industries and from various sections of the country ; and these facts coupled with a choice of maturities 78 CREDIT OFFICE ROUTINE make commercial paper a most desirable investment. It has been shown that commercial paper is usually met at matur- ity ; but should the bank find itself in urgent need of imme- diate funds, such paper can be resold on the open market before maturity. As a further illustration of the desir- ability of commercial paper, it is a common custom for the officers of a corporation to lend their personal indorsement to the paper of the corporation. The credit man of the bank should choose such paper over single-name paper, because of the additional financial worth of the paper through the extra indorsements, and because through such indorsements the officers express their faith in the concern. Their indorse- ments also serve to make forgeries more difficult. Commercial paper is frequently indorsed by firms or in- dividuals other than those immediately interested in the maker. It might be well to ascertain exactly the relations between the maker and indorser to see how close is the com- munity of interest. Such indorsement may be added for the twofold purpose of increasing security and insuring moral support; but the credit man should look for real se- curity on the part of the maker itself — and the strength of the indorser is just that much to the good. Mutual Interests of the Bank and Its Customers It is the present policy of credit men, to use their influence not only with a view to improving conditions, but for assist- ing all lines of legitimate business. This effort toward busi- ness extension is exercised by educating business men in proper methods of business management, so that they may attain to ultimate success by avoiding the pitfalls which con- stantly beset the pathway of the inexperienced. The banker occupies a position peculiarly fitted for helping the various industries represented in his list of customers. He acquires a wide and varied experience in all lines of business and BANK CREDITS 79 gets in touch with the most advanced ideas along business lines. A banker ought not to wait until the customer comes to him for advice and assistance, since the customer will often delay until it is too late. So if the credit department of the bank will keep in close touch with the customers and advise with them whenever there is the least sign of an ir- regularity in their business affairs, such customers may be guided away from approaching difficulties. The bank account is a sure index of the health of a busi- ness, and the shrewd credit man is the first to read the signs of impending disaster. The interests of bank and customer are mutual, for the bank is prosperous when its clients are prosperous. By careful and efficient management of their business these clients increase the safety of their loans from the bank; and such management is best brought about by close and personal contact with the bank officials, who are always glad to foster sound business by extending friendly advice on all important matters. Part II — Credit Information and Protection CHAPTER VII THE COMMERCIAL AGENCY The Rise of the Commercial Agency The most valuable source of information for the credit department is the commercial agency. The chief agencies — The Bradstreet Co., and R. G. Dun & Co. — began their work in a very limited way, but have kept pace with the many changes and great development of the commercial interests of the country. During their long career other commercial agencies have arisen and passed away. Agencies for spe- cial lines of trade have also been established and some of them have been more or less successful ; but with changing conditions and the growth of the department store idea, it has been shown that for the credit man the work of the trade bureau cannot be compared with that of either Dun or Bradstreet. The success of an institution depends primarily upon the need for its existence, and the commercial agency has suc- ceeded because it has become a necessity in the conduct of any business which involves the granting of credit. Before its foundation credit-granting was conducted along lines extremely primitive. The small merchants visited the large trade centers to purchase their goods. They secured credit on the strength of their own statements and the im- pressions which they made on the house. Frequently the merchants of New York and Philadelphia shipped large quantities of goods into the wilderness beyond the Alle- 80 THE COMMERCIAL AGENCY gj gheny Mountains, and it was months before they even heard of their safe arrival. Six months frequently elapsed before they again saw the merchant to whom they had trusted a large bill of merchandise. Money in the form of actual currency was scarce, and the small merchant took in ex- change for his goods, live stock, grain, and even skins and furs, which had to be shipped and marketed. During the panic of 1837, with its accompanying fail- ures among merchants, the wholesale houses of the East realized that their plan of sending house investigators or reporters among the trade was inadequate and that a more efficient system must be devised. The territory covered was rapidly increasing and the expense of sending a man from the house to make investigations was too great. At the same time the idea itself was not practical, as one or two men could not cover the territory with the inadequate means of transportation of those days ; even the postal service was slow and expensive. From such conditions grew the idea of collecting and recording information on merchants, and publishing or sending it out from a central office, and from this has resulted the two great commercial agencies — Dun's and Bradstreet's — and the numerous smaller agencies which operate in special lines of business. The early work of the agencies was crude and their re- ports necessarily incomplete. In recent years, however, there has come about a great change in the method of grant- ing credit, and the work of the agencies has expanded enor- mously. One of the chief reasons for the success of the agency is the general confidence reposed in it. This confidence arises from the absolute impartiality of its ratings. The com- mercial agency stands alone in dealing with all classes and kinds of business ; it rates the small merchant as well as the large houses from which the small merchant obtains his 82 CREDIT INFORMATION AND PROTECTION goods. The matter of credit is of such vital importance that the agency itself must be absolutely inaccessible to any pressure that might be brought to bear to influence it in the rating of a concern. Agency Publications The familiar rating books of the agencies, published each quatrter, cover the entire country and are arranged alphabet- ically by states, cities, and smaller corporate divisions. The names of all the merchants rated in any given city or village are also alphabetically arranged. As a convenience for trav- eling men, the rate books are also published in state editions of pocket size ; but such editions are sold only to subscribers to the larger rating books. Until recently the agencies pub- lished daily or weekly sheets containing lists of business changes, failures, new incorporations, and similar items of news ; but for various reasons this practice has been discon- tinued, and such changes first appear in the quarterly books. The rating books contain only the names of those indi- viduals, firms, or corporations which are actually engaged in business. No private persons are reported or rated. An individual may be worth millions, but unless he is engaged in buying or selling merchandise or in some business in- volving the granting or obtaining of credit (this including every form of mercantile transaction), his name will not appear in the rating books. In addition to the rating books the agencies, under con- tract, furnish as requested, detailed reports on specific busi- ness concerns. It is really upon these reports that the credit man bases his judgment. They are the fullest, the most ac- curate, and sometimes the only source of credit information obtainable. But before dealing with the report itself, it might be well to consider the organization and scope of the •work of the two great agencies. THE COMMERCIAL AGENCY 83 The Agency Organization For the purposes of the commercial agency the country is divided into districts, varying in size according to popula- tion and volume of business. The large trade centers are subdivided into districts and each line of trade is covered by a district reporter assigned to that particular line. These reporters are high-class, intelligent men, and are kept in the same district for years. They are thus able to get in touch with the inside workings of all the large business concerns. They report to the district manager each day all items affecting the business standing of the concerns to which they are assigned, together with the results of their own in- spection. The duties of the city reporter are very much like those of the reporter for a large daily paper, except that his work covers one particular line and his information must be kept secret. The country districts outside the large trade centers are subdivided into smaller districts, each in charge of a sub- office, with which is connected a staff of reporters. If the sub-office is of sufficient importance, reports are written and files made up covering the immediate territory; other- wise such reports are handled in the district office, supposed to cover a certain number of counties, which may lie in different states. In addition to the reporters who work from the district offices, the agency has an attorney at every county seat who makes investigations, reports failures and business changes, and often makes collections. Important towns other than the county seat and the neighboring territory are also represented by attorneys so distributed that the business con- dition of every village merchant and even every crossroads country store is covered by the organization of the com- mercial agency. The system is complete and effective in operation. 84 CREDIT INFORMATION AND PROTECTION The District Reporter The official in charge of the district office assigns each reporter to certain counties in the district. When the re- porter starts in to revise a certain county, he carries with him a printed fonn for each business concern, similar to the inspection slips of an insurance inspector. This form con- tains questions covering every feature of the business. Hav- ing a list of all business concerns in the county, the work of the reporter is clearly defined and he knows each day just what he is expected to accomplish. There was formerly more or less reluctance on the part of merchants to make a statement to the agencies, but this feeling has now disap- peared owing to the education of the small merchant by the credit men of the country, as well as by the agency itself. Even the smallest merchants are beginning to realize how important it is to make some kind of financial showing to the agencies, so that their business may be accurately re- ported and a just rating assigned. The reporter in his interview with the proprietor, goes carefully over the inspection slip, obtaining an answer to each question ; and whenever possible he also obtains a com- plete statement of assets and liabilities, together with the names of the largest creditors, references, and the name of the bank where deposits are made. The detailed statement is verified by consultation with banks and attorneys and from the county records. The reporter makes his own observations as to the merchant's business, how it is run, the condition of the stock, and the general policy and char- acter. He also gathers any important items as to the character, social standing, habits, and morals of the mer- chant. He practically lives in his work, and must be alert and keen at every moment to gather every scrap of informa- tion that has a bearing on the moral or financial condition of the concern under investigation. THE COMMERCIAL AGENCY 85 In addition to the above work of the reporter, he must also consider the annual statement of the merchant. It is the custom for a business concern to take an inventory at least once a year, but the time of year in which it is taken and the books closed varies with the line of business. A grocery house might take stock on July i, and a wholesale clothing house, after its fall shipments are made and before the spring stock begins to arrive. Other lines may choose January i ; but the commercial agency is expected to keep in close touch with all lines of business and furnish the latest statement as soon as the books for that concern are closed. The statement of the small merchant who never takes stock is largely guesswork, but the reporter takes the figures and endeavors to verify or correct them. Agency Information It will be seen that the gathering of the above informa- tion by the reporter involves an infinite amount of persever- ance, and considerable expense. The material is condensed into an abstract at the district ofiice. Frequently there are matters that demand further investigation through corre- spondence between the office and the subject of the report, or with other authorities. In addition to the report containing the annual state- ment, the agency revises or attempts to revise all its state- ments at periods of six months. It is a great annoyance to the credit man to receive a report which is largely a matter of surmise, containing merely an approximate statement or none at all; but it must be remembered that reporters are human and cannot accomplish the impossible. If a mer- chant persistently refuses to make a statement, the agency can only record this fact and make its own estimate. There is considerable criticism of the agency, at times, because it furnishes some kind of report upon every request ; the report 86 CREDIT INFORMATION AND PROTECTION itself may be valueless, but the agency furnishes it and charges for the service. If the credit man would only stop' to think that considerable time, effort, and expense have already been spent to gain this information, he would be willing to pay at regular rates for what little he does get and realize that it is the best and often the only information which the agency can obtain. For the sake of efficiency and the making of complete reports, the work in all lines must be kept strictly up to the minute in the district offices. If a new business is organized at some out-of-the-way station, a report must be written and placed on file, not only in the home office, but also in the other district offices, if the new concern is likely to buy in other markets. All changes of any nature must be recorded, not alone for the use of subscribers, but for the head office to note in the rating books. For the entire country these changes run into thousands each day. Any that are im- portant and affect other districts are telegraphed by a special code which insures secrecy. No attempt will be made to describe the commercial re- port in detail, as it is familiar to every credit man. As to the attitude of the credit man toward the ratings, it may be observed that the capital rating does not necessarily mean the actual net worth of the individual, but is based primarily on his statement and the deductions and confidential in- formation of the reporter. Due allowance is usually made for shrinkages, exemptions, etc. The report is merely a basis for an estimate, and while the agency does not guar- antee the information, it is nevertheless correct in a very great majority of cases. The absence of a rating does not mean that the subject is devoid of financial worth, but that the agency has not been able to procure information suffi- ciently satisfactory to justify it in assigning a rating to the concern. THE COMMERCIAL AGENCY g/ Agency Contracts •Contracts with the commercial agencies are made an- nually, and include, besides the rating books, a certain num- ber of reports dependent upon the requirements of the sub- scriber. The price of the report decreases proportionately as the number increases. In a new business it is necessary that a credit file be opened for each customer put on the books, and the same is equally important in an old-established business. These new accounts should be listed with the commercial agencies, whether reports have been ordered or not. The reason for this is that the agency makes a record on its files that the credit man is interested in the particular accounts. Thus the agency is enabled to get information regarding the customer from the jobber who has listed the account, and also to gather material for use in short reports to the jobber indicating fires, mortgages, deaths, failure, or other items affecting credit standing. This special information in nearly every case is most valuable and this voluntary reporting by the agencies is one of the best features of their contracts. Many leading credit men decline to furnish a "customers' list" to the agencies, maintaining that it is too much trouble to answer the inquiries when they come in. They argue that the agencies charge for every report they serve but do not pay the subscriber for voluntary information. This is a short-sighted policy on the part of the credit men, for if information is furnished a commercial agency regarding customers, the agency service is thus enhanced. Further- more, the local manager of that agency can and will repay such courtesy in many ways by advice and assistance for which he cannot charge under his contract. By all means a friendly spirit of co-operation with the agency should be cultivated by the credit man. CHAPTER VIII THE NATIONAL ASSOCIATION OF CREDIT MEN Purpose of the Association It is difficult to write of the National Association of Credit Men and its work without seeming to boast, not only of the rapid increase in its membership, but also of the high class of individuals composing the membership. Organized in 1896, and having a membership of over nineteen thousand in 191 5, it may reasonably be argued that the Association was the outgrowth of an urgent need. Any institution hav- ing such origin will, in the course of time, fulfil the purpose for which it was designed. Its success is assured to the extent that it conforms to its ideals and hews its course to the line of its original plans. "To promote such business principles that commerce can and must be conducted on honorable and equitable lines," is the attainment toward which the Association has striven. Acting on this basic principle it has become a great national institution for the scientific study of credit and the applica- tion of scientific principles to the every-day work of the credit man. It has accomplished more than this. Realiz- ing the importance of the credit department and its rela- tions to the other departments of the business structure, it has brought about an evolution from the old-fashioned, selfish, and narrow-minded methods of a close-fisted, secre- tive policy, to a broad and liberal scheme of business life. Origin and Ideals After the great panic of 1893, with its long record of commercial mortality, a few thinking credit men began to SS NATIONAL ASSOCIATION OF CREDIT MeN 89 realize that too little importance had been placed on the dispensation of credit. The idea that "credit is cheap" had taken a firm hold on the community at large. Credit men were working in the dark along antiquated lines; and al- though a few exceptionally bright men were meeting with success here and there, concerted action and systematic ledger interchange of credit information on customers were undeveloped ideas. While realizing that credit conditions were in need of radical changes, these men knew that such changes could be brought about only by united action ; that only through intelligent organized effort could needful, practical legisla- tion be secured; that only through eternal vigilance could good laws be kept from becoming dead letters and weak laws from serving as mere subterfuges. The average Amer- ican takes pride in upholding and upbuilding the community in which he lives. This idea of civic pride is apparent, also, in the tendency of business men to get together in commercial clubs, trade associations, boards of trade, or similar organizations having for their purpose the exten- sion of trade or business. Therefore, in the natural order of things, the National Association of Credit Men was born. There was a place for it in the great scheme of busi- ness affairs. Its ideals were the principles of integrity; and, as a natural consequence, it has taken its place as a great and national force in bringing about higher methods in the world of business. Business men have always worked more or less in co-operation; but, since the organization of the National Association, credit men have recognized a truth that is now generally regarded as fundamental — that each may persevere in his own business, and may compete fairly, honorably, and successfully with others in the same line of business, without keeping to himself as a trade secret, all that he knows, for his own personal advantage. If the As- go CREDIT INFORMATION AND PROTECTION sociation has done nothing more than bring credit men closer together, not merely socially or formally, but in the intimate relationship which now exists, resulting in the in- terchange of experiences and sound ideas, it has done well and the purpose of its founders may be said to have been accomplished. Practical Work of the Association Representing, as it does, the brightest minds of the credit interests of the country, the Association has not stopped m.erely with bringing men together; in fact, this only paved the way for the real work. The idea of personal re- sponsibility was strongly emphasized at the outset; respon- sibility not only for doing good work in one's own business, but also for inculcating high ethical business standards. When every man realized that upon him rested a respon- sibility for building up a sound social condition by trans- acting his business in accordance with the highest stan- dards, the public was quick to notice a change in business methods. These men have helped not only themselves; their influence has reacted through the business interests of the country, so that the same high principles which they adopted have worked to improve not only credit conditions but general business conditions as well. It is not out of place here to quote from the Bulletin, the official organ of the Association : "The Bulletin of the National Association has in many previous issues contended that the degree of progress of any city as a trade center depends to a large extent upon its credit men — ^that they be alert, men of big caliber, whose grasp on ideas and interests is not limited to the narrow, every-day routine of their own particular business. Big credit men mean big progress for the locality in which they are exercising their big powers." NATIONAL ASSOCIATION OF CREDIT MEN gj Working Committees To appreciate the various classes of work in which the Association is engaged in furtherance of these ideas, one has but to read the following list of the standing committees : 1. The Legislative Committee, which has for its object the promotion of legislation beneficial to business, partic- ularly the credit branch ; also for discouraging bad legisla- tion, state as well as national, especially as it affects the National Bankruptcy Act. 2. The Membership Committee, for carrying on the work for the extension of the Association among the most reputable wholesale houses and other concerns which are interested in the granting of credit. 3. The Committee on Bankruptcy Law, which has charge of all matters pertaining to bankruptcy. 4. The Adjustment Bureau, for formulating and carry- ing out plans for the establishment of bureaus for adjust- ing the affairs of debtors. 5. The Committee on Credit Department Methods, which deals with such work as the name implies. 6. The Mercantile Agency Committee, for co-operating with the commercial agencies with a view to improving the service. 7. The Credit Co-operation Committee, for furthering the work among members and the affiliated branches. 8. The Investigation and Prosecution Committee, which is one of the most important of all the committees, and has done much to bring about a regard for the law among dis- honest debtors. 9. The Fire Insurance Committee, which consults on all matters relating to this class of insurance, and aims espe- cially to awaken public sentiment against preventable fire waste. 9^ Credit iNFoRMAtioN and protection 10. The Committee on Business Literature, for carrying on educational work by disseminating helpful literature on credit subjects among credit men. 11. The Banking and Currency Committee, for promot- ing reforms in the currency system of the country, as well as along other similar lines. It will be seen from the above that, while a wide range of subjects is covered, they are all closely related to the fundamental subject of credit-granting. A brief generaliza- tion of the purposes of the several committees might be thus formulated: (a) Better protection of credits. (b) Protection of creditors. (c) Reduction of losses through bad debts. (d) Prosecution and punishment of fraud. (e) Reformation of collection laws. (f) Improvement of the present system of collections. (g) Improvement of the methods of handling bank- rupt estates, (h) Improvement of the commercial reporting system. The credit man is the one individual in the business estab- lishment who has personal intercourse, both actual and by correspondence, with more people than anyone else ; and it is to him that the customers naturally turn for advice and counsel. On the subject of the credit man a member of the As- sociation writes in the Bulletin : "He must be thoroughly informed on general matters of business. I am convinced, therefore, that the credit man is the logical teacher of those fundamental principles which go to make up the right sort of merchant, whether creditor or debtor; and that he must be both ethical and practical." In this short space it would be impossible to enumerate NATIONAL ASSOCIATION OF CREDIT MEN 93 the many benefits that members of the Credit Association obtain from each other and from the head office. It would be equally difficult to enumerate the many beneficial results that have accrued from the work of the Association as a whole. Benefits of the Association One of the greatest benefits derived from an organization of this character is the opportunity for its members to ex- change ideas. In the local organizations meetings are fre- quently held at the noon hour or in the evening, and the members gather at lunch or at dinner to discuss "hard" ac- counts of mutual interest, as well as other problems that con- front the credit man. A regular business programme is followed, and usually an address on some important credit topic is delivered to close the short session. It is told that in a certain trade center there was bitter rivalry among the jobbers, many of whom were not even on speaking terms ; and that this ugly spirit extended to the various credit departments, which were not in the habit of exchanging information and never lost the opportunity to take advantage of one another. A member of the National Association visited the town and looked over the situation. As a result a local branch was formed. In two years the credit men of practically every jobbing house in the city were members. All differences had been overlooked. The ethics of credit interchange were not only scrupulously re- garded, but were so extended that such interchange was considered a pleasure by both the inquirer and the in- formant, and the Association has grown to be one of the strongest local branches in the entire organization. Fur- thermore, the heads of the houses imbibed the same spirit, and took up the idea of "getting together" on such points regarding trade as did not come under the province of the 94 CREDIT INFORMATION AND PROTECTION credit office. This is but one illustration of how the As- sociation spirit has taken hold throughout the country. Trade abuses, cancellations, excessive and unwarranted discounts, and all manner of unbusiness-like practices on the part of customers are considered by the Association, and efforts to correct such evils are usually successful. In fact, one has only to read a copy of the Bulletin to gather some idea of the important work that is being accomplished. "The Association's task is a great one. Its work is to fight for truth among men, to strengthen confidence in the spoken and written word, to make men realize the absolute necessity of fidelity to their promises. Further, it must strive to simplify safe credit-granting; to rid the country of whatever acts as an obstacle to the exchange of commod- ities among men in whatever part of the land they may reside; and to make men see that so long as they depend in any sense on credit they are trustees in their relation to their creditors, and must be not only honest trustees but careful trustees, using every means in their power to dis- charge their obligations in due form. With this spirit developed in the individual — the spirit of pride in one's credit standing — there is developed a nation of men of whom it may be said that their word is as good as their bond. No higher thing can be asked or striven for !" CHAPTER IX INTERCHANGE OF LEDGER EXPERIENCE The Interchange or Trade Bureau One of the oldest methods of securing information that will decide the extension of credit, is by consulting the cus- tomer's references and obtaining their individual expres- sions of opinion. Although the idea of combining these opinions in a condensed report and establishing intercom- munication among such references has been in operation for about twenty years, its greatest development has come about quite recently. In this direction an effort has been made by trade as- sociations to establish interchange bureaus, or trade bureaus. For instance, the Boot and Shoe Association, or the Asso- ciation of Furniture Manufacturers, may combine in its central office the ledger experiences of all its members, and serve a copy of its report to interested subscribers. This is good as far as it goes, but the changing conditions of business in late years have made such reports fall far short of the purpose for which they were intended. In considering the work of such an association trade bureau, let it be assumed, for instance, that a shoe factory wishes a clearance on a shoe store in a good-sized city in the Middle West. The central office places the name of the store on its clearance sheet. When the report is com- piled it contains satisfactory comments from five factories which are selling in liberal amounts, and several comments in a smaller way which are not quite so favorable. It is reasonable to suppose that the experience of the larger creditors would govern, or at least influence the credit man 95 gS CREDIT INFORMATION AND PROTECTION in his decision; but upon reference to the reports of the commercial agencies it develops that the shoe store is merely a department in a large general store engaged in selling all lines of merchandise. The shoe department being only one of many lines in which the one concern is engaged, the trade bureau information falls far short of exhibiting the liabil- ities of the customer. On the contrary, it may be actually misleading, as it merely shows how he is paying a few favored accounts. It is presumed that these are favored accounts because the merchant is buying from factories with established and much-advertised lines, making it necessary for him to keep such bills paid with reasonable promptness in order to procure further accommodation. Now, the shoe jobber who has an order for a large bill of rubbers and overshoes from this merchant might well pause before checking through the order, because he has no knowledge of how the merchant is paying the creditors on whom he is not absolutely dependent. Again, the manufacturer wants his trade information before cutting the stock to make up the merchant's order for fall shipment. He is working on orders taken from February to May, and makes his clearances during the spring months, while the reports on ledger experiences probably deal with outstanding accounts for spring goods, many of which are not yet past due. The jobber wants to ship his rubbers in the fall and he must make a new clear- ance in order to procure information to suit his needs; he finds that the factory bills are not yet due, and he has no idea how the merchant will be situated when it comes time to pay them. His information is so one-sided and incom- plete that it is of no practical use to him. As another example, a furniture manufacturer clears through his association a man rated as a furniture dealer, and gets information telling how the furniture bills are paid. INTERCHANGE OF LEDGER EXPERIENCE 97 Of late, however, furniture stores are broadening out and carrying bedding, blankets, curtains, and other special lines that are handled by the dry-goods trade, as well as lines of goods which are sold by hardware, musical instrument, and even wholesale jewelry houses. Here, as in the case of the shoe store, information is lacking regarding the dealer's standing with his creditors in the other lines of goods which he carries. These two illustrations will show how inefficient the trade bureaus may be when it comes to checking up the liabilities of a customer. The furniture dealer may pay very promptly his bills for cutlery and household plated sil- verware because he can take advantage of a liberal discount ; but in order to do this, he will be forced to run his blanket bills long past maturity and thus reduce his credit standing with the dry-goods houses or the blanket mills. The in- formation afforded by such trade bureaus may, for obvious reasons, be compared with the references given by the cus- tomer himself. The local interchange bureaus among jobbers who sell in a restricted territory, give better service to the local credit man, as their membership usually includes jobbers in all lines. The disadvantage of such bureaus lies in the fact that even the smallest merchant does not confine all his pur- chases to one market, and hence the local bureau cannot fur- nish his complete record. Interchange of Ledger Experience The interchange of ledger experiences will be found in the end to be the most helpful and important source of in- formation for the credit man. The commercial agencies set forth the customer's ability, integrity, and capital; but the ledger interchange shows just how he makes use of these factors. A merchant's credit standing, after all, is 98 CREDIT INFORMATION AND PROTECTION determined by the manner in which he makes use of the confidence which the credit man places in him. He may pay his bills promptly; but if he makes unjust complaints, takes excessive discount, makes arbitrary deductions to which he is not entitled, or returns goods unjustly, he should not receive a high credit rating. He may be honest within the law, but he violates the principles of integrity by taking an unfair advantage of his position. While trade information based on ledger experiences is of such vital importance, there are few credit men who feel it incumbent on them to give this confidential information to a stranger. They do not know what use will be made of it ; nor can they be assured that this stranger will reciprocate the courtesy. There must be some definite assurance of an observance of the ethics of reciprocity. It is the experience of every credit man that a debtor for obvious reasons shows preferences in settling his bills. That he is running a fairly satisfactory account in a small way and paying his bills promptly may be due to the fact that the house is a good collector and keeps right after him. After he has become a steady customer and more reliance is placed on the account, the collection department may be- come more liberal, preferring to devote most of its time to accounts which demand constant attention. The steady customer is allowed to run up his bills and overlap in his payments, until the credit man is made suddenly aware that he has been sleeping over this account. An interchange of ledger experiences during this period of time might have acquainted him with the fact that his debtor was becoming slow with other creditors, or even becoming involved beyond the period of safety. If he had awakened to these facts in time, he might have gotten out from under the load. There is, therefore, need for a system which will bring about this interchange of experience in an automatic manner; that is. INTERCHANGE OF LEDGER EXPERIENCE gg without the credit man's having to single out an account every time he desires a revision of ledger facts. Also the impossibility of collecting such information by actual correspondence is manifest. Suppose a credit man receives an order from a new customer, and knows the names of fifty houses selling that customer. If he should attempt to procure the ledger experiences from the whole fifty, the actual cost in time and postage, especially on a small order, would be too great. If he should make from ten to twenty such investigations each day the cost of running the credit department would assume alarming proportions, not to speak of the possibility of all the fifty interested creditors undertaking to procure such information at the same time. The credit departments of all would have to share the bur- den, for the ethics of reciprocity must be observed. Some better way of interchanging ledger experiences is obviously desirable. The Credit Clearing House As a result of the problems involved in ledger inter- change, the Credit Clearing House has entered into the work of the credit department. Just as the great commercial agencies of Dun and Bradstreet have become fixtures in their line and powers in the business world because they have met a need, so has the institution known as the Credit Clear- ing House become a recognized feature of credit work be- cause it fills a distinct need in the field of ledger interchange. Its attitude has practically ceased to be that of a private corporation operated for gain, and has evolved into a public service institution. Early in its career it realized that its existence depended on prompt, efficient and faithful service to its subscribers, and that it could not furnish merely a service measured in dollars and cents. This broad-minded liberality has been met with the same spirit by the credit lOO CREDIT INFORMATION AND PROTECTION men; and by working together with the credit men the Credit Clearing House has grown into a national institu- tion. The gathering of reports on ledger experiences into a central office for the advantage of its members is the whole idea of the Credit Clearing House. The fact that it solicits its contracts from all classes of merchants and manufac- turers, and from every line of trade, both local and national, gives it an advantage over the trade bureaus, which work in a restricted field. From the miscellaneous character of its subscribers it must not be thought that it does not dis- criminate in its selection of customers. The ledger in- formation disclosed is a matter of secrecy and confidence. Also, absolute honesty and fairness must exist among the subscribers, not only in their relations to the Credit Clear- ing House itself, but with each other. The bond of mutual interest must be carefully guarded as well as defined; and the ethics of confidential interchange must be zealously ob- served, or else the system itself would be valueless. Clearing House Methods — the District Office In order that the system may be made thoroughly intel- ligible to those who are not subscribers, it is proper to de- scribe briefly the general method of the Credit Clearing House. A district office located at each trade center is placed under the supervision of a manager who is responsible to the officials operating from the executive office. Ledger experiences from all the subscribers in this particular dis- trict are gathered into the district office, and all communica- tions with other district offices are handled through these offices and not with subscribers direct. Subscribers do not come into contact with outside districts or even with eacli other, except through their district offices. In this way the INTERCHANGE OF LEDGER EXPERIENCE iqi vast amount of detail work in handling credit interchange is reduced to a minimum. Compiling a Local Report Should a subscriber desire a clearance on Henry Jones, of Willow Creek, he fills out his inquiry ticket and states the nature of his transaction with Jones. The subscriber must have a bona fide order of specified amount, which must be indicated either as a "first order" or as a credit for revision. If the latter, the subscriber must have had previous dealings with Jones and must fill out his ticket giving such experience in detail, so as to carry out the idea of mutual assistance. A subscriber cannot make an inquiry simply as an exploration tour into the ledgers of a competitor, with a view to hunting up a line of good customers for his own sales department. As soon as a house becomes a subscriber it files with the dis- trict manager of the Clearing House a complete list of all its customers, whether their accounts are active or not ; and whenever a new account is opened, the name and address of the customer are sent to the district office to be added to the subscriber's list. When the inquiry on Henry Jones is received, the man- ager looks to see if Jones' name is on the subscribers' lists. This work is facilitated by having a special file for every name that has ever been furnished to the ofBce of its sub- scribers. If Jones has been reported by four subscribers, their confidential numbers show on the "Jones" file. The city in which the district ofifice is located is divided into two or more districts, and at a certain hour each morning a dis- trict messenger calls upon the subscribers to whom he is as- signed, and along with other inquiry tickets he carries one on Henry Jones. As he calls upon each subscriber the Jones ticket is produced and the ledger experience is ob- tained ; and whether the subscriber has previously reported I02 CREDIT INFORMATION AND PROTECTION Jones as a customer or not, he now has a chance to enter his name upon the report, provided he can show a ledger experience. When the messengers return to the office the cards on Henry Jones are gathered, and the compilers typewrite a report which shows the experience of each subscriber who has furnished a comment. The district office is known by a number assigned to it. Each subscriber is given a confi- dential number and also a letter which indicates his line of business; for example. No. 1826-B in District 15 would indicate Blank & Co., a shoe house in the Boston district. The compiler, in writing the Jones report, places the con- fidential numbers of the subscribers on the office or reference copy, but usually omits them except in a purely local report. One copy of the report is furnished to each house which has made a comment, regardless of whether the account is open or not. Just after the noon hour the messengers start out again on their rounds and deliver to the subscribers who gave the information, the completed reports resulting from the morning trip; and also collect information for other reports, if any, to be written in the afternoon. In this way the credit man has on his desk a detailed report containing the comments of every other interested subscriber, in less time than he could have obtained such in- formation by telephone, and at much less expense than if he had sent out his own messenger. Again, the information is absolutely correct, because each credit man looks over that report, and if he discovers an error he is quick to call up the district office to make the correction. It is customary to charge only the subscriber who makes the inquiry, the other subscribers receiving the report free. Compiling a General Report If a general report, or clearance, is desired, the district INTERCHANGE OF LEDGER EXPERIENCE 103 manager immediately mails an inquiry ticket to every dis- trict office in the service, and these offices serve this ticket of inquiry on each subscriber in their respective districts. As soon as the service in each office is completed, the report is mailed back to the office from which the inquiry was sent. As these foreign reports come in they are tabulated, and an advance report is issued to the local inquirer with a notice that more information is to come. When the last report comes in from the most distant office, the manager serves a final report to the inquirer, containing all com- ments. He also sends copies to each district office, one copy for each subscriber who has furnished information, and one for the files of the office. The credit man who made the request now has a report which contains the ledger experiences of every subscriber who is a creditor of Henry Jones. If Jones is in the habit of confining his purchases to his own local market, the re- port will give a very clear idea of the extent of his mer- chandise liabilities, and can be checked against the state- ment he has m.ade to the commercial agencies. On the other hand, if he happens to be conducting a large depart- ment store in a city, the report will probably contain several pages of comments running into the hundreds, and reveal- ing many thousands of dollars in merchandise liabilities. When it is noted that only one subscriber pays for this long report and that all others are served free, one of the great advantages of the system is apparent. ' Advantages of the Clearing House Method A house that can buy so liberally, as is often shown by the long list of creditors in a report, must surely be a large concern with a high rating on the books of the commercial agencies. What, then, is the advantage of such a report? Primarily, it shows the credit man what kind of treatment I04 CREDIT INFORMATION AND PROTECTION to expect from such a house. The large bills may be dis- counted, while the small bills are practically ignored. Or the house may be guilty of taking excessive discounts, of re- turning goods without just cause, of making unjust claims; or, worse still, it may allow claims to reach the hands of at- torneys. If any subscriber has had such experiences as these he will be quick to note it, and under his contract he is in honor bound to make such comment in his report. This constant answering of inquiries brings about the automatic revision.- A credit man may make only one original inquiry a week, yet each day he receives a number of reports on his customers, which keep his files fresh and his department alive to what his customers are doing in the way of maintaining their reputations for credit. By taking the Jones inquiry, outlined above, as a basis, and keeping in mind that each subscriber to the service probably makes one inquiry or perhaps several a day, it can be estimated what an enormous amount of credit informa- tion is passing through the mails between the district offices. The infinite care in handling the small details, the exactness of the reports, the rapidity in gathering and serving this in- formation, all demonstrate the efficiency of the present Credit Clearing House, which has been developed by years of persistent effort. A system so national in scope would be impossible to achieve in a day. Another advantage of the Clearing House service lies in the fact that it is an instrument for good to the debtor himself. Honest merchants frequently become badly in- volved. If a credit man, who sees such indications in a clearance report, has the interest of his customer at heart, he will at once get in touch with him and warn him of the dangerous situation. Often a merchant may be saved if taken promptly in hand by his friends among the credit men. If a merchant should resent such interference, the credit INTERCHANGE OF LEDGER EXPERIENCE 105 man can immediately take steps to close the account and get from under the risk. . One of the greatest benefits to the mercantile world at large and to credit men in particular, is the work of detect- ing and preventing overbuying with intent to perpetrate a fraudulent bankruptcy. If a merchant begins a system of heavy buying and places a large number of first orders, an automatic alarm is sounded, and every district manager be- comes alert to watch this particular risk for further develop- ments.* If the occasion warrants, a special notice is sent to every district ofhce to be served to each subscriber, urging that the latest clearance be obtained before checking an order from the party. When a subscriber receives such a notice it is not very probable that he will take much of a chance on this particular debtor. The reports of the Credit Clearing House, more than any other agency, have a tendency to develop that keen in- sight in the credit man which has been called by various terms, such as '^intuition," "sixth sense," and even erron- eously, just plain "suspicion." He begins to read between the lines. Each comment bears its own significance. He studies the features underlying each factor in the comment. He practically puts himself before the debtor and, figur- atively speaking, assumes the attitude of each credit man who has passed on this same risk. Another feature of the service is the signed statement which accompanies many reports. Each debtor is given an opportunity to render a financial statement of his affairs, which forms a basis for the extension of credit to him by the associated members of the Credit Clearing House. Many merchants make this property statement and furnish a list of their principal creditors; and such names are given in detail, provided such creditors are non-members. But if *See Form 25, Appendix. I06 CREDIT INFORMATION AND PROTECTION any creditors are members, the letter indicating their busi- ness and the district office only are given. The object of the system has been to observe strict secrecy, and not to divulge the names of members who mc^ke comments in reports to district offices. The Clearing House and Commercial Agency Compared Only in the method of obtaining a statement does the Credit Clearing House approximate the scope of the com- mercial agency. Strictly speaking, the commercial agencies deal with the customer, the buyer of goods, and, therefore, the debtor. The Credit Clearing House represents the creditors; it is, in fact, the combination or co-ordination of the interested creditors, and, therefore, the creditors them- selves. The commercial agency furnishes the facts regard- ing the ability, integrity, and capital of the debtor ; the Credit Clearing House tells what the creditors say as to the manner in which the debtor uses these factors on which confidence is based. The agency establishes a rating, and by reporting this, suggests a margin of safety, and so becomes an ad- viser. The Credit Clearing House offers no estimates, as- signs no financial rating, gives no advice; it lays before the credit man the facts taken from the ledgers of other credit men, and leaves him to make his own deductions and act upon his own judgment. Neither the commercial agency nor the Credit Clearing House should encroach upon the work of the other. 5^ch is a specialist in its own line, and these lines are far apart, since they deal with the subject from entirely different viewpoints. CHAPTER X CHECKING ORDERS FOR CREDIT Incoming Orders Assuming that the organization of the credit office has been completed, it may be well to follow the course of an order from the time it comes out of the mail, in order to illustrate a practical application of the principles underlying the granting of credit. When the order is received it is entered upon the order record, which contains the name and address of the cus- tomer, the approximate amount of the order, a serial number given it by the salesman, the office serial number, the date received, and the date for shipping. A space is left to show on what date the order is checked out for shipment by the credit office. The record book is arranged so that the order numbers run serially. The order is accompanied by the salesman's credit re- port,'*' which with some houses forms the basis of the credit report file. Other houses use a sheet for classification of information,! which is pinned to the customer's order, and information from other houses is then written on this sheet. If either sheet is used to start the file the ratings from the agency books are at once recorded on it, because the rela- tive strength of the customer determines to a large extent the thoroughness of the investigation. Investigation of Orders All orders may be classified as follows : first, those from old customers whose credit is unquestioned and whose bills *Forms i and 2, Appendix. fForm 24', Appendix. 107 Io8 CREDIT INFORMATION AND PROTECTION are usually discounted; second, orders from old customers who should be investigated, or at least considered in more than a superficial way ; third, orders from new customers. Initial orders, even when small, should be thoroughly investigated. It is not good policy to allow a first order to slip through because it is small, with the intention of look- ing it up afterward and refusing the second order if in- formation is unfavorable. The time to refuse credit is before the first order is shipped. There are many plausible excuses which can be given a purchaser for failure to ship, without bluntly telling him that he is no good. There may be some items on a small order that are not in stock, the order may be too small to warrant opening a time account or to stand the expense of a thorough investigation, or other perfectly legitimate reasons for declining may exist. If the first order slips through easily, the purchaser will almost invariably try out the house the second time. Then to write him that his account is undesirable savors of indecision and lack of method, and is, in fact, amateurish. If a small order is declined courteously, a possible customer may be saved for future dealings. It is obvious that an order from a well-rated concern demands less investigation than one fromi a house of limited rating, though both should be looked into unless recent and complete information is already on file. Assuming that an order is received from a merchant with an M-4 rating, a careful investigation is advisable, and a report is ordered from one of the commercial agencies. Information request blanks, also, are filled out and mailed to the houses given as references on the salesman's credit report, and it may be assumed that in addition a special report will be ordered from the Credit Clearing House. As soon as the report arrives from the commercial agency the credit man proceeds to analyze it, and decides whether CHECKING ORDERS FOR CREDIT 109 there is anything special that requires an explanation, such as suits, mortgages, fires, previous failures, etc. If the re- port is reasonably clean and shows that the merchant has a fairly good record, an ordinary request for a narrative re- port may be mailed to the attorney in the customer's locality. The attorney may be one known to the credit man, or he may be selected from a list. An information request is also mailed to the customer's bank and often to one or more banks in his town, provided it is a small town. The banks in large cities have not the time, as a rule, to make free re- ports on small concerns, and it is best to address the request only to the bank of the customer, should he live in a town of considerable size. The bank is usually glad to make a report on one of its depositors when asked to do so by the credit department of a mercantile house, in order to help establish the customer's credit. Again, let it be understood that it is impossible to gather too much information about a customer. Sometimes the majority of reports are very favorable, and just when the credit man has made up his mind to check out the order he receives a report from some source which, upon investiga- tion, proves that the party is far from being a desirable credit risk. It must be remembered that the condition of a merchant's business is liable to constant change. It has been said that there is no such thing as a business standing still — it must either advance or lose ground. This is true from a sales and advertising standpoint, but not necessarily so from the standpoint of the credit department; for a business might drag along in a rut for years, barely making a living for its owner, who is yet able to pay his bills. Again, a business seemingly prosperous in the spring might become bankrupt in the fall. One has only to study the causes of failure to see for himself just what a risky thing selling goods on credit is. no CREDIT INFORMATION AND PROTECTION Commercial Agency Reports As an illustration of how the reports appear when they come in, a typical case has been selected to show a com- mercial report and other reports properly filled out and ar- ranged to lay before the credit man for his judgment on the risk. An order for $300 is sent in by the salesman from John Harris of Prosperityville. On the salesman's information sheet is shown the names of four houses from whom John Harris has been purchasing. The report from the commercial agency will read about as follows:* John Harris Genl. Store Prosperityville, Tenn. Age 41, Married. Our traveling reporter called at his place of business on June 16, 1913, and requested statement, but same was declined. The first statement obtained bears date of February 25, 1911, showing total resources of $4,850, consisting of merchandise, $2,800; notes and accounts receivable, $800; cash, $100; fixtures, $100; home- stead, $1,000; and other assets, bank stock, $50, with total indebtedness of $1,500, all of which was on open account for merchandise. He claimed annual sales of $6,000. Insurance on merchandise and fixtures, $1,400. Has never suffered a fire loss. The homestead given in this statement stands on record in name of John Harris and is located in Blank County. Authorities at present advise that he carries a stock of $1,800, his collectable accounts are valued at $300 to $400, and he is the reputed owner of a homestead valued at $1,000. Over allowances for legal exemptions, indebtedness and other contingencies he is conceded a net worth of $500 to $600. Antecedent He came to this place from Ohio and took over the business previously conducted by Richard Roe, prior to which he was employed as a salesman and bookkeeper. Since commencing this business he is believed to have made some small headway. * It is an invariable rule with the large agencies not to furnish information except to a subscriber, and in no case and under no circumstances can this infor- mation be divulged. The illustration is merely to show the form and character of a commercial report and the data given is purely fictitious. CHECKING ORDERS FOR CREDIT m Summary Locally he is well regarded and is a man of good general standing, but is said to be sometimes slow in the discharge of his obligations. Agency Nos.* Rating YF or M-4 June 16, 1914 Later — Additional He has not replied to our request for statement mailed December 28, 1914. Authorities consulted know of no changes of importance since our former detailed report. He is thought to have invested from $1,500 to $2,000. Said to own real estate valued at from $1,000 to $1,200 and is believed still worth from $500 to $600 net. Continues in good general standing, said to be of good habits and is now reported as fairly prompt in meeting his obligations. Agency Nos Rating YF or M-4 January 22, 1915 Analysis of the Report Analyzing the above report, the facts to be noted are these : John Harris objects to making a signed statement to the commercial agencies. The present rating is assigned on the strength of a report made over two years previously. The amount of insurance is small on a stock of $2,800, but it must be remembered that John Harris' store is located in a very small village, and insurance on a country store is hard to obtain. The amount of sales is apparently small, but it is assumed that his expenses and cost of living are also small. A little store like this, with careful management, might realize from 10 to 12 per cent, net on its sales. His homestead would probably be entirely exempt under the laws of the state in which John Harris resides, as his real estate exemptions are probably fixed at $1,000 by statute. His location is in a good farming section and his book ac- counts are probably better than the average. Antecedent information is very favorable, because he has had experience as a salesman and as an office man. Note that in the ad- ditional report the agencies state that he is fairly prompt *This being a sample report, the rating of both agencies is assigned to this fictitious subject. 112 CREDIT INFORMATION AND PROTECTION in meeting his obligations, whereas in the former report he was reported as slow. Nothing can better illustrate the difficulties which con- front the two great commercial agencies. John Harris re- fuses to make a report, and what information can be gath- ered is largely hearsay evidence; but when all facts are analyzed, and if the business were put on the auction block, the exemptions allowed, and all other contingencies consid- ered, it would probably be safe to say that John Harris could net over all debts as much as the $600 allowed to him by the agency ratings. In analyzing a report it is well to mark or underline im- portant points with a blue pencil so that they will stand out at all times and not escape attention. Credit Clearing House Report Quite a different report is that of the Credit Clearing House, which is shown on page 114. This will be noted as bearing the date of the credit man's original investigation, while his own $300 order heads the report. This report is an excellent showing for the merchant under investigation. The figures are taken from the ledgers of the subscribers who answered the inquiry, and represent actual transactions between the customer and the creditors. The favorable points shown by this Credit Clearing House report are these: Harris confines his purchases mainly to one market." Only in two instances does he appear to have received unusually large lines of credit, and upon inquiry direct to the subscriber, reporting as "D-860-0- 183-0- discounts," the report comes back verifying the figures with a further notation — "Trade reports are good and we con- sider it a very desirable account." Another reference reports, "H. C. $30. Owes o. Sold 13 and 14. Discounts all bills." CHECKING ORDERS FOR CREDIT 113 A grocery house on the C. C. H. list says, "We think safe." A hardware house to whom he owes nothing at this time says, "This was a good Httle account which we lost for some reason. Was prompt and desirable. Would be glad to ship again." The salesman sending in the order noted on his sheet, "I think Mr. Harris has about $2,000 worth of good, clean stock. Everybody here says he is good. He owns some property and has just bought some more, several acres near his home. I hear he paid for it in cash. He will not talk about his finances. Our competitor has been selling for some time and they are still anxious to sell him." The "competitor" to which the salesman refers is "B-5 20-0-0-0- slow" on the C. C. H. report. Upon direct inquiry they state that payments were ranging from prompt to thirty days slow and the account was desirable in every respect. The bank states, "He is one of our valued customers. He never asks any accommodation, and we are of the opinion that he is good for anything he buys." A lawyer states, "I think you will be safe in shipping $300. Harris is a good, honest, and enterprising small merchant. So far as I know he meets his bills promptly. Have never heard of a complaint nor have I ever heard of a claim or suit against him. He owns a nice home and a plot of ground on v/hich his store-house also is located ; the whole is worth probably from $2,000 to $2,300. No mort- gage against it. He is in a good farming section." 114 CREDIT INFORMATION AND PROTECTION 5_R_2-ll THE CREDIT CLEARING HOUSE REPORT February 20, 1914 John Harris, Prosperityville, Blank County, Tenn. U •s O c o o $ $ $ $ SOUTHEASTERN DISTRICT 29] ? B 300 first order- EAST TENNESSEE DISTRICT 602 G 25 when due sold years- 610 G 70 26 slow when due^sold 1907 to Feb- ruary, 1914- 619 N 17 when due sold 1913- 620 5 13 discounts sold May, 1913 to present- 621 Q 40 prompt sold years to date- 622 J 60 discounts sold years to May 1913- 628 B 520 slow sold 1909 to 1913- 631 H 49 8 8 little slow- sold some time to February, 1914- 634 C 368 when due to 60 days slow-sold 1909 to March, 1913- 638 H 95 discounts sold June, 1913, to January, 1914- 645 g 100 little slow sold years to date- 646 D 860 183 discounts sold 1911 to February, 1914- 655 G 200 120 discounts sold years to date- 663 J 133 discounts sold November, 1912, to Sep- tember, 1913- Conclusions from Reports To sum up the entire list of reports, it appears that it would be safe to ship John Harris $300 in practically any of the following lines : shoes, dry goods and notions, cloth- ing, or even groceries, should he buy as much of the last at one time. He would also be good for the same amount in millinery^ hats, or hardware (including farm implements), although it will be seen that he has not made a practice of buying these last-named lines in large quantities. John Harris evidently does most of his own work; car- CHECKING ORDERS FOR CREDIT 115 ries a small stock ; buys small and often, and turns his stock three or four times during the year. From all reports he is making a success in his small business, and his buying ad- ditional real estate and paying cash show that he is able to take money out of his business without crippling it, for he is still reported as prompt pay. Sometimes it is a bad sign when a merchant takes money out of the business to invest in unprofitable real estate, and this is a special "failing" with a great many small merchants. While most of the comments in the Credit Clearing House report show that his methods of paying are good, the real strength of the report lies in the fact that John Harris has been receiving liberal lines of credit, is confining his business closely to a few houses, and owes but little — there is only the small sum of $8 due at the time of the report. The principal references sent in by the. salesman were all on members of the Credit Clearing House, who report on the present sheet. If the salesman looked care- fully through the stock and noticed only the goods from these references, it is a safe conclusion that John Harris owes very little, if anything, outside of the members of the Credit Clearing House on the report sheet. The report shows that he owes only $337 all told, and with the order of $300 the total liabilities would still be well within the bounds of safety. Collateral Data In reading a report on a prospective customer it is well to train the mind to inquire about and consider carefully the following points, which have been fully explained in earlier chapters : age ; married or single ; past record for fires and business troubles; character and habits; local stand- ing in the community; experience; ability; location with regard to competition; location as to growth and develop- Il6 CREDIT INFORMATION AND PROTECTION merit of the business itself; and local conditions of sur- rounding country. Then the question of assets and liabil- ities should be taken up and each item carefully analyzed and comparisons made. If this practice is followed in judging every risk, the mind soon forms a habit of sys- tematic analysis, and automatically looks for an answer to each of the questions that can be asked regarding the vari- ous points enumerated. This might seem difficult at the start, but constant practice develops the habit. Until such analytical habits have become second nature, the credit man should be very careful about checking through credits for shipment. Handling the Order After the order is O K'd by the credit man it goes to the order fillers, or those who get out the order from, stock and turn it over to the packing and shipping department. In most houses, when the order itself is O K'd, the order sheet carries the shipping instructions. In many of the large houses, especially those which are departmentalized, a sheet called a "lead ticket" is used. This contains the shipping instructions; spaces for each department head to check and place his initials when goods are delivered from his department; and final instructions to the charge clerk, packers, and shipping clerk. This lead ticket is O K'd by the credit man, and after the order is charged the amount of the bill is recorded ; then, just before the cases are ready for delivery to the drayman, the ticket is sent back for final O K and release. This final O K is important. Suppose an order comes fronfi' a dangerous account for, say, a case of something and, because it is badly w'ritten, the order clerk in a hurry ships a carload. The mistake will be recognized when the credit man sees the amount recorded on the lead ticket before he CHECKING ORDERS FOR CREDIT 117 signs his release O K. This may seem needless, but it is really very important. For instance, a hardware house sells small bills in 80 or 90 per cent of its orders, yet it is not uncommon to see a mail order of three or four lines of goods run into several thousand dollars, as when powder, fuse, etc., are ordered by a mining commissary. A big dry- goods house ships cheap sheeting by the bolt to small cus- tomers and by the bale to large merchants. A big provision house ships a case of eggs to one man or a car of eggs to another. The sum of the matter is this : The shipping clerk is not the credit man ; he has no discretion when it comes to the size of the bill to be shipped, and he packs and ships whatever is sent to his department. A double check may sound like "red tape," but it will pay for itself many times over if it stops one bad mistake each year. CHAPTER XI SAFETY APPLIANCES IN THE CREDIT DE- PARTMENT The Signed Statement — Verbal Statement A safety appliance in the credit sense is an instrument for the prevention as well as for the alleviation of credit troubles. It refers particularly to those precautionary measures of the credit department which warn the credit man of the approach of disaster, or help him when he finds himself facing a loss. First in importance of these is the customer's signed statement of assets and liabilities. This may prevent trouble, if properly read and construed, by avoidance of poor risks, and later may be used as a lever to bring pressure to bear upon a delinquent customer to whom credit has been extended upon the strength of a statement which proves to be materially false. In some states a verbal statement is just as binding as one written and signed : and if found materially false, con- viction may be obtained upon proper proof, under the sec- tion of the Criminal Code relating to false pretense. But even in these states, the written statement, duly signed and witnessed, is plainly to be preferred, as it is to a great ex- tent prima facie evidence. All representations, therefore, either in answer to questions or as voluntary explanations., should be incorporated in writing over the signature of the applicant, and the same care should be exercised as if the credit man actually intended to use the statement as evidence in court. The applicant should be impressed with the fact that such statement is being made for the express purpose of obtaining credit, and that any allegation to this end it8 SAFETY APPLIANCES II9 should be embodied. Good forms for financial statements appear in the Appendix, numbers 14-21. Fortunately the percentage of false statements is small; but the credit man who has ever collected a desperate ac- count through the leverage of the false statement, immedi- ately becomes a confirmed believer in the value of the signed statement, proceeds to incorporate the system of procuring such statements in his credit work, and makes them the most important feature of his files. The "Container" Where a statement is sent by a customer through the mail, it is vitally necessary that the container — the envelope — be preserved, and that the person who received and opened the envelope should place thereon the date, time of receipt, his own initials, and those of a responsible witness ; and both parties should be prepared to swear that said statement was received in that identical envelope. An envelope identified in such manner has been held prima facie evidence in court. In the Appendix a "self -contained" form of financial state- ment is shown, in which the container is part of the form and is therefore largely self-proving. Getting the Statement The average merchant, large or small, is averse to giving a statement. The agencies have always encountered this prejudice, but after sixty years of effort they have, to some extent, overcome it and have educated the commercial world into the practice of furnishing such information. Only of late years, however, has the systematic taking of statements been practiced. Formerly the stranger, when desiring credit, usually made a statement of his own volition, and after the account wae opened no further statements were thought necessary, the ledger record being depended upon I20 CREDIT INFORMATION AND PROTECTION as an index to the merchant's progress. This was wrong. If the house is selHng a customer heavily year in and out, a statement should be requested annually, and when this is re- ceived the files should be thoroughly revised and the cor- rectness of the statement proved. It should not be inferred from this that such revision of the files should be made but once during the year. The annual statement should form a basis for a new annual file on the customer, which is kept alive during the year by constant additions, such as the re- cording of inquiries and interchanges of ledger experiences with other interested creditors, either by direct correspond- ence or through the medium of the Credit Clearing House. The credit man can frequently overcome the prejudice of a customer, where this exists, and obtain his statement by means of a series of diplomatic letters. Credit is founded on confidence, and this confidence between jobber and retail merchant can obtain only through a knowledge of the mer- chant's financial condition. Should the merchant desire the favor of a liberal line of credit, with extension of bills after maturity, such favors can be extended with safety to the house only after its credit man has been thoroughly informed as to the condition of the debtor. When a statement has been received from a customer the matter must not be allowed to end there. Acknowledge a statement always; make a few comments and criticisms, and some good suggestions if possible, to let the customer feel that there exists a friendly interest in his welfare. When the time rolls around again for requesting another statement the customer will remember such treatment and it will be almost a matter of pride with him to see that it is duly furnished. Investigating the Statement In some states the courts have held that when a state- SAFETY APPLIANCES 12 1 ment has been received it is incumbent upon the recipient to exercise due diligence in ascertaining its correctness, so far as he may be able. No other course is safe. No sane credit man would blindly extend credit on the strength of a state- ment which he knew to be false. No more should he ex- tend credit on the strength of a statement which he does not know is correct. The first statement should itself be merely an index or guide for further investigations. It stands to reason that such items as real estate or other assets of public record should be investigated, not only as to their actual ex- istence, but also as to their approximate value. The mere overvaluation of real estate has been held as not necessarily a crime in itself. False Statement Laws Many of the states have enacted laws pertaining to false statements, and eventually all the states will doubtless have such laws on their statute books. Most of the state laws class the making of a false statement as a misdemeanor, pun- ishable by jail sentence; but in flagrant cases false pretense may be successfully prosecuted as a felony. It is to the Federal statute that we look for severity of punishment as well as for thoroughness in prosecution. It is worth while for any credit man to submit a test case to a competent attorney and have him prepare a brief with full explanation of the statute against false statements. The paragraph in the law refers more particularly to lotteries and similar offenses ; but through numerous decisions the point has now been reached where the statute is construed to em- brace in its provisions any scheme or artifice to defraud in which the United States mails are used as the medium. Therefore, in addition to the statement and the envelope, it is necessary to show that a scheme or artifice to defraud has been devised, and that the party at fault made the false state- 122 CREDIT INFORMATION AND PROTECTION meiit with the intent to defraud the party to whom it was addressed, and, for the furtherance of such scheme or arti- fice, placed the said statement in the mails. Prosecutions — State Courts The prosecution for making a false statement must be begun where the crime was committed, and the courts have held that this is where credit was extended and where the business was transacted. Such questions are frequently fought bitterly in the state courts, the defendant usually seeking to get the case into his own court among his friends and neighbors. Where prosecution is necessary an indict- ment might be secured by the credit man in his home town, where he alleges the credit was extended; but if the debtor lives in another state extradition might be fought on the grounds that the transfer of the alleged criminal is not sought for the good of the community, but for the real pur- pose of collecting a debt. Then there is always the danger of a criminal prosecution before a jury. The only certain thing in litigation is its uncertainty. The failure to win a case through successful prosecution may subject the pros- ecutor to a severe damage suit. Prosecutions — Federal Courts If a strong case can be developed in the federal courts, conviction is more certain than in the state courts, and the penalties are far more severe. When a prosecution is begun in a state court, the offender may offer to compromise or to pay in full ; and such settlement can be made even after in- dictment. The prosecution may then be dismissed, or an agreed verdict rendered in favor of the defendant, or the case may be called and dismissed through failure of the prose- cutor to appear. In the Federal courts, on the other hand, it is not so easy to procure the dismissal of a case, and of- SAFETY APPLIANCES 123 fenders are learning that a statement through the mails which is false in a material sense, is certain to prove trou- blesome. In such cases a settlement is often obtainable, and it is then only common sense and good business practice to collect the debt and let the culprit go, thereby avoiding delay, annoyance, and possible financial loss. Ethics vs. Prudence In such cases, however, the ethical or moral aspect of the proceeding must be considered, since the failure to pros- ecute encourages dishonesty and places a premium on fraud. Makers of false statements soon learn that it is only neces- sary to dig up a settlement to secure immunity from prose- cution. For the good of the credit system generally, every case of false statement ought to be prosecuted to the bitter end ; but, as a matter of practice, each man decides for him- self according to his own conscience or his own pocket- book. The common sense way, however, is to avoid litigation if possible, and to use the signed statement as a club to coerce the debtor into a settlement. It is well to follow the example of a good trader in such cases and never "show your hand." The offender or his attorney should be pre- vented from seeing the original statement, if the offender did not retain a copy. It is the uncertainty that the crim- inal fears. He is not afraid of what he can see or what his lawyer can study out, but if the basis for prosecution is merely stated and the details carefully concealed, the de- fendant and his lawyer are kept constantly "guessing" and the psychological element frequently proves strong enough to secure a settlement. Recoveries It sometimes happens that a merchant fails, or his store 124 CREDIT INFORMATION AND PROTECTION is closed, a few days after a bill of goods has been shipped. In practically all the states there exists the right of stoppage in transit, or change in transit, and many a bill has been saved through the alertness of the credit department in ex- ercising this right. Should a merchant get into trouble immediately following a shipment, an order by wire to stop delivery must be instantly issued to the railroad. There are doubtless many instances in the experience of every credit man where goods which have been delayed by accident or sheer luck have been successfully stopped. The credit man should not abandon the fight until notice has been received that the goods are actually in the possession of the con- signee. Replevin The laws governing replevin of goods should be care- fully studied by the credit man. In most states an action to replevin will lie, and a prosecution will be successful, where it can be shown that the debtor was in a failing con- dition or knew he was insolvent and unable to pay for the goods at the time the shipment was made. Also, in case any other fraud can be proved, a recovery will be success- ful, because if fraud exists the title to the goods does not pass from vendor to vendee. This is only a general state- ment, as the law varies slightly in different states; but the same principle exists in practically all. Reclamations The right to reclaim goods is recognized in the bank- ruptcy statute. Where the bankrupt has made a materially false statement to a commercial agency, and where credit has been extended upon the strength of such statement, the credit man may reclaim any goods in the stock of the bank- rupt that can be identified. It is necessary to file quickly a SAFETY APPLIANCES 125 notice or demand upon the temporary receiver or trustee that such goods are to be set aside. The reason for haste is ap- parent, for if the trustee should dispose of the merchandise before a claim has been made on him, he can plead that the credit man or his house was guilty of negligence in proceed- ing to recover. If such notice is filed, then the attorney for the shipper or vendor files a petition in due form of law, setting forth the contentions of the claimant, and quoting in detail such false statement. To this is attached a copy of the original invoice and an invoice giving the value of the goods identified in the bankrupt's stock. When the case is de- cided by the referee the right of appeal exists, whereby either side may carry the case before the judge upon proper cer- tification of the referee. This subject of reclamation in bankruptcy should be studied by the credit man, and when an opportunity presents itself he should follow closely the proceedings of his lawyer in a recovery of this kind. Many a shipment can be recovered and an account entirely saved by knowing how to act, and act quickly, in reclamation pro- ceedings. CHAPTER XII CREDIT INSURANCE The Function of Credit Insurance Credit insurance is a provision against excessive loss through credit sales. It is to be noted that the word "exces- sive" is a very significant part of this definition, indicating unusual losses which, while supposedly unavoidable, run the percentage of total loss to an abnormal figure. Some of the best credit men set aside at the beginning of every year a certain sum of money as a maximum allow- ance for losses on bad debts. Such sum is determined by computing the average percentage of loss for the past few years, and the volume of sales for the year just closed, or the estimated volume of sales for the coming year. The department expects a loss of, say, one per cent on the total volume of sales, and provides for this amount, and then endeavors to keep the losses within this limit. Ordinarily it will succeed in doing this, but should the credit man en- counter unexpected financial troubles, brought about by crop failures, floods, or other natural causes, or by a gen- eral panic, his losses will exceed the sum set aside. In such case, however, they are abnormal, excessive, extraordinary — losses that nothing less than divine foresight could pre- vent — and it is to provide against these abnormal losses that credit insurance is resorted to. Suppose the losses have about reached the one per cent limit, and that near the end of the year two or three of the best accounts become involved through unavoidable casual- ties. Should it then be said that the credit man has failed ? Such criticism would be ridiculous, yet the house has suf- ' 126 CREDIT INSURANCE 1 27 fered a loss in excess of what had been estimated by the credit man, and its dividends are curtailed. The credit man is not to blame, nor should the house sustain the loss if there is a method of preventing it. Credit insurance is intended to provide for just such unavoidable losses. Origin and Methods of Insurance When a small group of merchants gathered around the tables in Lloyd's coffee-house, in the sixteenth century, and agreed with each other to share the losses of incoming car- goes by contributing in proportion to the amount of goods each had afloat, these merchants, unintentionally perhaps, "invented" insurance. And so today men afford protec- tion to each other against unlooked-for casualties, by each paying a premium into the general fund. The sum total of these premiums, less the expense of collecting and carry- ing on the business, constitutes a fund out of which losses are paid. The insurance company is the agency which col- lects the premiums and distributes the losses. The soundness and legitimacy of the general principles of insurance are not questioned. Life, fire, and casualty in- surance are regarded as necessities. Time has proved the correctness of their methods. The actuary of the life in- surance company figures from tables running back for de- cades, and determines just what premium to charge for insuring the life of an individual at a certain age. The fire insurance rating bureau fixes a certain rate on a dwell- ing, based on its construction, location, or use. All insur- ance, therefore, is based on the law of averages, and in all lines of insurance the principle is the same. A considera- tion of this will establish the reason for credit insurance. Insurance a Precautionary Measure The merchant insures his store and goods against fire, 128 CREDIT INFORMATION AND PROTECTION not that he expects them to burn, but to obtain their value or a part of their value if the unexpected should happen. If his property should burn without such protection, not only would his creditors suffer, but he would probably lose the accumulated earnings of a lifetime. Every precaution is ordinarily taken to guard against fire, even though in- surance is carried. A man may carry full insurance and recover the total value of his property, but he still sustains a loss through the disorganization of his affairs. It is not intended that he shall make a profit when he burns out ; but only that he and his creditors shall be protected against ex- cessive loss. The bulk of business today is transacted on credit. What greater risk, after all, could the manufacturer, job- ber, or merchant take when he scatters broadcast over a wide territory many thousands of dollars of his assets in the shape of merchandise shipped to other merchants on whom he relies for payment? The merchant in this day of sharp competition must know his costs and expenses. Assuming that his cost calculations are correct and that he has obtained the required margin of profit, his success would be assured but for the one item that he has not guarded against — the unexpected loss. He has insured his buildings, his merchandise, and his life; he has bonded his employees against theft; he has taken out sprinkler insurance, liability insurance, plate-glass, and even tornado insurance; yet he tosses on his bed at night and thinks of the thousands of dollars of his assets which his credit man has distributed among strangers, re- lying on their ability and integrity, and willingness to pay if not overtaken by unexpected misfortune. He knows that he will sustain some losses; in fact, he is willing to take some chances in order to build up a business. But what if the credit man has erred in judgment many times, CREDIT INSURANCE 129 instead of a few times? What of the unexpected losses? The solution of the question, and the only solace for his troubled spirit is the insurance of these credits by a credit indemnity company. Scope of Credit Insurance Credit insurance is sometimes compared to the indorse- ment on a note, or to the collateral that a bank takes against a loan; but the indemnity company does not guar- antee the payment of every loss, any more than a fire in- surance company would pay more than the face of its policy simply to reimburse the owner of a house and make him whole against a total loss. While credit insurance is a col- lateral against outstanding accounts, it is a collateral only for so much of these accounts as is beyond the share that is just and right for the policy owner himself to carry — just as a bank must first exhaust its efforts to collect from the maker of the note before proceeding against the en- dorser. Some initial loss must be expected, and it is only against the excess losses that the indemnity company af- fords protection to the policy holder. Work of the Credit Insurance Agent In negotiating for credit insurance the agent deter- mines, first, the normal loss which the house itself must sustain before the insurance company is called upon; and second, he determines the rate per cent per annum to be paid for the insurance, as well as the size of the bond, or the fixed limit of indemnification; third, he computes the premium' to be paid, which is a mere matter of arithmetic after the former factors have been determined. As has already been explained, net losses for several years back are compared with the volume of sales for each of those years in order to determine the average percent- I30 CREDIT INFORMATION AND PROTECTION age of loss as a basis for calculation in fixing the initial loss. It is to be expected that every wholesale house will endeavor to increase its business from year to year, and if the house is enlarging its territory and increasing its cred- its, such facts must be considered in establishing the rate of the initial loss for the coming year, which is to be cov- ered by the bond. It is also taken into consideration that the house already has on its books a considerable aggre- gate of accounts in all stages of maturity, and, if these accounts are to be covered in the bond, allowances must be made whereby they are to stand their share in the initial loss. After considering these premises, assume that it is agreed between the credit insurance company and the client that one per cent on all outstanding credits and sales for the year will be a fair rate for reckoning the initial loss. This means that on a total of $500,000 involved, the house must stand a loss of $5,000 before any liability accrues against the credit insurance company — subject, of course, to the limitations which will be explained later. For fixing the rate of premium, the indemnity com- pany furnishes its agent with a schedule of rates for each class of business transacted. Through many years of in- vestigations the mercantile agencies have accumulated ex- tensive data concerning failures in every class of business, the number of such failures, and the amounts involved, their geographical location, the causes, and the general commercial conditions under which they occurred; and such data are tabulated in a manner similar to mortality records of fire losses. From these tables are obtained fig- ures that determine the commercial mortality and the aver- age losses in every class of business ; such, for instance, as clothing stores, general merchandise stores, hardware stores, millinery or department stores, etc. As these fig- CREDIT INSURANCE 131 ures are based on computations running over a great num- ber of years, they are quite as accurate as fire insurance data, and a dependable rate is computed for each class of business. Through an investigation of the prospective insurer's books, the credit insurance agent considers the class of cus- tomers, the volume of business, the size of the accounts, and the general credit policy of the house. The size of the bond or fixed amount of indemnity is then determined; for example, on a business of $500,000 per annum it is perhaps agreed that the credit insurance company will be responsible for all losses over and above the initial loss of one per cent up to an amount of $10,000, subject to the limitations of the bond. Having determined the rate and amount, and agreed upon the initial loss of $5,000, it is now in order to dis- cuss the various limitations which are fixed by the terms of the bond itself. Limitations of the Insurance Bond The first consideration is the ratings of the customers of the house, for both capital and credit, in the rating books of Dun and Bradstreet. These customers are divided into two classes: (i) "rated," that is, those having a capital rating followed by a first or second credit rating, and (2) ''ofT-rated," or those having a lower credit rating than the former, and no capital rating, or else no ratings at all. Statistics show that the greatest commercial mortality exists in the off-rated class of accounts. Therefore, the indemnity company sets a limit to its liability on these ofY- rated accounts, and stipulates that only a certain percent- age of the bond shall apply to such accounts when figuring the total losses for the year. For example, suppose that on the bond mentioned above, the limit on any ofY-rated 132 CREDIT INFORMATION AND PROTECTION account is fixed at 75 per cent of $500, and that the total losses on off-rated accounts shall be but 40 per cent of the total bond, or $4,000 on the $10,000 bond. On the rated accounts the bond pays indemnity at the full rate up to an agreed percentage of the capital rating. A great many people misunderstand the purport of the bond, supposing that it assures them against all loss on each particular account, even above the amount fixed. This would be manifestly unfair, for the reason that while some credit men fix a limit on the amount they will sell to any one account, agreeing generally that a safe limit is 10 per cent of the capital rating, the great majority of credit men ship an account all that they think it will pay for, without regard to any fixed limit. Now, where a bond is intended to cover the excessive losses, it is meant to cover the total losses on all the accounts, up to the limit of the bond. For example, in the case of the bond already in- stanced, there might be a loss on one account of $1,000, and losses on twenty other accounts in various sums aggre- gating $3,500, making the total loss $4,500. There would in this case be no recovery on the bond, because the total of the losses is $500 less than the initial loss of $5,000 which the house itself is to stand. Suppose, however, that instead of the $1,000 loss, there was a loss of $3,000 on a well-rated concern, then the total of losses would aggre- gate $6,500, or $1,500 more than the initial loss, and there would be a claims to this extent under the bond. If, how- ever, in the twenty losses mentioned there were as many as fifteen off-rated accounts, and there was a stated limit of $400 loss on each one, and some of these losses exceeded such limit, then the adjuster would compute the losses, only up to the limit of $400 in each case. The theory of these provisions of credit insurance is that in taking chances contrary to the law of averages as CREDIT INSURANCE 133 shown by the statistics, the bondholder should be required to stand his share of such losses and become a coinsurer on his own risks. This explanation is made because a great deal of criticism against the credit insurance com- panies is sometimes aroused over the final adjustment. Such criticism is wholly unwarranted and brought about solely because the bondholder has never studied the terms of his bond. Credit insurance, for some reason, is not gen- erally understood; but with reasonable study it is as easily grasped as any other class of insurance, and the subject should be given due consideration by every credit man. A Wrong View of Credit Insurance An enthusiastic agent may claim for credit insurance that it gives a feeling of safety to the credit man; that under it he can extend the business of his concern, and take risks that he would not otherwise venture upon; that when he has a risk before him to pass on, which is well rated but bears all the earmarks of danger, he can go straight ahead and ship his bill, feeling sure that the credit indemnity company will take care of the loss. Such rea- soning is all wrong. There is never any excuse for know- ingly and, one might also say, maliciously, extending credit that the credit man knows is hazardous. He may be fully covered under his bond, and the indemnity company be forced to pay without question, but common honesty for- bids such a credit, just as an honest merchant would not allow his store to burn in order to collect his insurance. Wild and foolish credit-granting is never permissible. The credit man who is working conscientiously on a liberal pol- icy must take some risks, but he does so with the expecta- tion of collecting before the day of trouble. On the books of nearly every concern are numbers of risks more or less hazardous, but most of these turn out eventually to be 134 CREDIT INFORMATION AND PROTECTION good, and they are not entered into with the expectation of "cashing in" through the credit insurance company. The credit man should avoid risks which he knows are not worthy of being shipped, regardless of his insurance. There is no sense in trying to make money out of a credit insurance bond, any more than in trying to get ahead of the fire insurance company. The fact should always be kept in mind that insurance is a protection and not a money-making scheme. Advantages of Credit Insurance Suppose an unforeseen and unavoidable misfortune happens to a good customer whereby a heavy loss is sus- tained by the house. Ordinarily, the credit man would adopt a policy of contraction, pulling down on every ac- count on his books. He has a big loss on hand, and if losses keep on piling up even in small amounts he will run far beyond the limit allowed by the executive under whom he is working. If, however, there is a credit bond in force, he need not become panic stricken over the one loss. He is not to blame, since the loss was not caused through any error of judgment on his part, and a sudden contraction in his credits which will inevitably work harm to the house, is not necessary. He should not lose his head in such a case, but should continue his usual policy — if he is sure it is the correct one — and at the end of the year, if the big loss runs up his total beyond the specified initial loss, the bonding company pays the excess. Another advantage of the policy is its tendency to make the credit man keep in close touch with his accounts. He pays more attention to the ratings at each succeeding ship- ment, in order to see that he is within the provisions of his bond. Above all, he learns to pay strict attention to any changes in capital or credit rating. He takes more in- CREDIT INSURANCE 135 terest in the commercial reports, and checks up each one carefully to see if the agency is rating correctly. He also watches the ledger accounts because the bond only covers each account up to a certain amount. In the initial loss, which stands before him like a signpost, he finds some- thing to work against. The good credit man tries to ship all he can and keep his losses down to a minimum. If he can hold these losses well under the figure set for the initial loss he can feel justly proud, because this initial loss is the average for all houses of his class. By such good work he has a chance to lower the figures on his initial loss and procure a better rate on a subsequent bond. A False Objection to Credit Insurance One of the arguments against credit insurance claims that in a sense it "takes the head off the credit man's shoulders." By this is meant that the bond fixes the limit of losses on the accounts and prescribes certain limitations in regard to handling such accounts. Adherents to this theory hold that even the bookkeeper is competent to pass on credits by keeping the terms of the bond before him and shipping only such accounts and to such extents as are within the limits. If such a policy were practicable in any sense, there might be some truth back of this argument, but the policy is not practicable and the argument is fallacious. For illus- tration, suppose the insurance company giving the bond has adopted Dun as a basis on which to prescribe the limits to ratings. There is an order from a party rated "blank- blank" by Dun, but rated "T. C." by Bradstreet, while the Credit Clearing House shows twenty comments, all of which are good and some even discounting. Further in- vestigation of the Dun report shows that the customer has repeatedly refused to give out any information regarding 136 CREDIT INFORMATION AND PROTECTION his business, and that since no first-hand information could be obtained sufficient to justify a rating, such rating has been withheld. To answer this, one has only to consider how statements are obtained by the agencies. In this case, for instance, the reporter for Dun might have been refused information, and the local Dun attorney, not being friendly to the customer, could not bring influence to bear to assist in obtaining a statement. Possibly the reporter for Brad- street had also been turned down; but the Bradstreet attor- ney, being the local counsel for this customer, brought his influence to bear so that the Bradstreet reporter was put in possession of a statement. Under such circumstances both ratings might be justified. The commercial agencies go to great pains and expense to rate justly, and while they may be correct in withholding a rating, it happens many times that the unrated subject is not utterly unworthy of confidence. Under these conditions, if a house should adopt a policy of blindly following the ratings in the books — which are not guaranteed by the agencies — it would have no need for a credit man, and it would probably not make much of a suc- cess of its business. At the same time it must be admitted that the plan of the credit indemnity companies in basing their insurance figures on ratings is scientific and correct; for their statistics are based on millions of ratings and not simply on a few scattered cases. The few thousand cus- tomers on the books of a wholesale house are infinitesimal as compared with the business of the entire country. The Credit Man Indispensable In the case above cited, the credit man would use his judgment and probably ship the customer, just as he would turn him down even if he had a high rating in one agency, but was unfavorably reported by the other agencies. Credit CREDIT INSURANCE 1 37 insurance is based on averages and not on isolated cases; and the credit insurance company demands above all things that the holder of a bond employ a thoroughly competent credit man to sift the chaff from the wheat. If the weak credit man keeps the bond constantly before him and is afraid to use his common sense, the chances are that he will grow weaker and the bond will be a detriment to him and to the house for which he is working. Suppose a department store crowded with merchandise should refuse to decorate for Christmas because of the extra fire hazard occasioned by the decorations. It would lose the Christ- mas trade and likely the good will of many of its customers. The progressive department store early in the fall procures quantities of fireproofed decorations, puts in additional port- able extinguishers, redoubles its ordinary fire precautions, and puts an extra watchman on every floor. The sane, safe credit man uses his brains, investigates every risk, watches the limitations on his bond, and disregards such limitations if he thinks the facts warrant his doing so. He takes all precautions against extra hazards, just as the de- partment store provides against the fire hazard. In the majority of cases he will find that he is correct in judgment ; but when he misses in judgment — as any man will do oc- casionally — he makes up for it in his ability as a collector and in watching the account after it is on his books. Credit Insurance and Fire Insurance Some will say that credit insurance is not like fire insurance because it divides its policy holders into classes based on the kind of business engaged in ; whereas the fire insurance company rates each risk on its individual features of construction, exposure, goods, or the nature of business conducted. Credit insurance goes quite as far and really digs deeper into the subject by placing each risk on its 138 CREDIT INFORMATION AND PROTECTION individual merits. In addition to working along the general line of averages as applied to a certain class of business, the credit insurance company applies the same .rule to its cus- tomers and their ratings. It considers not only the business itself, but the policy of the house, the moral hazard, and the ability and efficiency of the credit office. Credit insurance is yet in its infancy, and it is probable that it will be developed to a wonderful extent. The basic principles are correct, and experience has demonstrated that it has a legitimate reason for its existence. CHAPTER XIII INCIDENTAL PROBLEMS OF THE CREDIT MAN Credit Diplomacy The duties of a credit man extend not merely to the granting of credit and the collection of accounts; but through the exercise of these functions he helps to shape the policy of the house toward its customers, particularly in such matters as touch upon its accounts. Some of the prob- lems arising from bad or unbusinesslike practices on the part of customers, and which directly affect the book accounts, are the following : 1. Failure to pay interest where accounts have run past maturity. 2. Taking excessive or unjust discounts. 3. Making unjust claims. 4. Returning merchandise. 5. Cancellations. It is in the handling of such problems that the credit man may display ability of a high character, or, through in- capacity to grasp the situation and handle it successfully, may become a mere follower of routine. Tact, diplomacy, firmness of character, and broad-mindedness are essential in handling such problems, and, since their adjustments are usually made through correspondence, tactful, forceful letter writing is also required. The writer should be absolutely convinced of the justice of his contention and the strength of his position before he undertakes to convince an erring customer. But he must also bear in mind that it costs money to put a new customer on the books, and it is better 139 I40 CREDIT INFORMATION AND PROTECTION to save one old customer whose credit is firmly established, than to search for two new ones of whom nothing is known. The average merchant is reasonable and honest; and the credit man who can read character will know how to ap- proach an individual and set any question before him in such a manner as to show the right and wrong of the con- troversy, and do this so pleasantly as not to cause offense. 1. Failure to Pay Interest When an account is allowed to run past maturity, in- terest should be charged, not only from the standpoint of business common sense but as a matter of principle. The wholesale house in planning its financial policy allots a cer- tain proportion of its capital to merchandise, another amount to accounts receivable, and so on through the list of its necessary requirements. If accounts are met promptly at maturity, borrowing is not necessary; but if through over- buying the stock increases beyond its quota, or if through slowness of collections the accounts receivable exceed their limit, the business becomes a borrower from its banker, and it pays interest on the money it borrows. When the customer goes to his bank and borrows, he thinks it entirely right and proper for his banker to charge him bank discount, which is interest in advance. This, then, is an argument to lay before the customer who refuses to pay interest on open accounts running beyond maturity, since in this case the merchant is merely acting as his customer's banker. Again, the wholesale house carries the customer past maturity as an act of courtesy, and, in consideration of such courtesy, the merchant should look upon the interest as a moral obligation. But the customer may argue : "I showed you a favor in buying my goods of you, and therefore I am justly entitled to reciprocal courtesy, and I won't pay PROBLEMS OF THE CREDIT MAN 141 interest on an open account when it runs past due." The answer to this would be that the jobber is selHng goods, not time or terms, and, beyond this, that he has put the full value into the goods themselves, and is therefore under no obligations to anyi customer for the mere purchase of his goods, as the prices and quality are of themselves sufficient inducements. This contention might be amplified, and many other arguments pecuHar to each line of business will undoubtedly suggest themselves to the credit man. Such lengthy arguments are, of course, intended for smaller or more unbusinesslike merchants. Commission houses and brokers are able to collect interest from large buyers, and notify them by printed stickers attached to their invoices that they expect to do so. The great volume of business in this country is, however, done through the job- bers who sell and often carry the small merchants. Such retail merchants must be taught, and the fact must be im- pressed upon them that interest after maturity is just as much a part of the obligation as the principal itself. It is folly to say that a house should not sell a merchant who is slow pay. It should rather be said that if the slow-paying customer cannot be educated into paying promptly, or if he lives in one of the great agricultural sections where he can- not pay promptly, then he should be educated to pay interest. The plan usually adopted is to close the open account, when due, by a note. All the states recognize the right to collect interest on notes, yet very few make interest on an open account a legal obligation. 2. Excessive or Unjust Discounts Discount is a reward for payment within a specified limit of time. It is not, as some suppose, interest on money, nor is it merely a trade allowance. Therefore, cash discount, strictly speaking, is earned by the customer only when his re- 142 CREDIT INFORMATION AND PROTECTION mittance reaches the office of the seller before the expiration of. the time limit. The rate of discount, if clearly expressed in the terms on the invoice, governs the amount to be de- ducted. Any deviation from the prescribed manner of settle- ment is a violation of the contract between buyer and seller, and the credit man should so regard it. Knowing the gen- eral principle, individual cases can be handled on their re- spective merits. On a question of excessive deductions the credit man should adopt a firm attitude and stand positively upon his rights. It is poor policy to allow a customer to override the house by deliberately making deductions to which he is not entitled. Where the terms of sale are clearly outlined and definitely understood at the time the sale is made, there can be no excuse for this practice. Before handling such a case the credit man should have placed before him the original order and any correspondence bearing on that order, from either customer or salesman, and particularly the latter; for a too zealous salesman sometimes offers terms and discounts that are not expressed on the order sheet. After considering the facts and establishing the security of his position, the credit man proceeds to outline the policy of the house, firmly but courteously, and follows the matter up until settlement is effected. It is unfortunate that differ- ent classes of merchandise often carry widely varying rates of discount, but this is one of the results of the complex system on which business in the United States is conducted — a system which differs materially from the systems in operation in foreign countries. The question of the entire elimination of cash discount has been agitated among credit men for some years and the idea is constantly gaining favor. With the continual in- crease in the cost of doing business and the consequent shortening of margins of profit, it is necessary that both the PROBLEMS OF THE CREDIT MAN 143" rate of discount and the time allowed for a bill to run should be cut down. It is barely possible that this may lead to an eventual elimination of the open account system — a dis- tinctively American institution — and to the closing of ac- counts into notes or acceptances. This latter idea is especially to be favored where the time of a bill exceeds thirty days. Under the favoring provisions of the Federal Reserve Banking Law, such paper should prove very popular with the banks. 3. Unjust Claims Unjust claims should be handled in a manner similar to unjust discounts. Claims arise through the tortuous work- ings of the human intellect, and their name is therefore Legion. No man knoweth when or how claims may arise. The most aggravating of these is shortage — the favorite claim of the small merchant and the only one to be discussed here. Wholesale houses at present follow a system of checking through an order from stock to shipping room and then into the shipping cases, which practically eliminates any chance for shortage in a shipment. The house is therefore able to furnish readily an affidavit setting forth the material facts of checking and packing. The receiving merchant also should be prepared to make the necessary affidavit that the specified shortage occurred, and this practically forces upon the carrier the burden of proving that the shipment was not robbed in transit. The transportation companies usually give such matters careful attention, particularly if the con- signee has had the package examined by an employee of the transportation company when the shortage appeared and before the shipment itself was placed in stock. One of the duties devolving upon the credit man, from an ethical and humanitarian standpoint, is that of educating 144 CREDIT INFORMATION AND PROTECTION the small merchant in matters pertaining to the conduct of his business along the line of good practice. Therefore, the proper handHng of claims against a transportation company, whether for shortage in shipment, loss and damage, con- cealed damage, overcharge in freight, or overweight, can be explained to the customer in such a way that untold worry and annoyance to all parties concerned may be eliminated. 4. Returned Merchandise The unjust and arbitrary return of merchandise is one of the most disagreeable matters that come before the credit man. Returns without good reason may be classed as arbitrary and unjust, because the customer should know, when buying the merchandise, (a) that it is adapted to his business; (b) that his stock of such goods warrants the purchase; (c) that he can see his way clear to dispose of the stock. The lack of foresight in one or more of these particulars is the principal cause of returns. The clearance reports will indicate whether a merchant is disposed to follow the practice of returning goods. He should not be allowed arbitrarily to return goods, particu- larly if his record indicates that he has been guilty of such practices in the past. The credit man owes it to his house, and to the wholesale world generally, to take a firm' stand against such abuses. When once a merchant finds that a house will condone such an offense, he becomes more free in his buying and more careless in his selections. He naturally feels that he can place the goods on display and, if they do not sell, can return what is unsold to the whole- sale house. On the other hand, there are cases without number where the shipper is at fault, such as in substitutions, goods not being delivered according to sample, delayed shipments, etc. In most cases, adjustments are easily made. Also, cases PROBLEMS OF THE CREDIT MAN 145 often arise where a merchant buys with care but his cal- culations are set at naught through failure of crops or other unforeseen adversity, and it becomes necessary for him to return merchandise. Such cases should be handled with tact and on their individual merits as sound common sense may dictate. 5. Cancellations Cancellations of orders, especially in the manufacturing trade, are as annoying as, and often more troublesome than, the returning of merchandise; although both abuses are of similar nature. There are important court decisions in many states on the cancellation of orders; and as these are well known to every good lawyer, it might be well for the credit man to obtain information on, and study, the law involving contracts, and thoroughly familiarize himself with the court rulings. All blanks used by salesmen in taking orders for future shipment, especially where the merchandise is made according to specifications of the buyer, should have printed on them a clause to the effect that such order is not subject to countermand after a specified date, nor subject to can- cellation after work on it has started. The cancellation agreement can be eliminated if desired ; but in order to pre- serve the equity of the contract, when the cancellation clause is retained, a clause should also appear binding the mill to deliver after approval, except upon certain conditions beyond the ordinary. Effect of Trade Abuses on Credit Standing In order to understand what relations trade abuses bear to the credit standing of customers, it is only necessary to study the causes of failures and then to read intelligently the records of merchants for some time preceding their failures. Very few merchants are slow pay out of deliberate mean- 146 CREDIT INFORMATION AND PROTECTION ness; nor does a merchant become guilty of various trade abuses out of malice. Back of all lies the one great reason — want of sufficient funds. If various trade abuses are shown on a clearance report, it is an unmistakable sign of financial weakness. Slow and unsatisfactory settlements are also further indications; and when the record shows that claims are reaching the hands of attorneys, it is time for the credit man to get from under the risk as quickly as possible. He is unwise in thinking that because he has escaped so far, the fear is foolish. If only one or possibly two trade abuses appear in a lengthy report, there might be some just grounds for the merchant's asking for credit ; but if a number of such comments appear, then it stands to reason that all of the houses making comment in the report cannot be wrong. The preponderance of unfavorable evi- dence is against the merchant. However, if the agency reports indicate that the mer- chant is possessed of ample assets in excess of liabilities, it will be apparent that the individual in question makes a habit of unjustly complaining. The credit man should in- vestigate carefully every order of any size from such a merchant, and have all dealings thoroughly understood in advance of shipment, so as to forestall and avoid unjust complaints. In rare cases it happens that in addition to mak- ing unjust claims, a merchant is prompt in payment to the point of taking excessive and unwarranted discounts. Such facts in a report indicate that the merchant is in the habit of taking advantage of the jobbers and small manufacturers, and this should be taken into consideration by the credit man when passing on a request for credit. Part III — The Collection Department CHAPTER XIV THE COLLECTOR AND HIS METHODS Qualifications of the Collector It is only in recent years that the collection department has been raised to a position of importance in the wholesale house. Formerly it was the custom to delegate the collecting to the bookkeeper, or to a minor clerk who had entered the office with a view to learning the details of the business. Now the thoughtful credit man realizes that the prompt col- lection of accounts is more than half the battle in keeping down the percentage of losses, and that the qualifications of the collector are therefore a matter of much importance. It is a fallacy to suppose that a collector must be born to the job and that only one specially gifted can be markedly successful. It is true that some men are peculiarly fitted for collectors, but it is true, also, that any intelligent person can become a good collector by study and effort. The collector must be a good correspondent* and must have a knowledge of common law as well as of the statutes of the various states in which the firm is operating. His position calls for the exercise of diplomacy and common sense. He must realize that collecting is not merely getting the money from the delinquent; for his house expects to continue to sell merchandise, and it wishes to retain the delinquent as a customer. *See Chapter XV. 148 THE COLLECTION DEPARTMENT Relations of the Credit and Collection Departments If the business of the house is small so that the credit man can also look after the collections, he can apply to this branch of his duties his knowledge of the accounts, and of the condition of debtors, and often a personal acquaintance with them. From the viewpoint of a collector, however, this personal acquaintance may be a detriment to the proper handling of an account. The credit man may be inclined to leniency amounting to tardiness in enforcing collection, while the practiced collector, unhampered by personal con- siderations, keeps ever in mind, first, last, and all the time, just what he is after, and bends every effort to induce the delinquent to remit the amount past due. However, the collector cannot handle delinquents suc- cessfully unless he is acquainted with their credit standing. This knowledge can be gained only by a thorough study of the credit files. Unless time is devoted to a study of the account, the collector might as well draw up a series of form letters and delegate his work to the ofifice boy. Even after studying the files he should consult the credit man, and under no circumstances should he adopt drastic measures for collecting a dif^cult account, without the approval of the credit manager. Above all, there should exist between the credit man and the collector a spirit of co-operation and friendly inter- course. Their positions are so closely allied that any fric- tion works harm to the house. The credit man should have authority over the collection department, even to being re- sponsible for its work; and he should therefore be given the privilege of choosing, or at least approving the selection of, the individuals who constitute the personnel of that department. The collector himself should be allowed free- dom in the selection of the workers who are directly under him and for whose work he is responsible. THE COLLECTOR AND HIS METHODS 149 The Collector and the Customer A part of the policy of every house should be the educa- tion of its customers in habits of prompt payment. A house that is a prompt collector and shows its customers that their accounts are carefully watched, will command more respect than the careless house, and will almost invariably be paid first. The collector must thoroughly understand the policy of the credit department and of the sales department as well. Above all, he should strive to cultivate toward the customer that cordial feeling which leads to the general popularity of any house among its customers. To be popular in busi- ness is next to being successful; in fact, the most successful houses the world over are the most popular, and it may be noticed that the reverse of this is equally true. A house which spends time, money, and thought in building up a fine trade and an excellent list of customers, cannot afford to have this work torn down by the carelessness or ineffi- ciency of a cold-blooded collection department. The collector must keep informed on the debtor's local conditions. Sickness, crop failures, or adverse weather often cause a good merchant to become slow in settling his bills, and this same merchant may be foolishly jealous of his good credit and extremely sensitive about his condition. If the files show such a man to be honest and reasonably solvent, an extension should not be withheld. The very bonds of sympathy beget a feeling of confidence; and con- fidence between a house and its customers, whether in buy- ing, selling, or collecting, is an important factor. If an extension is asked, the favor should be conferred in a kindly spirit, or else not at all. If the debtor feels that he has simply forced an unwilling favor, it ceases to be regarded as a favor and he feels that he is under no obliga- tions. The granting of an extension may afford an excel- 150 THE COLLECTION DEPARTMENT lent opportunity to ask the debtor for a statement of his affairs, or to procure other information from him which will be of great value to the credit department. Often the small country merchant does not appreciate the fact that his account should be paid simply because it is due, and statements or ordinary dunning letters do not move him to make even a reply. But occasionally in dealing with such a debtor it is a good idea to make a personal appeal by letter, with a very plausible reason why his particular money is needed. Such a request may arouse an interest on his part, which will result in an earnest effort to make the remittance. No stronger argument can be made to a debtor than in presenting the case to him plainly and truthfully. The prime consideration is not to dodge the issue; to leave no loophole in a letter which will allow the delinquent to pro- long the matter. State the proposition plainly and very cour- teously. When a man feels such a quality in a letter — friend- ly but final — he will realize that he had best come to terms quickly. Delinquent Debtors The careless debtor, or the one who is chronically slow, reveals his characteristics in the credit reports, and a col- lector knows what to expect when he makes a systematic effort to collect from such a man. The customer who is tem- porarily hard up and who has had a good paying record, should be investigated, and the exact reasons for his slow- ness should be ascertained as a matter of credit precaution. Possibly he may have sustained some severe loss which will eventually cripple his business. In such a case, if the credit man decides that the customer is materially weakened by his loss and that it is dangerous to try to help him pull through, then, without a moment's hesitation, the collector should THE COLLECTOR AND HIS METHODS 151 demonstrate his right to his title by exerting every means in his power to get from under the account before other credi- tors begin to press the unfortunate debtor. If the house has salesmen coming regularly into the office, the collector can keep in touch with out-of-town cus- tomers through these salesmen; and this should be done every time they come in off the road. A salesman will usu- ally know to what extent a debtor is crippled, and proper action can then be taken. Usually when the credit department has obtained such information from the salesman, or from other private sources, and this information is not generally known to the trade, the account can be saved without doing the debtor any harm ; but indecision at such a time is fatal. The one idea of getting from under that particular account should take hold of the collector, and he should not cease his efforts until he has his money or security. In the case of a delinquent debtor who is still solvent but pays no attention to letters, collection must be forced. If the credit reports show the debtor in bad condition, legal proceedings may be necessary, but, if otherwise, some of the following methods may prove effective. 1. The "Collection Agency" Method A great many houses operate a fictitious collection agency. Such an agency has its letterhead, drafts, receipts, and, in fact, a full line of stationery; a box is rented at the post-office and the number is prominently displayed on all the agency stationery to deceive the debtor as much as pos- sible into thinking that he is dealing with an outside agency. Direct-demand letters are formulated, which in many cases meet with ready response. These letters are usually couched in courteous terms, and an effort is made not to offend the debtor, but simply to wake him up at once and thoroughly to the determination of the house to collect. 152 THE COLLECTION DEPARTMENT 2. The Draft Method Occasionally a draft on a small merchant, if properly placed, is productive of good results. A well-written letter should impress on him that if the draft is returned unpaid it will undoubtedly affect his credit standing. When the draft is sent to a country bank a letter should be written to the bank, and at least ten cents in stamps should be enclosed for the cost of entering the draft. Courteous instructions should be given as to presenting the draft and holding it for payment, with the further request to remit the proceeds, if collected, in New York exchange less the usual charges. Remember that a bank is not a collection agency, and that such drafts are not always desirable, especially to banks in small towns. 3. The Collection Agency If the draft system fails and the house has no private "fake" collection agency — for that is all it amounts to — the next procedure is to intrust the collection either to a com- mercial agency, to the Credit Clearing House, or to some collection agency that will furnish a bond for the faithful performance of its duties. The first step taken is usually the sending of a direct-demand letter by the house, written on a printed form furnished by the agency, a copy of which is retained in the office by means of a stub ; a further notice, usually a part of the stub, being sent to the agency. If this is not effective, the agency takes up the account at the end of a certain time and then handles it as a regular legal collec- tion. After the account is placed with the agency the col- lector usually does nothing but possess his soul in patience and wait for results. He should, however, require a report on the collections at regular intervals, trace regularly and vigorously, and demand that the collection agency follow up the debtor without cessation. THE COLLECTOR AND HIS METHODS 153 4. Legal Proceedings Before deciding to adopt legal measures in the collection of an account, it is well to consider the matter thoroughly from several viewpoints. Legal action will probably close the account on the firm's books for the following reasons : In the first place, the credit man will always regard such a customer with suspicion, and with good cause, and he will hesitate to grant him credit again. Second, it will be a good account to drop, for a man who is sued by a creditor treasures it up in his mind against him, and will take a delight in catching such creditor unawares if an opportunity presents itself. Third, if the customer is financially responsible and wor- thy of credit, he will rarely of his own accord come back to trade with a house which has sued him. These are the strongest arguments in favor of the direct- demand system of the collection agencies. In many in- stances the debtor can be induced to pay and still be saved as a customer of the house; also, such a customer learns that this particular house will not stand for negligence and delay. The house itself cannot make demands for its money through a lawyer without breaking off amicable relations. Such a demand antagonizes the debtor and throws him into an attitude of resistance. However, when a collector con- cludes to drop the customer and close the account for good, there is no longer any cause for hesitancy. When legal proceedings are contemplated, it is desirable that the collector obtain information regarding the courts in whose jurisdiction the debtor lives. First, he should see what court would have jurisdiction over a debt the size of the one to be collected. In the rating books of Dun and Bradstreet will be found a synopsis of the collection laws of each state, showing to what extent each court has juris- diction and when and how it is exercised. Then, if the debt 154 THE COLLECTION DEPARTMENT is of considerable size and comes within the jurisdiction of a court of equity or the Supreme Court, it is well to ascertain how quickly an action and subsequent judgment can be ob- tained. This is very important, because in some states at this time (191 5) there are certain courts covering actions ranging from $100 and upwards, which are from two to five years behind on their dockets ; that is, a lawsuit to collect a debt could not be reached and a judgment obtained until two years or more from the filing of the suit, and possibly not even then. Also, if the statement of the customer's account com- prises a number of unpaid items, some past due and some not yet due, a situation arises calling for a considerable amount of caution; for in many cases an action begun for the col- lection of part of an account renders void the obligation as to the remainder. In some states a creditor is prohibited from beginning action on an account until all items of the account are due. Again, an action begun against a debtor for an entire account, a part of which is not due, may lead to a damage suit. The handling of such an account is there- fore a matter requiring the utmost caution. The Collection Attorney When it is decided to send a claim direct to an attorney, all further business relations with the debtor have practically been broken off. When this point is reached, nothing is to be gained by waiting. Set aside all policy and give the at- torney instructions to proceed to vigorous and aggressive action. All the preliminary work of notifying and coaxing the debtor has been done, and the attorney is simply the rep- resentative on the ground to see that the processes of law are enforced. He should adopt any measures possible to collect the account, even to attachment or bankruptcy proceedings. If the debtor is solvent a claim can usually be made without THE COLLECTOR AND HIS METHODS 155 much trouble; and even if the debtor is in a critical condi- tion he will make a desperate effort to pay before suit, in or- der to save himself from the attacks of other creditors. The credit man is usually in possession of facts that will enable him, or the collector, to instruct the attorney as to what course to adopt. As to the proper time to send a claim to an attorney, a motto appearing in advertisements and other literature of collecting agencies may be quoted : "It is better to pay the attorney a small fee to collect in full before failure, than to take 23 cents on the dollar from an assignee or trustee in bankruptcy." When a claim is sent to the attorney, he should be bonded to insure faithful accounting. So important is this one point that it is covered specifically in Chapter XVI, to which ref- erence should be made. Collector and Attorney The attitude of the collector toward the attorney calls for more than a passing remark. All good attorneys ac- knowledge receipt of a claim immediately, and usually make some statement as to the prospects for obtaining a settle- ment. The collector will, however, sometimes encounter as much difficulty in procuring satisfactory service from an attorney, and work as hard to keep the attorney in line, as he would with the debtor himself. It must be remembered that in a small community the attorney is usually a neighbor and sometimes a friend of the debtor; and it also happens in many instances that a thoroughly efficient lawyer is a poor collector. It is therefore necessary to trace vigorously every claim sent to an attorney unless he makes regular reports. There need be no feeling of delicacy on this point. The at- torney is being provided with a share of his practice, and it is only fair that he furnish full information on all points con- cerning the collection. CHAPTER XV COLLECTION AND CREDIT CORRESPONDENCE Power of Expression A most important and fundamental qualification of the collector is ability in correspondence. Collections must usually be made by letter, and it is well to have in mind from the outset that the fundamental purpose of a letter is to take the place of a personal conversation, and that to produce the desired results the writer must have power of expression. A deficiency in such power is caused, first, by lack of a suffi- cient vocabulary, and, second, by a lack of experience in composing correct and forcible sentences and paragraphs. One may have a clear and definite notion of what he wishes to impart by means of a letter, and yet lack the ability to ex- press his ideas in proper form. As a result, he racks his brain and loses valuable time in formulating a letter which should require but a few minutes. There are on the market a number of excellent books on business letter writ- ing, from which the collector can derive valuable assistance. The test of a collection letter is the results secured. Will this letter produce the desired effect? Will it secure the action desired? Will it bring about in the mind of the re- cipient the attitude which is desirable ? These are questions which the writer must ask himself. Attitude toward the Customer Intelligent and unremitting persistence is the secret of success in collecting, whether in person or by letter. This does not imply the writing of a series of annoying or offen- sive letters. More harm can be done by harsh, impolite let- 156 COLLECTION AND CREDIT CORRESPONDENCE 157 ters, than can be remedied by any number of calls by the leading salesman. Every letter should be courteous and ex- pressed in terms which cannot possibly offend or awaken a spirit of opposition. The object should be to make the reader think as the writer thinks. The flippant, sarcastic, or brutally blunt letter has absolutely no place in a business office; much less is it admissible in the credit or collection departments. Though it becomes necessary to sever rela- tions with the customer, or even to threaten suit, the proper method is to make a dignified statement of facts and inten- tions which will impress the recipient more forcibly than a letter containing discourteous or threatening remarks. The latter would also provoke a feeling of resentment and re- sistance. The collector's personality — which should be a persuasive one — should, therefore, show so strongly in his letters that a responsive chord will be struck in the recipient. Civility is always better than bluntness. It will get more business and likewise more money. The mental attitude of the collector should be that of a promoter of mutual interests. In handling an account by correspondence he should familiarize himself with the char- acter of the customer. He should put himself in the cus- tomer's place and endeavor to feel the effect that his letter will produce. The Cost of Making a Customer It should never be forgotten that it costs money to sell goods and get customers on the books; and the best cus- tomers are often the easiest to drive away. Some houses go so far as to calculate just what it has cost in expense money, advertising, time of office and salesmen, to sell a prospective customer and to make him a regular purchaser. If the credit man or the collection manager will only bear in mind what it has cost to take the order, he will never deliberately drive 1^8 THE COLLECTION DEPARTMENT a customer away from the house by harsh letters. To sum up the subject, it is simply a plain, straightforward, cour- teous letter that produces the best results. Collection Correspondence Regarding the actual collecting of accounts, whole books have been written, and the subject will therefore be treated very briefly here. The first collection letter, after a statement has been submitted, might be termed the "first request." After this "first request" there are probably a number of good cus- tomers to whom can be sent a "second request" on a regular form; but to the chronically slow ones it is better to write a letter to fit the individual case. Where the letter makes specific requests for a settlement within a certain time limit, and seems rather blunt, it is sometimes advisable to write just a few words of a complimentary closing so as not to make it sound too harsh. This is left to the judgment of the correspondent, who must know the condition of the ac- count on the books. After the second request letter has gone out, the number and tenor of the subsequent letters must be governed by the conditions. They will naturally become more personal and individual as the account runs. The condition of each ac- count should be analyzed and the letter go straight to the root of the situation, so that the recipient will know that it is intended for him alone and that it is not merely a regular form of dunning letter. Just how far the letters must be carried, and whether drafts and other collection devices will be used, and when the account will be placed in the hands of a collection agency, or attorney, is for the individual to determine according to the nature of the account and the policy of his house toward delinquent debtors. COLLECTION AND CREDIT CORRESPONDENCE 159 Form Letters By "form letters" is meant here the printed or multi- graphed forms. It is a great mistake for the collection manager to get into the form-letter habit. Few such letters can be profitably employed in the collection department, since each case must be treated according to the circum- stances peculiar to that case. Form letters in the collection department can in reality produce good results only in a retail office which carries a large volume of accounts. In such case the first and second request letters can be multigraphed, provided they are care- fully and neatly filled in on the typewriter ; but unless this is done with great care, it is better to have the form complete- ly copied. Beyond these two letters, the multigraphed form should not be used. This does not mean that letters, or paragraphs of letters already prepared, cannot be used when they apply, or can be modified so as to apply, and thereby save the labor of composing new matter each time, but merely that each case must be handled in accordance with the conditions; and this cannot be done with a letter already completely prepared. Requests for Credit Information One of the most difficult letters to write is that request- ing from the purchaser a signed statement to serve as a basis for credit. When this is to be done, care must be taken to set forth clearly the necessity for the desired information, but at the same time the least intimation of doubt as to the customer's good standing must be avoided. If a reply is not forthcoming, a second letter is drafted along the same lines as the first, merely elaborating on the inability to procure satisfactory information, but still maintaining the idea of the "signed statement" for the purpose of procuring credit. It is important to bring this idea in clearly. If it is nee- l6o THE COLLECTION DEPARTMENT essary to demand a signed statement, then it is also necessary to couch the letter in such terms that it will serve the pur- pose of evidence in court should occasion for prosecution arise. The letter should always be courteous, but never- theless should contain the facts that a lawyer would require in order to show that a statement was solicited with the object of obtaining the signed statement for credit purposes. Every succeeding letter should also be drafted in terms that admit of no other construction than as demanding the report for use as a basis of credit. Needless to say, it is most im- portant to keep an exact copy of each letter for possible future use in court, and it is best to place the copies in the credit folders themselves in order to have an unbroken record of the whole transaction. Requests for Security If a party is unworthy of credit, it is sometimes necessary to ask for cash in advance before shipping, or to request security or guaranty against a shipment. The credit man sometimes discovers from the trade investigation reports, or from the commercial agencies, that bills are being guar- anteed by friends or relatives of the customer. In this event the letter might suggest that the customer send notes signed by himself and indorsed by such guarantors. In requesting cash or security against an order from a small merchant, it is important to make the matter very easy for him to understand. In the letters written to him men- tion should always be made of the amount or approximate amount of the bill, and sometimes a copy of the invoice should be enclosed to remind the customer of just what he has purchased, and at what prices, etc. Frequently the sight of the bill itself awakens in his mind the fact that the goods are just what he is needing, or that he is obtaining especially good values. This is simply a plan to bring into play the COLLECTION AND CREDIT CORRESPONDENCE i6i possessive propensity, to the end that the desired cash or security may be forthcoming. Importance of Notes as Evidence Next in importance to procuring the cash itself, if that cannot be accomplished, is the obtaining of notes properly indorsed. Notes serve two purposes. First, in nearly all states, they represent such evidence as admits of no con- troversy in court, the notes serving both as evidence and as acknowledgment of the debt. (This is the law in nearly every state except in Mississippi, where it is varied by what is known as the Anti-Commercial Statute. ) Second, a small merchant usually understands a note, and its simple indorse- ment can be made readily and the transaction closed. Forms of guaranty against open accounts are shown in the Appendix.* If one of these forms is to be used, it is well to fill it out completely, ready for the signatures. The terms of this guaranty must be strictly observed to make it effec- tive. If a limited guaranty is given, to apply to one par- ticular bill or shipment, it follows that it would be very unwise to ship additional goods against the same guaranty. Again, if a guaranty covering a running account is fur- nished, the account must be closely watched to see that the terms of the guaranty are strictly observed. In each of these cases the credit man, or the collector, must know how to frame his letter in order to bring about the desired results without making the customer suspicious that the writer has some ulterior motive behind his request. Refusal of an Order Sometimes it is necessary to refuse an order entirely. In many houses the practice of deliberately "turning down'' an order has been discontinued, and in its stead are used letters * Forms 22, 23. l62 THE COLLECTION DEPARTMENT requesting the cash or security. These letters are followed up, thereby indicating to the purchaser that his business is desired, and that if proper arrangements are made, his order will receive the best attention. This is advisable for the rea- son that the merchant might eventually become a desirable credit risk. It should always be the policy of the credit office to write to the customer or purchaser in so friendly and courteous a tone as to produce on his mind the idea that he is getting a square deal. Answers to Complaints Complaints from customers are often handled through the correspondence of the credit office. Unjust demands, excessive discounts, interest, and claims of all kinds, deserve the best thought of the business brain as well as the best ability of the letter writer. In such cases the claim is first thoroughly investigated and sifted, as it were, and, when thoroughly understood, is handled according to the policy of the house. Everything depends upon putting the matter before the customer in plain, simple language. The problem should be analyzed and explained, item by item, and details treated so as to leave no possible argument permitting of further discussion. The attitude should be adopted that the matter is being handled in a fair-minded way with a fair- minded man. "Don't argue with a customer," is good ad- vice for the letter writer as well as for the man at the desk when he comes into personal contact with the customer. CHAPTER XVI COLLECTION AGENC'lES Collection Nomenclature A collection agency is just what its name indicates — an organization for the collection of debts. When a credit man checks through an order for shipment, the bill is posted to the ledger, and is spoken of as an "account." When the account matures, or falls due, it is spoken of in general terms as a "collection," or, more exactly, an item to be col- lected. If the collection is not readily made or a promise of payment is not forthcoming, it assumes the nature of a "bad debt." Of course, bad debts may be divided into further classes based on the difficulty in effecting settlement. Dun's and the Clearing House There are two great collection agencies which are acces- sible to every credit man. They are the collection depart- ments of Dun, and the Credit Clearing House. When the credit man places a collection with one of these he can rest assured that it will receive prompt and vigorous attention ; and if the collection is made he will receive the proceeds immediately. The great amount of assets back of these agencies insures absolute safety. Should any of their at- torneys fail to account for money collected, the agency will make it good. The credit man cannot always have this feeling of security when handling a collection through some of the smaller collection agencies or through his own at- torney, unless he has had sufficient foresight to send the claim under a forwarding bond. Each district office of these two large agencies has its 163 164 THE COLLECTION DEPARTMENT own collection department, in charge of a thoroughly trained collection officer, usually an attorney. The department has its form letters, drafts, corresponding attorneys, and a thoroughly organized system which works with the regu- larity of a clock. In addition to this there is a strong moral argument for the placing of accounts with these agencies. They repre- sent the forces which record, pass on, and circulate the information whereby the debtor obtains credit. If he allows himself to fall into bad repute with the agencies, his credit standing suffers. The average debtor, even when he will pay no attention to an unknown agency or an attorney who threatens to sue him, will make a strong effort to settle with one of these larger agencies. The Work of the Collection Agency The advantages of agency collection are many. One of importance is found in the unfailing regularity and system with which it operates. The overworked credit man, with a constant addition of new items of worry almost hourly, is in no condition to handle a number of collections with the system and follow-up methods employed by the agencies. At the time the first notice is sent to the debtor a "tickler" or follow-up system is started, so that every few days this collection item comes to hand automatically, and the debtor is sent another notice. Thus he receives a con- stant prodding until the claim is sent to the agency's local attorney. Here again the debtor has no rest. One of the strongest argimients for patronage advanced by the agencies is the fact that their attorneys receive such great numbers of claims for collection that they give agency business attention over all else. Another advantage of the collection agency is that an arrangement can usually be made for a direct-demand sys- COLLECTION AGENCIES i6s tern. That is, the agency makes a direct demand upon the debtor for the payment of the account, and gives him the privilege of remitting direct to the creditor himself. Where a collection is made under this system, only a small per- centage is charged. The direct demand and the agency draft are wonderful helps to the credit man, and the cost of collection is much less than if made through a private attorney. In order to secure the best results when a claim is sent to a collection agency, the credit man should make a brief, or synopsis, of the latest information in his file, and give as nearly as possible the condition of the debtor. This is im- portant, because the information of the commercial agencies may not be closely up to date, as their reports are not sup- posed to be revised oftener than every six months. The Credit Clearing House has an advantage in this respect, in that its reports show how the debtor is paying his bills and whether other claims are out for collection; and, through its accumulated ledger facts, its collection manager knows just how much pressure to bring to bear on the debtor. The credit man can procure from his collection agency a supply of draft blanks which he can sometimes use to great advantage. A debtor will often pay attention to a draft of this nature when the ordinary draft has no effect, for he has learned that it is a lever that sets in motion the machinery which eventually accomplishes the work. The only criticism that can be made of the work of the better collection agencies is that the form letter is so much in evidence. It is true that the substance of these letters has been devised by legal talent of the highest order and that they are models of their kind; but there are few in- stances where the form letter will work as effectively as a dictated letter, which comes right to the point and bears the l66 THE COLLECTION DEPARTMENT stamp of a personality. A printed form letter sent to a merchant of some standing will have its effect, and will probably produce less resentment than a personally dictated letter; but the small merchant, whose slowness in payment is chronic, needs something more than a printed form to move him to action. In such instances the collection man- ager should realize the conditions and act on his own judg- ment. Advance Fee Collection Agencies Above all things, the credit man should keep away from any collection agency which comes to him with a proposal to handle his bad debts upon payment of an advance fee. There are agencies of this kind all over the country which send a smooth-talking and very aggressive salesman into the credit office to explain methods and solicit the signature to a contract. At first glance their system is apparently fair, and just what the credit man wants for the purpose of dig- ging up the old items charged off to profit and loss account. An important feature of the scheme is an advance fee, ostensibly to cover the cost of setting the machinery in motion. The contract forms are so skilfully worded that it often develops later that the agency has performed its full duty when it has addressed letters to the debtors on the furnished list — and incidentally pocketed the advance fee. The retail dealer readily bites at such a contract and it is therefore the duty of every wholesale credit man to warn the retailers against signing any contract which de- mands the payment of an advance fee. The National As- sociation of Credit Men has for some time waged a strong fight against this kind of collection agency; and should the credit man be in doubt regarding any such matter, he is advised to write to the executive office of the Association, and obtain full information. COLLECTION AGENCIES 167 Adjustments There are also collection agencies which operate through an adjustment bureau. The requirements of adjustments vary with the conditions, and the work is one which requires a high degree of skill, business judgment, and tact on the part of the adjuster. It is treated fully in Chapter XVII, and will be only briefly mentioned here. In some cases the work of the adjuster is constructive and far-reaching. For instance, a debtor becomes involved to such an extent that he cannot pay all his debts as they fall due, yet he shows an excess of assets over liabilities and is a man of ability and integrity. It would be injustice of the worst sort to close out such a business and deprive such a man of the means of making an honest living. A skilful adjuster will usually avoid this by getting the debtor to allow his creditors — ^usually represented by the adjuster — a hand in running the business until he tides over his em- barrassment. Then the responsibilities of the business fall upon the adjuster and he has the difficult task of bringing the imperilled undertaking to success. For this reason the adjuster must not only be a good merchandise man and a practical merchant, but must have all the qualities of a good credit man as well. When an adjuster is needed, the credit man must exer- cise great care in selecting one who is not only competent, but one who will observe • strictly the ethics of honorable business. If the debtor can be thrown into bankruptcy, it is an easy matter for an adjuster to enlist the services of an attorney on the basis of a division of the spoils, and, as the attorney filing the petition is allowed a good fee out of the assets, it is a temptation to the adjuster to throw the debtor into bankruptcy when this should not be done. Every pre- caution should be taken to prevent collusion between these two interests. l68 THE COLLECTION DEPARTMENT Collection Attorneys In nearly every jobbing center there are attorneys who make collections a strong feature of their business. When they are hard workers or have unusual ability in this line, they often obtain good results. The credit man should see that an attorney to whom he gives an account for collection, furnishes a good bond for a faithful accounting, not only on his own part, but also on the part of the correspondents to whom he intrusts the actual work of collecting. If the credit man will place his business with lawyers of repute, he will avoid the losses and worries that come from dealing with what is known as the "shyster" class. Among 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. COLLECTION AGENCIES 169 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. CHAPTER XVII ADJUSTMENTS AND ADJUSTMENT BUREAUS 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 assumes 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 born collector of infinite tact and patience, yet capable of quick decision. He must be an 170 ADJUSTMENTS AND ADJUSTMENT BUREAUS 171 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- 172 THE COLLECTION DEPARTMENT 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 creditors. 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 See Appendix. ADJUSTMENTS AND ADJUSTMENT BUREAUS 173 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 174 THE COLLECTION DEPARTMENT 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 men. Such is the nature 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 nominal. ADJUSTMENTS AND ADJUSTMENT BUREAUS 175 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- \y6 THE COLLECTION DEPARTMENT 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 : Assets Stock $5,500.00 Notes and accounts 1,500.00 Furniture and fixtures. . . 300.00 Real estate 2,500.00 Liabilities Bank loan $1,000.00 Loan from friend 500.00 Merchandise creditors. . . 2,500.00 Owing wages, taxes, etc 200.00 $4,200.00 $9,800.00 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 summer 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 ADJUSTMENTS AND ADJUSTMENT BUREAUS 177 legal proceedings and the reduction of assets to a cash basis, this is how the new balance sheet appears : Assets Stock, 50% $2,750.00 Accounts, 60% 900.00 Furniture and fixtures. . . 100.00 $3,750.00 Liabilities Expense, state courts. . . . $50.00 Attorney's fees, state courts 50.00 Expenses, bankruptcy... 450.00 Debts preferred by law. . 200.00 $750.00 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, every 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 1^8 THE COLLECTION DEPARTMENT 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 patience 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. ADJUSTMENTS AND ADJUSTMENT BUREAUS 1^79 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 ^ 1 80 THE COLLECTION DEPARTMENT work are set on a high level. A premium has l)een 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 run along and work itself out at a profit, and they are generally aroused to the need of a perrnanent adjustment bureau. Part IV — Insolvency > CHAPTER XVIII CAUSES OF FAILUEfE. Analysis of Failures Bradstreet's defines a business failure as "one that in- volves some loss to creditors or individuals, firms, or 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 capabiHties of the customer or individuals of the firm, it is v^ell to consider the causes of failure. These causes, v^ith the percentages of failures due to each, are as foUov^s, according to the Bradstreet tables : Class A — Due to Faults of Those Failing Incompetence (irrespective of other causes).. . 29.4% Inexperience (v^ithout other incompetence) . . . 4.8% Lack of capital 29.5% Unvv^ise 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 10.7% Total 80.4% 181 1 82 INSOLVENCY 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 19 1 3 inclusive, with very slight variations j 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 short-comings. Incompetence 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 merchandise methods of approved efficiency; and in care- CAUSES OF FAILURE 183 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- ure. It is usually when coupled with incompetence or inex- perience that it brings disaster. Therefore, where a lack of capital is apparently the chief weakness, the credit man must search diligently for any other faults that affect the character of the risk. Neglect, for example, including as it does, all manner of doubtful habits, while it is in itself the cause of but 2 per cent of the total failures, would be a very serious factor when coupled with lack of capital. This is also true of the other faults, which show small percentages. Lack of capital should not only be considered in connec- tion with the other faults enumerated under Class A, but also in connection with the causes of failure in Class B, in so far as the credit man is able to ascertain them through a study of conditions in the locality of the risk. In these days of sharp competition the jobber of general merchandise is fighting to increase his volume of sales — this so that he may purchase his goods in larger quantities and thereby secure lower prices and a resulting lower percentage cost of doing business. Therefore the constructive credit man always welcomes the new customer, and even when he l84 INSOLVENCY lacks capital, if he has ability to compensate for this lack of capital. There are many cases, especially in the South, where jobbers have attained a high degree of prosperity simply by building up the small-capital retail trade and thereby creating an outlet for their goods. Neglect, Speculation, and Extravagance Neglect, speculation, and extravagance are what might be termed ascertainable faults, in that they show them- selves so plainly. As causes of failure, these factors have been put before the business world in so strong a light that the percentage of failures due to them has been actually and greatly reduced. In fact, the average merchant learned long ago that such faults will not be countenanced by the careful credit man of to-day. In the old days it was cus- tomary to say, "Honesty is the best policy," but in the modern revised version this adage appears, "Honesty is the only policy allowed." Fraud It is to be regretted that a high percentage of failures are due to fraud. Is it that the moral foundations of busi- ness are weakening through the apparent tendency of the public to condone the offenses of those high in business circles ? Is it because the public has been educated to see a line of demarcation between "high finance" and old- fashioned theft? The solution appears rather to lie in the apathy of -the credit men themselves toward those un- scrupulous merchants who profit by fraudulent failures. Usually the other creditors drop out of the fight when they see one creditor taking the lead and attempting to uncover the fraud and to bring the offender to justice. The one creditor then argues that time is too valuable, court pro- ceedings and lawyers too costly, and laws too uncertain to CAUSES OF FAILURE 185 justify him in conducting the fight single-handed, and the fraudulent debtor escapes. Fraud is also made popular because of the frequent com- promise between debtors and creditors. Sometimes when a fraudulent debtor realizes he is caught, his attorney offers to pay a sum wherewith to swell the assets and increase the dividend, and the creditors usually accept the proposition. How much better it would be in the long run if no such com- promises were accepted in fraudulent cases, and if every such debtor were prosecuted vigorously until convicted. As evidence that this is practicable, the very excellent work of the Jewelers' Board of Trade in the persistent prosecution of fraud may be cited. If the credit men of the country have not the time to devote to this matter, would it not be highly profitable to combine in some way for the prosecution of fraudulent failures? The National Association of Credit Men has been working to establish a fund exclusively for this pur- pose, but from all points has arisen the question: "How much shall we get for our share in this fund?" or, "How much will you spend in our neighborhood ?" The plan will be worked out eventually, but the menace of fraud is a present one and will continue until the means are devised to defeat it. Failures from Disaster and Competition In the consideration of the causes of failure listed under Class B, the treatment is to some extent merely a matter of theory. The relatively large percentage of failures caused by "specific conditions" is due tO' some extent to a conjunc- tion of these conditions with one or more of the causes listed in Class A; for when severe weather conditions, ad- verse crops, epidemics, or other catastrophes fall upon a community it is the weaker concerns that are forced out of 1 86 INSOLVENCY business. The concern which has overbought or which has sold on credit far beyond its capacity, or extended its opera- tions in other ways beyond the limits of ordinary safety, is the one hardest hit by the calamities included under specific conditions. Of course, floods and cyclones are such disasters as might happen to the best and most conservative business concerns, and no practical rules can be laid down to guard against failures from such a cause. It is almost impossible to foresee disaster in local con- ditions ; but by following a systematic plan of investigating and keeping informed on fundamental conditions through- out his territory, the credit man may be able to keep his credits so well in hand that he can pull out from under a risk when disaster is about to overtake the customer, or, at least, just after it has occurred. The small percentage of failures given in the table under Class B as due to competition, is surprising; but it is un- doubtedly a fact that either incompetence or lack of capital has received the blame for many a failure where competition is the underlying and real cause. It is argued that a man of ability will prove himself capable of resisting competition; but all merchants are not men of ability, and it is usually to those already afflicted with incompetence or inexperience that competition comes. It must be a source of gratification to the credit man, after all, that over 80 per cent of the failures are due to the faults of those failing. Outside causes may be difficult to foresee and impossible to guard against, but the faults of those failing, should be foreseen and ought to be guarded against. CHAPTER XIX BANKRUPTCY LAW AND PROCEEDINGS The National Bankruptcy Law* The National Bankruptcy Act has until recently been regarded as merely a statute, which it undoubtedly is; but through the great volume of business adjudicated in the bankruptcy courts and the numerous decisions bearing on almost every phase of insolvency, there has developed a great system of jurisprudence. Insolvency in its various forms and phases is at the bottom of most commercial and business litigation. When one reads the long list of legal actions — attachments, executions, garnishments, receiver- ships, assignments — involving questions of liens, trusts, and kindred subjects, this fact is readily recognized. It is a notable fact that the study of bankruptcy has been greatly neglected by lawyers. Even in law schools it is but incidentally considered. Only when brought into contact with the law through an actual case in a bank- ruptcy court does the average lawyer make any attempt to study its working principles. The power to enact laws relating to bankruptcy is vested in Congress by Article I, Section 8, of the Constitution, and this power has been repeatedly exercised. Statutes were enacted in 1800, 1841, 1867, 1880, and finally the present Act, in 1898, but none of the laws so enacted remained in force for any great length of time until the passage of the Act of 1898. All of these acts, comprising the bank- ruptcy law of our country, were founded on the English bankruptcy law, the first statute of which was enacted in 1542 during the reign of King Henry VIII. It is significant * For text of law, see Appendix, page 270. 187 i88 INSOLVENCY that the preamble to this ancient statute, notwithstanding its quaint verbiage, might suffice for the preamble to a bank- ruptcy statute of the present day. Despite the criticism and opposition to the present Act, it seems to be in a fair way to become permanent, for the amendments of 1903, 1906, and 19 10 have demonstrated that improvements can be made without great difficulty, and that further necessary changes wall be effected when it has been fully demonstrated that such changes are advisable and for the good of all concerned. State Bankruptcy Laws Before the passage of the Act of 1898, every state had its own laws regarding the settling of insolvent estates, but none of these laws insured an equitable and economical administration which would be fair to creditor and bank- rupt alike. In every failure preference could be made, and the creditor who was alert or nearest to the scene of failure had a great advantage over the late comer. At the first sign of business trouble there was a scramble — a race to be in first at the death and to fight over the spoils. When a debtor felt hard pressed, he was afraid to consult freely or openly with any of his creditors because, if his condition became known, someone was sure to resort to one of the numerous legal expedients to obtain a preference over other debtors and save his own account. The common law remedies of attachment and execution were dreaded by creditor and debtor alike. In some states a law providing for a general creditors' bill was enacted with a view to placing all creditors on an equal footing. But all of these measures proved inadequate to meet the constantly changing conditions growing out of expanding business and its increasing complexities. Practically all the remedies gave certain advantages to the most diligent BANKRUPTCY LAW AND PROCEEDINGS 189 among the creditors, and left the late comers out in the cold. Furthermore, these laws were not adapted to the administration of insolvent estates where a great number of widely scattered creditors were involved. Bankruptcy Jurisprudence Out of this apparent chaos has arisen the present-day national bankruptcy jurisprudence, which has for its very foundation equal privileges among creditors and efficiency and despatch in adjudication. The Act recognizes and safe- guards the rights of the bankrupt as well as of the creditors. No clearer exposition of the meaning and scope of the Act has been made than that given by Mr. Harold Remington, in substantially the following words : As bankruptcy jurisprudence now stands in the United States, it may be said to be a system of laws ( i ) for taking possession of the assets of an insolvent, either upon his own initiative, or in case he has done certain acts called "acts of bankruptcy," which have demonstrated his un worthiness or incapacity properly to conduct his business, upon the initia- tive of his creditors; (2) for recovering his assets, including such as have been fraudulently transferred to third parties or unfairly to preferred creditors or have been seized by creditors while the debtor was insolvent; (3) for selling the assets and distributing the proceeds equitably among his creditors; and (4) for granting to him, in case he has surrendered all his assets and disclosed to his creditors in bankruptcy the truth about his business, a discharge from the unpaid deficit of his debts. The Credit Man and the Bankruptcy Law If the credit man is familiar with the Act — and it is assumed that every credit man has studied it — it will be noted that the foregoing statement by Remington sum- 190 INSOLVENCY marizes every phase of the bankruptcy law. It must also be seen that a law concerned with such a broad subject must be far-reaching in its administration, and capable of wonderful development in the future evolution of business methods and ideas. The Bankruptcy Act is here to stay, and, since the bankruptcy court is essentially the court of the unsecured creditor, it behooves every credit man to make so thorough a study of the subject that he will be able to take advantage of every one of the provisions which have been enacted for his benefit. No attempt will be made here to discuss the Act in its entirety, but only those features which directly concern creditors and which would be handled by the credit man himself if he appeared in a bankruptcy court. In the appendix of the present volume will be found a complete copy of the Act with all its amendments ; and the credit man is advised to familiarize himself with the entire text and especially with those sections which refer more particularly to the creditor. He should then pursue the subject further, and study the various explanations and decisions in the standard works on bankruptcy, such as Remington, Love- land, and Collier, one of which at least will be found in the library of every active attorney. Involuntary Bankruptcy The credit man should bear in mind that the debtor must owe at least $1,000 to permit of an involuntary petition being filed against him, and the allegation that such amount is owing should always appear in the petition drawn by the attorney. The fact is mentioned here because this require- ment is sometimes confused with another requirement — that the petitioners must represent at least three or more provable claims which aggregate not less than $500. In the case of a small merchant who becomes insolvent, BANKRUPTCY LAW AND PROCEEDINGS 191 it sometimes happens that a few of the largest creditors combine and seize the assets of the debtor and leave out in the cold all remaining creditors, the total of whose claims do not aggregate the necessary $500. In this event, the remaining creditors cannot ordinarily throw the debtor into involuntary bankruptcy, but still have a chance to share in the assets if they can induce the debtor to file a voluntary petition in bankruptcy. If they are unsuccessful in this there may be another way. If the debtor owes more than $1,000 and there are less than twelve creditors, any creditor having a claim of not less than $500 can file an involuntary petition against the debtor and thus throw him into bankruptcy. Procedure in Bankruptcy In both voluntary and involuntary bankruptcy, schedules of the assets of the bankrupt must be filed, and such schedules play a most important part in the proceedings. They must contain full and true statements of the assets and liabilities of the bankrupt ; and should there be any knowing omissions therefrom, or should any wilful misstatement on a material point appear therein, the condition may constitute not only a bar to the bankrupt's discharge, but may also, in certain cases and under certain conditions, constitute a crime punishable even to confinement in a Federal penitentiary. The Act affords certain provisional relief while an in- voluntary petition is pending. If it did not, the bankrupt might abscond; or he might dispose of a portion of his assets; or a third party, with or without his connivance, might sequester the assets or otherwise defeat the creditors ; or the stock of goods might be of a perishable nature, and subject to damage and loss if not properly handled. Upon proper showing being made to the judge, or the referee, there are remedies in each and every case. Such important matters as these should, of course, be 192 INSOLVENCY handled by an attorney, as should also the petitions in both voluntary and involuntary proceedings ; but the lawyer must be furnished with the facts he requires as a basis for action, and, as the creditors are usually in possession of these facts and are the only ones who can, or will, supply them, the lawyer is really dependent upon the creditors. It is a mis- taken idea that the attorney is everything and that he must be let alone, for he can act only in so far as his knowledge of the case will permit. It is the duty of the credit man to confer with the other creditors and to assist in gathering information with which the attorney may proceed. If the credit man has reason to believe that unfavorable or danger- ous conditions exist which may cause a further loss or damage to the assets of the insolvent debtor, his attorney may, upon information, file a petition and have the property in the hands of the bankrupt seized in the same manner as in case of an attachment before judgment. If the conditions warrant, he may even have the debtor arrested and detained for examination. In the great majority of bankruptcy cases a temporary receiver is named to take immediate charge of the assets, and various restraining orders are issued. The attorney for the creditors, or their several attorneys, may, if they see fit, start independent suits as if bankruptcy had not intervened, and the expenses of such suits be later reim- bursed to such creditors out of the funds of the bankrupt. The Petition in Bankruptcy The actual filing of the petition in bankruptcy against an insolvent debtor is a simple process, but the form of the petition itself must be followed closely and the wording must be strictly in accordance with the established form.* It is necessary to allege insolvency and that the debtor owes debts to the amount of $1,000 and over. The petitioning creditors *For form of petition in bankruptcy see Form ^, Appendix. BANKRUPTCY LAW AND PROCEEDINGS 193 must represent claims to the extent of $500 in excess of securities held by them. There are certain specific acts of bankruptcy defined by the statute, and the attorney or adjuster must know that at least one such specific act of bankruptcy has been committed. Some of these would not seem at first sight to be legitimate acts of bankruptcy. Thus it has been held that a merchant making payments to certain creditors while he is insolvent, even though such payments are supposed to be made in the ordinary course of business, thereby commits an act of bank- ruptcy in that he is preferring such creditors to the detriment of his other general creditors. The specific act of bankruptcy must be stated plainly and in as few words as possible, so as to leave no doubt of the facts as they exist. If possible, the petition is signed by each of the petition- ing creditors, or by the proper party, who later makes oath as to the facts. A petition can be filed by one or more attorneys, who sign the names of the petitioning creditors over their own signatures, and later make oath in the pre- scribed way. Should an adjuster or an attorney represent three clients, and it became necessary to file a petition in haste, he could, and undoubtedly would, sign the names of the creditors himself without waiting to send the petition to the different creditors for their signatures, although some attorneys follow this latter procedure. Filing the Petition Generally speaking, for judicial purposes each state is divided into two or more districts, and each district into two or more divisions, although this is not an arbitrary rule, nor is this the plan in every state of the Union. For example, a Federal judge may preside over the Eastern District of a certain state and may hold his court in three divisions of that district, these being, for example, the northern, 194 INSOLVENCY southern, and northeastern divisions of the district. Each division comprises a certain number of counties of the state, which for convenience are grouped into this division, the court usually sitting at some important town or city where a Federal court building is located, and where a clerk or assistant clerk of the court has a permanent office. When the petition has been prepared, signed, and duly attested on oath, it is lodged with the clerk of the district court in the division in which the alleged bankrupt resides or conducts his business. After the petition is lodged with the clerk and proper entries are made, the petition is referred to the judge, who, if he approves of the petition, issues the proper orders and the clerk issues the subpoena which is served by the United States marshal or a designated deputy- marshal. If, however, the bankrupt admits his insolvency in writ- ing and states his willingness to be adjudged a bankrupt, in most cases the clerk of the court immediately refers the petition to the referee in bankruptcy, who issues the proper notices to all creditors and other parties at interest. If the bankrupt accepts and signs the process of service, the duties of the marshal are dispensed with and a fee of $io is saved. When the petition is lodged with the clerk a deposit of $35 is required for court fees. Should the services of the marshal be necessary, then the fee of $10 must also be deposited with the petition. The Referee in Bankruptcy The referee is appointed for a period of two years and his territorial jurisdiction is assigned by the district judge, who may change such jurisdiction at his discretion. This brings the administration of the bankruptcy court home to the people, and enables the proceedings to be conducted in the county where the bankrupt resides. After an insolvent BANKRUPTCY LAW AND PROCEEDINGS 195 debtor is adjudged a bankrupt, the referee issues to each creditor such notices by mail, at least ten days in advance in each case, as will give him all necessary information as to : 1. All examinations of the bankrupt. 2. All hearings upon applications for the confirmation of compositions, or proposed compromises of any controversy. 3. All meetings of creditors. 4. All proposed sales of property and the rejection or confirmation of such sales. 5. The declaration and time of payment of dividends. 6. The filing of the final report of the trustee and all matters regarding the examination of such report. 7. The dismissal of the proceedings. CHAPTER XX PROCEEDINGS OF CREDITORS The Bankruptcy Court It must be borne in mind that bankruptcy proceedings are conducted like any other judicial proceedings, and that, while the creditors are allowed to appear and have votes in certain matters, it is the court that passes upon the rights of the litigants. A bankruptcy court, even though it may be held in the store of the debtor or in the office of an attorney, is conducted with dignity, and the attitude of the attorneys is the same as in a high court of chancery in its own court room. On the other hand, while the Bankruptcy Act prescribes just what must be submitted to the vote of the creditors, the referee very often consults the wishes of the assembled creditors, and not only confers with them and asks their advice, but allows them to determine certain questions as to the policy of the trustee in his administration of the assets. The votes of the creditors may, however, be considered as merely advisory, except in the selection of the trustee or in such other matters as are specifically defined in the statute. In the same way, if the creditors are harmonious and exhibit an interest in the proceedings, it is customary for the trustee to defer in great measure to their wishes and advice, although, strictly speaking, the creditors have no right to interfere with the trustee, since his official actions are governed by orders from the referee. Filing Creditors' Claims Matters submitted to creditors at their meetings are 196 PROCEEDINGS OF CREDITORS igy voted on by open ballot, and a decision is reached by a majority vote, determined by the number and amount of the allowed claims represented by the creditors present. Creditors whose claims have not been allowed cannot participate in the voting. An, "allowed" claim is one which has been properly filed and passed upon and allowed by the referee, this with due consideration for the nature of the debt. For example, a secured creditor, or one who has a claim secured in part, cannot vote in the selection of a trustee, yet he shares in the distribution of the assets. Another provision as to claims is, that to be entitled to vote, they must be filed with the referee not later than the day before the meeting of creditors.* This gives the referee a chance to examine the claims, to see that the proof of each is properly executed, and that the other requirements of the law have been complied with. If it has been found that the amounts are correct and that such claims are prop- erly filed, then, unless there is some valid objection, the claim is said to be "allowed," and the claimant can partici- pate in the voting. It is well to impress upon the credit man right here that he should make it a point always to file his claim promptly upon receipt of the notice of the first meet- ing of creditors, or should direct his attorney to do so. This provision does not seem to be generally understood, but if any creditor invokes the rule of the court, the referee may refuse permission to vote to those creditors whose claims are filed and allowed on the day of the meeting. Any creditor having a provable claim, whether filed or not, is entitled to be heard in the meeting; but the referee can exercise his right to require of such person prima facie proof of interest in the claim. Where the expression "con- cerning a majority of claims" is used, it means a majority of the claims that have been allowed and are represented either *This is a rule of procedure established by the judges of many of the District Courts. 198 INSOLVENCY in person or by power of attorney. This, however, does not mean simply a majority in either the number or the value of claims, but takes into consideration both of these factors. That is, there must be a majority in both the number of creditors and the amount of claims. The credit man may represent his house as a claimant, just as an individual creditor may represent himself, but a lawyer representing a creditor must have a power of attorney made out on the form prescribed for that purpose. Creditors' Meetings The credit man should preserve and file all notices of meetings as they are received from the referee, and demand from his attorney a report of all proceedings ; then, regard- less of whether he is present or not, he will have a complete history of the case. Usually it is impossible for all the creditors to be present at bankruptcy proceedings, especially if they are some distance away, but in any event the creditors should select an attorney to represent them and to keep them thoroughly informed on all points as the case proceeds. Most of the criticism directed against the Bank- ruptcy Act by credit men is due wholly to their own lack of interest and their failure to look after their rights as provided in the law itself. A most valuable feature of the bankruptcy law is the provision for calling the creditors together for the purpose of electing a trustee to administer the estate, and for examin- ing the bankrupt and other witnesses. Creditors' meetings are also held for the purpose of hearing reports of receivers and trustees, and at all such meetings the privilege is granted the creditors of consulting together and with the trustee for the proper care and protection of the estate. The first meeting of creditors must be held not earlier than ten nor later than thirty days after the adjudication in PROCEEDINGS OF CREDITORS 199 bankruptcy, except in certain cases of "mischance," which latter situation is fully covered in the Act. The law re- quires, also, that the first meeting must be held in the county where the bankrupt resides or is domiciled, or where he has his principal place of business. Under former bankruptcy laws the litigants were compelled to travel to the seat of the Federal court, and this at times entailed much hardship on all concerned. Strictly speaking, there should be a referee for each county, but this point is covered by assigning a referee to several adjoining counties, and he may comply with the law by maintaining an office at each county seat. The require- ments of the law are satisfied if the first meeting is held in the town or place of business of the bankrupt or at the county seat, or at any other town in the county where it is convenient. There is a regular form of procedure to be followed at the first meeting of creditors. The first procedure is usually the consideration of claims. The law requires that the bank- rupt shall obey all orders of court, and a failure to do so may be made the grounds for opposition to his discharge. Pursuant to this authority, the referee usually orders that the bankrupt be present at the first meeting to assist the court in the examination of all proofs of claims filed against the estate. After the claims have been considered, a trustee is voted for; and if no other business intervenes, the bank- rupt is then sworn by the court and placed upon the witness stand for examination by the creditors themselves or through their attorneys. Although the Act directs that the creditors shall at each meeting take such steps as may be necessary for the best interests of the estate, and though it is required that creditors be served with notices of all meetings, it is not the purpose of the Act to place the creditors above the court. These 200 INSOLVENCY provisions are simply to give the creditors standing in the court, with the right to speak and to assemble in court and confer together. A creditor may appear in person and may, under certain limitations and restrictions, conduct his own case in a court of bankruptcy, where in a state court he would be denied such a privilege and would be obliged to speak through his attorney. Election of Trustee Too much importance cannot be attached to the right of the creditors to elect the trustee, for on that official de- pends largely the successful administration of the assets. A trustee who is a good merchandise man as well as a capable business man, and who will enter upon his duties with a determination to conserve the assets of the business for the best interests of the creditors, will accomplish just what was intended in the passage of the Act. Under the old state laws, the insolvent debtor appointed his assignee or trustee, who administered the estate as he thought best; and the general creditors had but little voice in the management. It often happened that the debtor and the largest creditors had a tacit understanding, and the estate was administered to the detriment of the minor creditors. Under the present bankruptcy law such a proceeding is im- possible, for all creditors stand upon an equal footing, and the trustee is elected by the votes of the creditors who are not preferred and whose claims are not secured. Remington says, "The administration is essentially an administration by general creditors — ^by the unprotected creditors.'* Much of the adverse criticism of the bankruptcy law and of trus- tees in general has been caused by the failure of creditors to avail themselves of their legal right to act for the protection of their own interests. The Act provides for one trustee in some cases, and for PROCEEDINGS OF CREDITORS 201 three trustees in others. In the latter event, there must be a concurrent action by two out of the three named on all matters in which the trustee is concerned. In voting for the trustee, if a majority in number of claims should vote for one candidate and a majority in amount should favor a different one, the referee may declare that there is no elec- tion, and he himself appoint a trustee. He may, however, if he sees fit, allow other ballots to be taken or permit a change of votes. If no creditors appear at the meeting and no voting for trustee takes place, then the referee appoints the trustee. The trustee elected by the creditors is subject to confirma- tion by the judge or referee, but the choice of the creditors is not to be disregarded on slight grounds. Should the referee disapprove of their choice, he is required to sign an order to this effect, and the creditors may carry the decision up to the judge for his review. The same is true of any decision given in the form of an order by the referee. However, if the creditors do not carry the order of disapproval up to the judge, or if, after it has been carried up, the judge sustains the ruling of the referee, then a second election may be held. The referee has no right summarily to appoint a trustee after he has disapproved of the choice made by the creditors, and the creditors must again be given the opportunity to make a choice. Such proceedings are of rare occurrence, as the referee in practically all cases concurs with the decision of the creditors. The creditors also have the right to fix the amount of the trustee's bond after his election, but the referee passes upon the qualifications of the surety or sureties. Duties and Prerogatives of the Trustee The office of trustee is most important, and the credit man should study carefully the provisions of the statute 202 INSOLVENCY relating to the powers, duties, and other important features of the trustee and his work. While the trustee is elected by the creditors, the law does not give them the right to dictate to him in any respect. Also, while he is elected by the majority of creditors, he is not their representative particularly, but represents all the unsecured creditors. The authorities on bankruptcy are all very explicit in defining the attitude which the creditors should assume toward the trustee; and this is in effect that, having elected the trustee, they are to stand back and let him alone. He is supposed to be thoroughly competent to discharge all the prescribed duties, as well as tO' act on his own responsibility and to take advice from counsel when necessary. The au- thorities further state that creditors should not be allowed to nominate a committee to supervise the trustee, and, furthermore, that they should not elect an attorney for him. The reasons for such policy toward the trustee are plain, and are based on the assumption that a trustee elected by the creditors is competent to act for himself. All of this is correct in theory and is doubtless good law; but it is not always possible to procure a man to act as trustee who' is so thoroughly qualified to fill the position that he can handle the estate as well, or better, than several good business men, such as may almost always be found in the ranks of the credit men of the country. While the law does not permit the creditors to dictate to the trustee in any way, they may, by the exercise of tact, influence to a great extent the policy of the trustee in the administration of the estate, and may at the same time procure the assistance and co-operation of the bankrupt. Of course, the creditors must do anything of this kind in the right way and usually in the presence of the referee, who should always see that an estate is handled to the best PROCEEDINGS OF CREDITORS 203 advantage. The referee must necessarily be positive at all times in the maintenance of his dignity and rights, and allow no interference with his court or its officers ; but if a creditors' committee or any one of the creditors can bring to his attention matters that will assist the trustee in handling the estate, they are usually given courteous and proper con- sideration. A referee under no circumstances should allow any suggestion or interference that would not be for the best interests of all the creditors; and while he might con- sider verbal suggestions from creditors in open meetings, it is the customary practice in bankruptcy jurisprudence to re- quire these suggestions in the form of regular petitions from the attorney in behalf of the creditors he represents. The creditors should, of course, see that the trustee does not employ counsel representing interests adverse to the general estate, and, in general, should keep careful watch over the entire proceedings. CHAPTER XXI CLAIMS Proof of Claim One of the earliest proceedings at the first meeting of creditors is the allowance or disallowance of claims. A creditor is allowed to prove and file his claim direct with the court, thereby saving any expense except the small fee charged by the notary for administering the oath and attaching his signature and seal. The preparation of the proof of claim is a matter for great care, as it represents both the pleadings and the evidence of the creditor, and as such places his case for him before the court. The Supreme Court has prescribed a certain form to be used in proving claims against a bankrupt estate — a form familiar to all credit men who have had dealings with the bankruptcy court. In all cases the form prescribed by the Supreme Court must be followed — a matter of no particular difficulty, since such forms are now printed and can be ob- tained from any stationery or office supply store. There are, however, certain important points to be observed in filling the blank, and the credit man must exercise care, lest, for technical reasons, the claim be returned by the court for correction. Where a claim is returned for correction, the creditor might not be able to participate in the voting for trustee. The Affidavit As one of the first requirements in proving a claim, the title of the case and that of the court must be correctly stated in the heading of the affidavit. The lists of guar- anteed attorneys furnished by the bonding companies show 204 CLAIMS 205 the divisions and subdivisions of each state for bankruptcy cases, the counties in which petitions are returnable to such divisions, and the towns where the Federal court may sit. Some of these lists contain as well the names of the referees in bankruptcy. Such lists may also be found in the rating books of the commercial agencies under "Classified Informa- tion" relating to the respective states and territories, and in the Credit Men's Diary of the National Association of Credit Men. The specific amount of the claim must be set forth, and the claimant must aver that such amount is justly owing by the bankrupt. In the case of a running account of several items, the average due date is to be stated. If such date is not given, the referee need not compute the interest on the claim, and dividends on the principal only will be paid. In the case of notes, interest is computed only to the date of filing the bankruptcy petition. Where interest is added to the face of a note which falls due later than the date of the petition, the referee would probably instruct the creditor to rebate the interest to that date. If a note has been taken for the claim or any part of the claim, the note must be attached to the claim as an original exhibit, to form part of the court record. The affidavit must always state whether a judgment has been taken, and any such judgment must be described. After the claim has been allowed or disallowed, the referee at his discretion may permit a note to be removed from the file, provided a copy is substituted. Such removal is sometimes necessary where a note is required as evidence in a pending suit ; or the creditors may desire to obtain evi- dence of the legality of the note itself, or prove the number or the genuineness of signatures. Where a note has been lost, a certain form of proof of such note may be substituted, upon application to the referee and by his order. 2o6 INSOLVENCY Consideration for Claim The affidavit must set forth plainly the consideration for the claim. While some referees allow claims which state "for goods, wares, and merchandise sold," such claims must be accompanied by itemized invoices. In. order that the work of the credit department may be lessened and the provisions of the Act fully carried out in this respect, it is well to state in the space in the proof of claim blank pro- vided for this purpose, that the consideration for the claim is dry goods, or hardware, or notions, etc., as the case may be. If there has been only one shipment, the bill may be itemized and attached to the claim as an exhibit; but if there is a running account, such account must be fully itemized on the statement, as the court will not allow a statement to read merely "Account rendered" or "Balance due." If there is an intimation that the account will be contested either by the bankrupt or by another creditor, it might be well to itemize the statement fully and support it by certified copies of the original invoices together with bills of lading or other indisputable evidence of shipment or delivery. Secured Claims If a claim is secured, not only must this fact be stated in the proof, but the character of the security must be de- scribed. In preparing a claim based on negotiable com- mercial paper, there are so many legal questions involved and so many might arise that it is always well to have the assistance of an attorney. Assigned Claims Cases often arise where claims have been assigned for value. If a claim has been thus assigned before bankruptcy, the assignee as owner of the claim makes the proof and sets CLAIMS 207 forth the fact that he is the owner. If, however, the claim has been assigned after bankruptcy but before it has been filed with the bankruptcy court, the claimant must make affidavit in the regular way and must support his own affidavit by that of the assignor who owned the claim at the commencement of bankruptcy proceedings. This addi- tional affidavit must set forth the facts of the transfer, the consideration therefor, and must describe the security if any exists. Claims may be assigned after filing, but the referee will always require full information as to the nature and good faith of the transaction. He may allow any such transfer at his discretion ; but before final acceptance he will issue a ten days' notice to the original creditor who filed the claim to appear in court and deny the assignment if it should prove fraudulent. Who May Make Affidavit and Claims The proof of a claim must be made by the creditor under oath, though in case he has conscientious scruples against swearing, proof may be made by affirmation. The oath may be taken before any officer authorized to administer oaths in either a state or Federal court, but as a matter of con- venience it is usually taken before a notary public. If the creditor is doing business in his own name he can make the affidavit in person, but in case of a partnership the proof of debt must show that it is made by one of the partners. Provision is also made whereby an agent may make the proof, but the affidavit must state the reason why the claim- ant did not make it in person, and it must show the agent's authority and that he has knowledge of the facts. Al- though it is often necessary for proof to be made by an agent, there must be a good and sufficient excuse for this, satisfactory to the court. For instance, the mere fact that the claimant is absent from the city would not be held as a 2o8 INSOLVENCY sufificient excuse. It would be necessary to show that the claimant was not only absent, but that, even though using due diligence, it would be impossible for him to execute and file the proof within the time allowed by law. Affidavit to Corporation Claim If the claimant is a corporation, the proof is made by the treasurer, who must state in the beginning of the form his relation to the corporation, viz., that he is "Treasurer of The John Doe Co., a corporation incorporated by and exist- ing under the laws of the State of .... , etc." If the cor- poration has no treasurer, the proof is made by the officer whose duties are most nearly related to those of a treasurer, and this fact must be stated. In the case of a national bank, the cashier would be the proper officer to make the proof. Frequently when a corporation is a claimant, the error is made of signing the corporate name to the affidavit, as, for example, "The John Doe Co. by Richard Roe, Treas- urer." This is improper because it apparently represents the oath of a corporation — a manifest impossibility, since a corporation cannot be sworn nor can it be put in jail for perjury or contempt. The idea that a corporation is a person is the cause of this error; and in view of the fact that many difficult questions arise in bankruptcy through the differences existing between corporations and individuals, it is well for the creditor to gain a clear understanding of how the corporation is regarded in law: What Debts May Be Proved? In Chapter VII, paragraph 63, of the Bankruptcy Act, it is stated specifically just what claims constitute "provable debts." This section of the law should be studied with special care by the credit man, since it involves many ques- tions which arise in every case of bankruptcy. Judgments, CLAIMS 209 taxes, court costs, and contract claims (the latter including open accounts) are, in reality, the only claims that may be proved in bankruptcy and allowed to participate in the pro- ceedings and share in the dividends. It often happens, however, that the bankrupt has been sued for damages ; but a claim on such ground would be indefinite unless the suit were reduced to judgment. Also, on the side of the bankrupt, it is a common occur- rence to find claims against transportation companies, or to find that he has started one or more damage suits which have not been reduced to judgments at the time of his adjudication. Any such claims are regarded as a part of the assets which belong to the creditors. When there are such claims the trustee assumes charge of them, and at his discretion compromises or prosecutes them, subject to the approval of the referee. It is well for the credit man to bear this constantly in mind and see that the bankrupt is examined as to all possible claims of this kind. In considering whether a claim is provable or not, the idea must not be entertained that because a claim is not readily provable it is not a valid one. Any claims against the bankrupt or his estate must be reduced to such form as shall comply with the requirements of the statute, but the matter of provable debts and contingent claims is frequently the subject of much litigation, and any claim that might obtain against the bankrupt or his estate, which is not readily provable under the regular form, should be submitted to the claimant's attorney and be handled by him. Filing Claims It is expected that all claims in bankruptcy will be filed as soon after adjudication as possible. They must be filed within a year from the date of adjudication. Claims may be filed by the creditor with the clerk of the Federal court 2IO INSOLVENCY or with the referee, either directly or through an attorney. When the filing is to be handled by an attorney, his name should be inserted in the space provided in the proof of claim for that purpose. This confers upon the attorney power to represent the creditor. When the claim is filed direct, a separate power of attorney may be given to some individual to attend the creditors' meetings in the interest of the claimant if he cannot attend himself. The Act gives the creditors the right to file claims with the referee and share in the dividends without incurring the expense of an attorney, and in many cases this is the correct procedure. If, however, fraud is suspected or preferences exist, the credit man should not merely file his claim and let the matter rest there in order to save an attorney's fee. Whenever the credit man thinks that a case should be thoroughly investigated, and he cannot attend to this in person, he should either join with other creditors in employ- ing an attorney, or himself employ an attorney to examine the bankrupt and endeavor to uncover any fraud or preferen- tial payments which should be brought to the attention of the referee. CHAPTER XXII THE BANKRUPT Examination of the Bankrupt The Bankruptcy Act is essentially; the law of the busi- ness man; and if he does not avail himself of his rights under its provisions, he has himself alone to blame. The referee cannot act for him, as the referee is a judge of the court, and it is not his place to develop a case of fraud for the benefit of the creditors. It is therefore incumbent upon the creditors themselves to make out their case and establish the fact of fraud or preferences, if such exist. The law recognizes the rights of the bankrupt, even to paying out of the funds of the estate the fees of his counsel and his expenses when attending meetings distant from his place of residence. His rights, therefore, will be well looked after, and it is almost always best for the creditor or creditors to be represented at the examination by an attorney who is thoroughly conversant with bankruptcy law, and who will ''fight" a case to the bitter end. The first meeting of creditors in particular is most important, and the examina- tion of the bankrupt here should be thorough. The credit man is not often competent to conduct an examination of, or to cross-question, the bankrupt, but he can and should secure evidence and furnish facts to his attorney as a basis for such examinations. The examination of the bankrupt has been referred to several times as a matter of great importance to the creditors, and it might be interesting to note that provision for such an examination has been made a feature of every bankruptcy statute since the time of Henry VHI. The 211 212 INSOLVENCY present Act provides that even if a creditor has not filed his claim at the time of the first creditors' meeting, he may be allowed to examine the bankrupt, although the referee usually requires some proof that the creditor really possesses a bona -fide claim against the estate. If the examination of the bankrupt cannot be completed on the day of the first meeting of creditors, the meeting is adjourned by the referee to another date, on which the examination is continued. If at any time other than at the first meeting or an adjourned meeting, an examination of the bankrupt is de- sired and approved by the referee, order is entered by the referee and ten days' notice given to all creditors. The bankrupt may be examined in this way. as many times as the court may order, and may even be examined after he has received his discharge. The Act specifically provides that the wife of the bankrupt may also be required to appear and be examined as to certain phases relating to matters of business concerning both her husband and herself. An examination may be held at any place where the creditors and the bankrupt can attend, but the bankrupt can- not be compelled to attend for examination at a place more than one hundred and fifty miles from his home or place of business, unless so ordered by the court for special causes shown. A bankrupt may be arrested and held for examination if it can be shown that he is about to leave the district where he resides, or that he is leaving the district to avoid examina- tion, and that his departure will defeat the proceedings in bankruptcy. If at the time set for the examination the bankrupt be in prison, he may be brought before the court by the jailor. Every contingency is provided for in the Act, and it is doubtful if any circumstances could arise whereby the bankrupt could escape examination if it could be shown to the court that such examination was necessary. i THE BANKRUPT 213 Rights of the Bankrupt On the other hand, the rights of the bankrupt are re- spected. The Act provides that "no testimony given by him shall be offered in evidence against him in any criminal proceedings." This section of the Act is hardly understood by the average layman, as he does not see why a bankrupt should not meet with punishment for any criminal act which might be disclosed by his testimony. The reason for this rule, however, is sound, being found in the provision of the Constitution that "no person .... shall be compelled in any criminal case to be a witness against himself." If, however, the bankrupt has purposely made a false statement in writing to one of his creditors, and admits this in his examination, is there no way in which he can be brought to account? How far will the constitutional pro- vision protect him? This is so important a point that it may be well to quote from an authority: "It can have no other effect than to protect the bankrupt against the use of his testimony in any prosecution in the courts of the United States. It would be no answer to a prosecution which might be instituted in the state courts, which are not created by acts of Congress and which prescribe their own rules of proceeding independently of Congress."* It must be. borne in mind that any examination of the bankrupt must be in the interest of the creditors and must be conducted by the creditors or their attorneys and under the supervision of the referee, and that an examination for mere malice, or out of curiosity, will not be allowed. Within these limits the most searching examination may be held and the questions must be answered. From the fact that such examinations are sometimes quite extended and cover so many topics (and likewise so many pages of the record which amount to nothing in the end), they have been *Loveland on Bankruptcy. 214 INSOLVENCY referred to in decisions by various learned courts as "fishing excursions." Duty of the Bankrupt If a bankrupt, properly summoned, refuses to appear or fails to produce books or records, or refuses to answer any questions when ordered to do so by a referee, the matter is brought to the attention of the judge upon application to commit the bankrupt to jail for contempt of court. If the witness makes an unsatisfactory answer, or one which is untrue, or if he answers evasively, the court may commit him for contempt. ''Thus, where the bankrupt, by answers of 'I don't know' and 'What do you mean ?' given in response to questions on matters with which he must have been familiar, in effect refuses to disclose information which would enable the trustee to follow his property, an order is proper for adjudg- ing him in contempt of court for refusing to answer ques- tions and for concealing from his creditors material facts as to his property. It is immaterial that he was adjudged in contempt before the conclusion of his direct testimony and before he was cross-examined."* The duty of the bankrupt, in general, is to answer truth- fully, connectedly, and fully, to the extent that his mental equipment will allow, all questions put to him ; and should he withdraw from the office of the referee before the comple- tion of his examination, he may be punished. It has been shown that a bankrupt may be prosecuted in the state courts if he has given testimony that incriminates him ; but a state court has no jurisdiction to punish a party for perjury, as such punishment is provided for in the Bankruptcy Act itself, and such offenses, therefore, come under the jurisdic- tion of the Federal courts. 'In re Schulman, 177 Fed. Rep. 191. THE BANKRUPT 215 Fraudulent Statements Many of the states have laws making the giving of a false statement for the purpose of procuring credit, a felony; but it is difficult to procure the information neces- sary to lay before a grand jury and procure an indictment for false pretense. To indict it is incumbent on the creditor to show beyond question that the statement itself is false to a material extent; that it was made for the purpose of obtaining credit; that certain goods to a certain amount were shipped on the strength of such statement; and that the debtor did knowingly falsify his true financial condi- tion. The examination offers an opportunity to the creditor to obtain under oath all the facts concerning the giving of such a statement. It is sometimes the case that a bankrupt, believing himself immune from prosecution, is thrown off his guard and will admit facts in connection with his condi- tion or in the making of the statement which could not possibly be obtained otherwise. It is also held that parties in interest are entitled to examine the testimony of the bankrupt after it has been transcribed by the court stenographer, and likewise to pur- chase a copy of it for use in the state courts if necessary. A copy of such testimony filed with a grand jury as an exhibit will in most cases prove to be the strongest grounds for the indictment. Settlement by Composition Another feature of the Bankruptcy Act which will be of interest to any credit man, and with which he often comes into contact, is the matter of compositions. A composition is practically an agreement between the bankrupt and his creditors that the bankrupt will procure on the outside a certain amount of money or securities, and that, under the direction of the court, he will divide such amount among 2l6 INSOLVENCY the creditors in proportion to their respective claims. The bankrupt through his attorney presents to the court a schedule containing the names of all his creditors and the amounts due each of them, and states the amount of his assets and the rate per centum he is willing to pay on such debts as a compromise, provided that he receive a discharge from the balance of these debts. After the debtor has filed his schedules and has been examined under oath, the creditors take up the matter for consideration. If they decide that the bankrupt has made an honest failure and has conducted himself properly in all matters relating to bankruptcy, and that the per centum offered is all that the estaite could be made to pay, then, subject to the permission of the court, they may accept the offer of composition. The offer of composition must be made by the bankrupt to all his creditors ; and the referee sends ten days' notice of such offer. If it is impossible for all creditors to attend the meeting, the bankrupt may circulate his petition and procure signatures; but any offer of composition must be accepted by the creditors in writing. The power of attorney in the proof of debt* confers such power upon the lawyer who is representing the claimant. It must be noted that a bankrupt can offer terms of com- position either before or after adjudication, but not before he has been examined in open court or at a meeting of his creditors and has filed in the court the required schedules of property and list of creditors. The offer of composition must be accepted by a majority of the creditors both in num- ber and amount of claims, and such composition must be approved by the judge. The minority creditors have a right to file their petition in protest against the composition and the judge will review such petition. The property * See Form 27, Appendix. THE BANKRUPT 217 offered in settlement by the bankrupt will always be dis- tributed under the direction of the court. The judge will confirm an offer of composition only in case the bankrupt has not failed to perform any of the duties incumbent upon him and has not been gtiilty of any of the acts which would be a bar to his discharge. Prac- tically speaking, anything that will bar a discharge will be a bar to confirming a composition. After a creditor has accepted the offer of the bankrupt, he will not be allowed to withdraw this consent unless he can prove that fraud exists or that his signature has been obtained upon a mis- representation of the facts. Procedure in Composition Settlement The bankrupt must deposit with the court sufficient money to cover all costs in the case and also to pay any claims that may have priority. These claims are specified in the Act.* While the Act states specifically that money must be deposited for costs and debts having priority, as above, it also refers to the "securities" which the bankrupt may dis- tribute among the creditors, and therefore the bankrupt may effect the composition by paying to the creditors the value of the assets in cash or securities. The reason for a composi- tion is that the debtor can take over the assets and get more out of them than the trustee can. It is simply the theory that a business is worth more as a going concern than as an estate in bankruptcy; and so the bankrupt calls on his friends to come to his aid and furnish the money or indorse his notes to effect the composition. It is to be admitted that a composition is the quickest and most inexpensive way in which to settle an estate ; and creditors may often realize more out of it than in winding up the estate in the usual way. A composition should, however, be considered very • 864. 2i8 INSOLVENCY carefully ; the reasons for it should be evident and the bank- rupt should show beyond question how and where he obtains the funds with which to pay his debts. The Act states that when the matter is settled in this way the bankrupt shall be discharged from all debts except those agreed to be paid in the terms of the composition. In opposing a composition it must be shown that it is not for the best interests of the creditors ; or that the bank- rupt has been guilty of some act that would be a bar to his discharge; or that the composition has been procured by fraud. These matters are so serious and involve so many points of law that when there is any question about a com- position it is wise to lay all the facts before a good attorney. The attorney should, of course, be one well versed in all phases of bankruptcy proceedings. If the composition is accepted, it is supposed that the precaution is taken to see that the securities are safe beyond question. It is provided, however, that on breach of an agreement by the bankrupt in a composition, the creditor may bring action on the original claim. If the consideration consists of negotiable paper and the bankrupt fails to fulfil the obligations and agreements in connection therewith, the creditor may recover his whole debt from the bankrupt. It is also to be noted that the confirmation of a composition will regularly discharge a debt created by fraud, save as to those, specifically excepted by the Act, and this is taken to mean that a debt created by a false statement will be dis- charged. There are also, as intimated, certain debts that are not discharged in composition. This brings up again the discussion of ''provable" and "not provable" debts — a question too technical for the layman, as was shown in the discussion of this subject when dealing with the claims themselves. For this reason such matters should be referred to an attorney. THE BANKRUPT 219 False Claims and Extortion of Property from Bankrupt It has been shown that the concealment of assets, the making of a false oath, and other offenses on the part of the bankrupt are punishable under the statute. It must also be borne in mind that it is an offense punishable under the bankruptcy statute to file knowingly and fraudulently under oath any false claim against the estate of a bankrupt, or use such claim in any composition, either personally, or by agent, proxy, or attorney; and this applies likewise to the party acting in the capacity of agent, proxy, or attorney. It is also a punishable offense knowingly and fraudulently to receive any material amount of property from a bankrupt after the filing of the petition, with intent to defeat any of the provisions of the Act. In other words, any one who knowingly receives property from the bankrupt belonging to the estate, assists the bankrupt in making a concealment of assets ; and this clause of the Act makes the person so receiving property guilty also of an offense. One of the most important provisions of the Act is in regard to extorting money in bankruptcy proceedings. It is a punishable offense to extort knowingly and fraudulently, or to attempt to extort, any money or property from any person as a consideration either for acting or forbearing to act in bankruptcy proceedings. This is somewhat similar to the state laws regarding the compounding of felonies; i.e., if a person, for example, has stolen goods or money from another, and this latter agrees not to prosecute the offender in consideration of payment for the goods, then, under certain conditions this constitutes the compounding of a felony, and lays the party forbearing to prosecute, him- self liable to prosecution. The taking of property from the party in bankruptcy under any such circumstances is a viola- tion of the spirit and purpose of the Bankruptcy Act, as attempting to prevent the administration of the estate by the 220 INSOLVENCY proper court, and as also attempting to obtain a preference over other creditors. Therefore, when a case has been developed against a bankrupt in the examination which would lead to a prosecution in the ordinary course, a creditor should exercise great care in accepting any kind of settlement from either the bankrupt, his family, or friends without taking advice from his legal counsel. As the examination is conducted in the presence of the referee and he is familiar with the circumstances and the facts developed, it might be a good idea to acquaint the referee with any offer of compromise as soon as it is made. For example, if a case has been developed against a debtor for making a false statement, and the attorney of the debtor realizes that his client is made liable to a criminal prosecu- tion, it is possible, under certain conditions, for the creditor to receive payment for his account from the family of the debtor and yet not be guilty of an offense under the Act. As stated, it might be the safest plan to acquaint and keep the referee advised of any offers of settlement which may come up, even outside the bankruptcy court. By doing so, and following the provisions of the Act in other similar matters, the creditor will not be guilty of knowingly and fraudulently committing the offense within the meaning of the law. The punishment for such offenses is imprisonment for a term not exceeding two years. Another important provision of the Act is that the bankruptcy court will not sanction an agreement to stifle prosecution for a crime, although it may increase the assets of the estate. In this connection it may be well to call to mind what was said above, concerning the jurisdictions of the state and Federal courts in handling various offenses growing out of the examination of the bankrupt. CHAPTER XXIII DISCHARGE IN BANKRUPTCY Discharge of Bankrupts The discharge of the bankrupt is one of the most im- portant matters in which creditors are concerned, and al- though only ten days' notice is requisite in other orders in bankruptcy, thirty days' notice of all hearings must be given the creditors to act on an application for discharge. A person who has been adjudged a bankrupt may file an application for a discharge from all his provable debts, save those which are excepted by law, at any time after the ex- piration of one month and within the next twelve months subsequent to the adjudication. Under certain conditions the judge may permit the filing of such an application after the expiration of the twelve months, but within the next following six months. Copies of the petition are published in a newspaper, and affidavit of such publication is made, stating the days on which the notices appeared. The printed notices are attached to the affidavit, which is then filed in the records of the court. A bankrupt who has been denied a discharge after an investigation of the merits of his petition by a judge, is not entitled to file a second application for a discharge in the same proceedings. Opposition to Discharge An application for a discharge may be opposed by any of the parties in interest. The construction placed upon this expression is so broad that it might be said to include almost any creditor. If a creditor files specifications of objection to a discharge and later abandons the proceeding, the court may 221 222 INSOLVENCY in its discretion permit other creditors to carry on the op- position as if they had originally filed the specifications. It has also been held that the failure of a creditor to object to a discharge does not bar his bringing action for fraud after the discharge. A creditor who intends to oppose an application for dis- charge files with the clerk of the court a statement on a -prescribed form, citing the case in bankruptcy and giving his own name and address fully, as required by law. The form used is a simple one, to be found in any of the works on bankruptcy or to be obtained from the clerk of the court. The specifications of objection may be filled out on the prescribed form, or merely the wording of the form fol- lowed, but the specifications must always be in writing, must state the name of the opposing creditor, and show that he is a party in interest. The statement that he is a creditor whose debt will be released by a discharge, is sufficient to show that he is a party in interest. The specifications should then state briefly and specifically the grounds of opposition. The object of the specifications is to give the bankrupt reasonable notice of what is expected to be proved against him, and to advise the court of the issue to be tried. The facts in the specifications must be set forth exactly and fully; for instance, if the ground of objection is the com- mission of an offense or crime under the Act, it is insufficient to quote merely the words of the statute, but the specifica- tions must show what the offense is, as well as the nature and the facts or figures in connection therewith. Before drawing up so important a paper it is well to study the forms in one of the larger works on bankruptcy and follow the one which most closely fits the particular case. The opposi- tion to a discharge is such an important matter that it is well for the creditor to employ a competent attorney to handle it. DISCHARGE IN BANKRUPTCY 223 The filing of this statement is necessary to enter an appearance. The creditor may enter his appearance in person, or by attorney ; but the attorney must be one who is duly authorized to practice in the Federal courts. Unless the appearance is properly entered or duly authorized, it will be disregarded. Also, the creditor failing to enter his appearance has no standing" in court as to the petition for discharge, and therefore cannot be heard in opposition to it. As soon as the entry is made, all proceedings upon the petition are suspended until the specifications of grounds in opposition to the discharge are filed. An appearance is usually entered after the petition of the bankrupt for dis- charge has been filed ; but the appearance may be entered to oppose the discharge at any time before the expiration of the time limited by the order of the court. Sometimes the creditors may signify their intention to oppose the discharge early in the course of the proceedings ; but it is usually a better plan to wait until the bankrupt files his petition for discharge, and then immediately enter an appearance and proceed to file the specifications. Acts Barring Discharge The court will refuse the application for a discharge if the bankrupt has : "i. Committed an offense punishable by imprisonment as herein provided ;* or, "2. With intent to conceal his financial condition, de- stroyed, concealed, or failed to keep books of account or records from which such condition might be ascertained ; or, "3. Obtained money or property on credit upon a materially false statement in writing, made by him to any person or his representative for the purpose of obtaining credit from such person; or. In §29, Bankruptcy Act. 224 INSOLVENCY "4. At any time subsequent to the first day of the four months immediately preceding the fiHng of the petition transferred, removed, destroyed, or concealed, or permitted to be removed, destroyed, or concealed any of his property, with intent to hinder, delay, or defraud his creditors ; or, "5. In voluntary proceedings been granted a discharge in bankruptcy within six years ; or, "6. In the course of the proceedings in bankruptcy re- fused to obey any lawful order of, or to answer any material question approved by the court : "Provided, that a trustee shall not interpose objections to a bankrupt's discharge until he shall be authorized so to do at a meeting of creditors called for that purpose."* It is not necessary that the bankrupt shall have been con- victed of any offense to bar him from discharge; but his discharge lies within the discretion of the court. A discharge will be refused where the bankrupt pur- chases the claim of a creditor in order to secure a withdrawal of his objections to the bankrupt's petition for discharge. But as already intimated, it does not necessarily subject the bankrupt to the penalty of this provision — nor is it wrongful — ^to buy off a creditor where the money is not received directly from the bankrupt. Concealment of Financial Condition The phrase "to conceal" used in No. 2 of the offenses which bar a discharge, includes the secreting of property and the falsification or mutilation of papers or books of account. There are so many legal points which may arise in the discussion of concealment that it is well for the credit man to go into the subject at length in one of the larger works on bankruptcy. The decisions are numerous and broad ; but it may be stated in brief that the bankrupt * § 14, Bankruptcy Act. DISCHARGE IN BANKRUPTCY 225 is supposed to keep books in proportion to the size and nature of his business, and that such books must be in- telHgently kept so as to show his true condition. If not so kept as to be intelHgible to one versed in bookkeeping, they may be said to come within the meaning of that part of the statute which deals with the concealment of the bank- rupt's financial condition. In order to prevent his discharge it must be shown that the bankrupt has destroyed, concealed, or failed to keep proper books, with the intent to conceal his financial condition. The following illustration may be cited :* "A failure of a bankrupt to enter on his books, loans from relatives and friends was found to be with intention to conceal his financial condition and was a bar to his dis- charge, notwithstanding the bankrupt's explanation that he did not set down the notes as he thought these creditors would not push him." Where the bankrupt acts honestly without intent to con- ceal his financial condition, he may be entitled to a discharge, although he may have destroyed or neglected to keep books through inadvertence, ignorance, or mistake. Under the Statute of 1867 this was not so, as the mere failure of a merchant or tradesman to keep books of account, without regard to intent, was all that was necessary to defeat his discharge. False Statement as a Bar to Discharge In the amendment of February 5, 1903, it was provided that a bankrupt should not be discharged if he had obtained credit on a materially false statement in writing, made to a person for the purpose of obtaining credit. Nothing like this was contained in any of the former laws of bankruptcy in this country. To prevent a discharge under this amend- *In re Alvord, 135 Fed. Rep. 236. 226 INSOLVENCY ment, it must be shown, first, that the bankrupt obtained property on credit, and, second, that he made to the person from whom he obtained the said property a materially false statement in writing for the purpose of obtaining it on credit. The statement referred to must have been made by the bankrupt, or by his agent with his authority, and to the creditor who granted the credit. In further construction of this provision, it has been held sufficient to bar the discharge if such statement was made to a commercial agency ; and the statement need not have been made to the creditor opposing the discharge. It has also been held sufficient to bar a discharge if the false statement was made to a creditor whose debt was paid in full before bankruptcy. A false statement by one partner will defeat the discharge of another partner, provided the firm received credit on such statement; but a false state- ment in writing by one partner will not bar a personal discharge of another partner. The statement upon which credit was secured must have been made in writing, as an oral statement is not sufficient ; but there is nothing in the Act which requires it to be signed by the debtor. The statement must also be materially false in fact, and must be wilfully and intentionally misleading. If it is false and the credit man has granted the credit on the strength of such statement, it is sufficient to bar the discharge. If, however, it is shown that the credit man did not grant credit on the faith of such statement, or if the debtor did not make the statement for the purpose of obtain- ing credit, it will not bar the discharge, no matter how false the statement may have been. Fraudulent Conveyance of Property It was also provided in the amendment of 1903 that a discharge will not be granted when the bankrupt has, at DISCHARGE IN BANKRUPTCY 227 any time subsequent to the first day of the four months immediately preceding the filing of the petition, transferred, destroyed, or concealed any of his property with intent to hinder, delay, or defraud his creditors. This provision covers fraudulent conveyances, and is very sweeping, but there are some exceptions to its general provisions. For instance, an assignment for the benefit of creditors is not in itself fraudulent and will not be a bar to a discharge, for the laws of some of the states sanction the making of assign- ments and the preferring of one or more creditors ; and in such states a preference is not made a bar to a discharge. The property transferred or concealed, to fall within this provision, must, of course, belong to the bankrupt. It must also be shown that the purpose of the transfer was to defraud the entire body of creditors. Refusal to Obey Court The bankrupt will be refused a discharge if, during the proceedings in bankruptcy, he has refused to obey any law- ful order of, or to answer any material question approved by, the court. If the bankrupt is merely guilty of contempt in refusing to obey an order of the court, he is not entitled to a discharge ; and it is not necessary that he be convicted of such charge. It is not even necessary that the bankrupt actually refuse to obey the order or declare that he will not do so ; a delay or failure on his part to perform for a reason- able time after an order is made, is a refusal sufficient to prevent a discharge. The bankrupt will not be granted a discharge when, in voluntary proceedings, he has been granted a discharge within six years. The Act and the Credit Man It will be noted that although considerable space has 228 INSOLVENCY been given to the National Bankruptcy Act in the present volume, no point has been covered thoroughly. The last item discussed, that is, discharge in bankruptcy, covers many pages in the larger works on the subject of bankruptcy; but in the present volume the writer has dealt with only such parts of the Act as may be readily understood and handled by the credit man. Bankruptcy jurisprudence represents features which should appeal to the credit man beyond all other branches of the law, for it not only concerns him directly, but the bankruptcy court is practically the only court where he has a standing and can be heard on almost the same footing as a licensed attorney. Because of its importance to him, the credit man should not only study the Act, but he should go further into the subject and procure one or more of the very excellent works treating of bankruptcy. The study of such books will give him a thorough knowledge of the sub- ject that will be of continuing value in his general work and that will be of even greater service when he appears among the creditors in a court of bankruptcy. . APPENDIX I. FORMS 2. THE NATIONAL BANKRUPTCY ACT FORMS 231 191 M. C. KISER COMPANY, ATLANTA, GEORGIA Gentlemen: Enclosed please find order for Been buying Shoes from Been buying Dry Goods and Notions from Been buying Clothing from Been buying Groceries from Other references : Banks with I judge has about $ stock on hand, which is insured for $ Does about $ annual business, divided $ Cash, $ on Credit. Remarks : N. B. — One of these reports MUST accompany each order, whether for old or new customers, and give three or more references in each line if possible. Form 1. Salesman's Report. This report is sent in by the sales- man with every order. It brings the changes in the condition of the merchant's business almost automatically to the attention of the credit office. 232 APPENDIX J SPENCER TURNER CO. 86 WORTH STREET New York City SALESMAN'S NEW CUSTOMER REPORT To be filled out and sent in with each new customer's order. Do this in order to insure receiving credit for the sale. Report from Date 19. Amount of order, about $ Sold to Address i City or Town State 1. Kind of business 2. Value of stock, $ 3. Condition, and if well kept 4. Insurance, $ 5. Is business growing? 6. What is local standing? 7. Has he good ability? 8. Is location good ? 9. What is competition? 10. Banks with 11. What is your opinion of customer? Signed Salesman Remarks Form 2. Salesman's New Customer Report. This report is used by some mercantile houses. It is sent in by the salesman with every order from a new customer, and often determines the next step in investigat- ing the customer's standing. FORMS 233 1 — ■ *^ W Z .5 2 u S s ^§ 5 > 5§i « 5 ^ «s § 1 5£ : -< IS •« *". 1 ^ .^1 Hi «5 52 s 1 'So -a fc3 c < i 1 2 <-• 1 1 ' Q c -T3 J2 2 0^ a ^3 » H § (2) ■5 o< E •S £ 0. .2 0. s ^ s «/^ a '-5 <«- d C €^ <«^ s c '^ 0) B 0) g P ^ cy a > m 2 «) 1 < o! ,1 5 s •T3 C/3 s 2 e2 < Form 3. Trade Inquiry Blank. This is the old form used by N. A. C. M. members, and for size and style is preferred by some credit men to Form 4. The house receiving it can see at a glance what line of business is inquiring. If one dry-goods house inquires of another dry-goods house, the inquiry is much more important to both houses than if the lines of business differ. The form is sent out in duplicate, the recipient keeping one copy for his own files and returning the other to the inquirer. 234 APPENDIX RETURN THIS TO US 632 ST. CLAIR AVE.. N. W.. Cleveland, Ohio, .191 Messrs- Kindly give us below YOUR EXPERIENCE with Name P. O, AU. INFORMATION WILL BE CONSIDERED STRICTLY CONFIDENTIAL Yours truly. JOSEPH & FEiSS CO. MEMBERS NATIONAL ASSOCIATION OF CREDIT MEN Sold Since- Terms- Highest Recent Credit $._ fOn Open A On Notes, Past Due On Open Aco On Notes, First Order, $ Other Informatioa ^ MANNER OF PAYMENT Discounts Prompt and satisfactory Slow but considered good Slow and unsatisfactory Pays C. O. D. Sell for cash only Account secured Notes secured Account closed for cause Makes unjust claims Collected by attorney (Original) Form 4. Trade Inquiry Blank. This is the standard inquiry blank poses it covers all points thoroughly. The only criticism is the small blank is sometimes used. If all questions on the blank are carefully This blank is satisfactory and should serve as a general model for ought to be used in making inquiries, unless it should fail to conform form is made out in duplicate, one to be returned to the inquirer and FORMS 235 RETAIN THIS FOR YOUR FILES 632 ST. CLAIR AVE., N. W., Cleveland. Ohio, .191 Messrs..™ We give you below OUR EXPERIENCE with Name. P. O.- PLCASB CONSIDER INrORMATION STRICTUV CONFIDENTIAL Yours truly, JOSEPH & FEISS CO. MEMBERS NATIONAL ASSOCIATION OF CREDIT MEN Sold Since. Terms Highest Recent Credit $. ( On Open A Owing Now-j ( On Notes, Past Due On Open Aco ( On Notes, First Order, $„ _ Other Information MANNER OF PAYMENT Discount! Prompt and satisfactory Slow but considered food Slow and unsatisfactory Pays C. O. D. Sell for cash only Account secured Notes secured Account closed for cause Makes unjust claims Collected by attorney (Duplicate) adopted by the National Association of Credit Men. For practical pur- space allowed for "other information," but the reverse side of the and correctly answered, the subject of the inquiry will be fully covered, such blanks. If the house is a member of the Association, this blank with the other blanks adopted for use in the credit department. The the other to be kept on file. 236 APPENDIX Foni>9. lOM. 12-13 FRANK M HAYNES, Pre^ FJ^ANK PRESTON. V-Pre^ O. M. TATE, Secy and Tteu. J. B. CRISWELL, Sale. Mgr. HAYNES-HENSON SHOE COMPANY Wholesale Shoes and Rubbers Knozville, Tenn., DEAR SIR: We wish to ask your confidential opinion and advice as to. the safety of extending credit to the extent of $ ......to Messrs,.- , We will gladly return this courtesy at any time. Thanking you in advance for prompt reply. Yours truly. NES-HENSON SHOE CO. We subscribe to hjVi VedYMenV Assoeiatio'tt ^^ MERCHANT'S REPORT ATTORN EYS REPORT BANKS REPORT How long told? Eirtimated. Value of Mdse. $... •• •• Real EalateJ... ... " " Other Asseti | Banlcwith Deposits how often? Highest credit $ Owing nowl „ Do you have drafts for collection? Are they paid usually? Eatimate of Debt. $ Do you know of clainu in Attorney', hand, recently? Could you collect the above account by .uit> Do you know of any debt. pa.t due or in Attorney's hands?. . How Jong put due> he prompt or ilow) „ Value of Mdse.. eOimated $ Real Estate, estimated $ Encumbrance on Real Estate $ Would you lend above amount with- out security)... Give general information below. Ha. either MEMBER OF THE FIRM ever awigned. burned out. or gone through bankruptcy. 1 recommend the rUk from ■ moral rtandpoint? — I give the name* of other Wholeuler. with whom he i. dealing?^. REMARKS Form 5. Trade Inquiry Blank. This is a convenient form of inquiry and might be styled the "triple-expansion" type. It is used by many leading houses in jobbing lines. The inquiry is made up in triplicate on the typewriter, using carbon paper, and the name of the merchant, attorney, or bank to whom it is sent is afterwards filled in at the top. The cost of printing is thus greatly reduced; the size is standardized for filing; the questions are few and strictly to the point.^ The only criticism is that there is no space for recording the experience of the inquirer, but on first orders this is usually noted on the blank with the amount of the order. FORMS ^Z7 ANPERSON-DULIN-VARNELL CO. Wholesale Dry Goods, Notions MILLINERY and FURNISHINGS DEAR SIR : We havp an caAn fmm . , ., Amount $ : Will you kindly give us your experience below, and greatly oblige. We will gladly return the courtesy when an opportunity is presented. Respectfully, OUR EXI Highest Credit $ Amount Owing $ . ., »ERIENCE Antiripates Di.woimts When n„e Days .Slnw. Am't Past Due NAME ANDF R SON-f)! II IN-VARNF LL CO KNOXVILLE, TENN. .<^W In lOl HigKMt Credit .$ Antiripates When n,.e When Due Amount Past Diie Hay, .SInvf C^minlermands Orders Makes IJnjiistClaims Remark, ' '• Ry Form 6. Trade Inquiry Blank. The inquirer fills in the upper half of the blank, which is perforated through the middle. The recipient fills in the lower half, detaches this part and returns it to the inquirer, keeping the upper half for his own files. 238 APPENDIX z < . o -J < z^ Q uj| M ^-^Z O o h ui (0 (OS Q8 Oo O? 05 z o H o z §3233 QqPu .9 '+3.2 .2 o o (J o t« w c 2 o d d u C C 0) O O-C i^.^-yi III r3 o '^ o w o CO K O Oh (U C ^2 d ^ C 0) •" d >.- .^ -C J£ a. ., o )r, rt be Oj C/3 FORMS 239 OOFTDON P. KISCR, KISER.Tpcasuheb. C.J.SULJ.IVAN,SjCC>.tTAB P.O. BOX 1747 a^_ BOSTON OFFICE: 57 l_l NCOl_N ST. a<. ^&L me ^^U:>^r^A ^?t4/^y^/-/^;^?'?.a^^(my^i ^^i rec/, S^HiUi Form 8. Trade Inquiry Blank. This inquiry blank leaves it to the discretion of the recipient to give whatever information he desires. Many houses have a rubber stamp outlining their ledger experience and leaving spaces to be filled in by the bookkeeper. Such information stamped on this sheet, with a few words of opinion from the credit man, gives all that is desired. The practice of giving ledger experience is so general that it is not necessary to specifically request it. 240 APPENDIX CONFIDENTIAL INFORMATION CREDIT DEPARTMENT Geo. D. Witt Shoe Company. Manufacturers LYNCHBURG. VA. - - ~ 19. M DEAR SIR: We will Esteem it a favor If you will kindly give ua la strict confidence your opinion of the Party named below as a moral and financial risk, IHentloning any claim against him that has come to Your knowledge and any other matter which in your judgment will aid In determining his desirability as A customer we will highly ESTEEM YOUR KINDNESS AND WILL BE GLAD TO RECIPROCATE AT ANY TIME. YOURS VERY TRULY, GEO. D. WITT SHOE CO* AMOUNT OF ORDBRS- YOURS TRULY. Form 9. Trade Inquiry Blank. This is another form of inquiry blank used by large houses. It leaves largely to the house ans\yering the inquiry how much information it should volunteer in addition to the ledger experience, which is always expected. FORMS 241 NATIONAI.ASIIOCIATIONOPCRK- (Erg^tt WtpnrUmnt Capital paid in, »i,6Sp,opo.oo Dear Sin In Strict confidence, please give us any information you may possess concerning the financial ability, character, busi- nesB capacity , and paying qualities of firm named below. Holding ourselves ever in readiness to reciprocate your cour- tesy. Yours very truly. [OarOnbrt- INQUIRY ON How long sold? Highest credit?. Terms Regular or aerms, special? _ Piscount Prompt, Slow or Very Slow? Now Owes $. Past Due $ . Due Since Form 10. General Inquiry Blank. An excellent form of credit inquiry blank for obtaining general information. It can be used in the typewriter with carbon paper; the questions are short and there is ample space for "General Remarks." 242 APPENDIX (Btmt if partfflgnt Capital Paid In, si.eao.oocoo &l|og IMattufarturgrg HtjnrliburQ. l^a.. Dear Sir: In Strict confidence, please give us any inforoation you may possess concerning the financial ability, character, buai- ness capacity and paying (jualltlea of firm named below. Thimking you in advance for your prompt and kind reply we are. Yours very truly. INQUIRY ON Seem prosperous? Keep fair balanoe?^ Pay notes when due?- GENERAL REMARKS Honor Drafts on presentation? Estimated net worth over all lia- bilities i , Would you eonsider reasonably safe credit risk for f Form 11. Inquiry Blank for Bank. This blank is for the bank's report on its customer. Note especially the questions, which are of such nature that they can be easily answered by any bank cashier. The answers will contain information of value in passing on the risk. This is one of the best forms of bank inquiry that has been devised. FORMS 243 €a)iital Paid 3n, ^1.620.000.00 Atty. Dear Sir: In Strict Confidence; please give us any information you may possess concerning the financial ability, character, busi- ness capacity and paying qualities of firm named below. Thanking you in advance for your prompt and kind reply we are. Yours very truly. INQUIRY ON Seem prosperous? Ever been sued or had claim in At- torney's hands P___ ,__ :0wn3 Real. Estate? Value $ Estimated net worth over all lia- bilities $_J . Good business ability and well thought of in cDmmunity?__ Would you consider reasonably safe credit risk for $ Form 12. Attorney's Report. A good form for the attorney's report. The questions are few and simple, leaving ample space for "General Remarks." This blank carries out the idea that the answerer's time is valuable ; it does not antagonize by a mass of useless questions. The style of inquiry and tone of the letter should invariably bring an answer of value to the credit man. 244 APPENDIX < Ok • O Q. >• ■^ °= ^.^ I 0) u z DC O h I- > w Q O H U w tog 2^ Oe Ox 0) z DCS z o o z HOP S 2 Q w o'A < c o 2 ■■*2 rt.rt .2 o w o o o W . >>>> ^ CJQQ rt rt ii C C (U O OA ^^y^ <: I— I H t— ( H o (U en iz; 'S o § Q >. y bo ^ I ^ H 9 « ■^ ^ Q rt !" O rt >^ ^ -^ a ro •+-> -i-j -^ C ^ o "^ S o c o bc.S ^ *^ "a cti bO >> be pec 3 o rt ^ o = 3 c «^ o -^ c •r >- P-i ^ c ^ ^ C^ 1^ 05 _, "1 2i Wl <-M T; en en u. o Oj E Li M-i ti ^ >. •o o en 03 a; > «-M o OJ >-> > ^ en bo .S _o ft C E cn~ '5 0! ? ^ l-H OS en 2 t-i S 03 en 1 03 oT ^ 4J 03 en JJ Ui > 'en a u o3 en .S en :3 ;3 E t 2:^ boo en 'O OS P < u bo d < CO 3 en 43 E 0} .2 T—t • Amount of sales last year Amount of expenses last year What proportion of your sales is on credit? How often do you take an inventory of stock? Date of last inven- tory If you have borrowed money in the business, state what amount is secured and in what way — _ Are any merchandise creditors secured in any way? Have you any judgments, judgement notes, chattel mortgages, or other liens against you, recorded or unrecorded ? If so, describe Suits pending and of what nature-..........~.........~~. ^ ~- If you have pledged or transferred outstanding accounts or property remaining under your control, state amount thereof and amount received, or to be received, on account of such pledge or transfer. Keep bank account with What books of account do you keep?.. Buy principally from following firms : Name Address What line of business? The above statement, both printed and written, has been carefully read by the undersigned, and is a f uil and correct statement of my or our financial condition as of. — 191 Firm signature. — «.. ~.... • — ......~..~ • By -whom signed ••• ....^...m < »♦« -ft member of the firm. Alt questions must 'be answered, insert ciphers in absence of any amount. When the Words ** Yes," "No" or " None" will correctly answer the questions, write them in their proper places. Form 14c. Property Statement — Individual or Partnership (page 3). 250 APPENDIX To RICH, MANN & CO., New York For the purpose of obtaining credit now and hereafter for goods purchased, we here- with submit to you the following statement of our resources and liabilities, and will im- mediately notify you of any material change in our financial condition. In consideration of your granting credit to the undersigned, we agree that in case of our failure or insolvency, or in case we shall make any assignment for the benefit of credit- ors, bill of sale, mortgage, or other transfer of our property, or shall have our stock or plant attached, receiver appointed, or should any judgment be entered against us, then all and every of the claims which you have against us shall at your option become immediately due and payable, even though the term of-cfedit has not expired. All goods hereafter purchased from you shall be taken to be purchased subject to the foregoing conditions as a part of the terms of sale. Corporation style . City , County State. BUSINESS ASSETS Value of Merchandiseon hand at cost If manufacturing, raw material, $ finished, $. unfinished, $. Notes and accounts, cash value Cash in hand Cash in bank Bills or accounts receivable, due from officers Patents and patterns Fixtures and machinery Total real estate, cash value $ Total encumbrances on real estate, $. Equity Total Active Business Asseta [ Dollars Cents 1 1 1 1 1 1 1 J) BUSINESS LIABILITIES. Owe for mdse.,open acct, ofwhich$ is past due Owe for notes for mdse Owe banks Owe for bills for paper sold Owe others for bor'd money Owe taxes and rent Mtgs. on fixt's and mach'y Dollars Cents ii II Total Business Liabilities- Total net worth.- TiTT I I I .1 I I I II Please state location and description of each parcel of real estate, and cash valuation of, and encumbrances on, each — „ Form 15a. Property Statement— Corporation (page 2). FORMS {Accommodation indorsements ...... Indorsed bills receivable and outstanding. 251 OFFICERS. Name in Full President _ Vice-Prest Secretary Treasurer DIRECTORS. Name in Full Authorized capital Subscribed Paid in .-~. How paid in: Cash, $ _ Other property Description of other property, and how valued In whose name is title to real estate held? Incorporated in what State and under what general laws or special act? Nature of business? Date of charter? ...Suits pending, and of what nature? Are any merchandise creditors secured in any way? Amount of annual business Annual expenses 'Annual dividends When was last dividend declared ? Rate Insurance carried on merchandise Fixtures and machinery. Real estate Regular time of taking inventory. Keep bank accounts with , Keep- following books of account „ If you have pledged or transferred outstanding accounts or property^ remaining* under your control, state amount thereof and amount received, or to be received, on account of such pledge or transfer Buy principally from following firms : Name Address What line of business? The above statement, both printed and written, has been carefully read by the undersig^ned, and is a full and correct statement of • our financial conditiou as of -^ 191 Corporation Signature .......^.^ By Date ■ - All questions must be answered, insert ciphers in absence of any amount When thok words "Yes," " No" or " None" will correctly answer the questions, write them in their proper places. Form 15b. Property Statement — Corporation (page 3). 55^ Aft>ENf)lX 1^2 §1 Hz ^^ a E g o 5| 55 0^ u Zm ■■S et "3 -a a" - ►,- •Ss «■« if. «S 20. 2 * •s « -Ss ■ 1p E S A 14 1.9 .4i'8 •d a '^^^ n^.^ "jj •-■ -< K.-tt "J b &« Ki ■^ o-a &li rt rfi S n jj 0.« » 4) |S-Sg •5 2 B S o 3 rt *" ■2 S'C B « ,. 4) O s r-i 5 ! |||3 I 'tis n-d « «> o 3 s -s a ^ > tn <2 3 M 1 1 3 *j O rt < ^ c u O o Q 9 4 ^ ^5 i ^ i 2 i S 2 e E ^- .3 >^ t: ?. :s i b -H S 5 2§, ^ "d Form 16. Property Statement — Individual FORMS 253 r a -a J2 boS o .5 5 .S i tot 4> ti -, 13 J. o tt> •" > tog o - w -•a to to s II a m 11 • 1 i i i 1 \ V s 1 1 i i OS I u "3 \ \ i i 5 i 5 i > 1 or Partnership. (See page 246.) 254 APPENDIX fc^ « is 4> . ca 1 c c 1 o Q 8 II >-• « • . c It la c ^^ o il !i Jl 11 c g 2 1/1 i w 3 •O 1 1 2, a 1 1 Owe Open Accounts for Mdse. due and past due OwP NotM ff>r MdsP not diip Owe Notes for Mdse. due and past due Borrowed Money (In (ddltlon to ibovo but not Including rtil esttte mortgigtt) OwP Rant 1 1 a 3 s S a •a 1 J •3 a 11 2 1 •o j: si si u c i I n 3 \ I a § s i 3 >• a m ai J 1 4 1 c 1 c "S 1 « 1 1 1 ,r c c X. C 1 o i ;i '1 ? o 3 > 3 ] S 1 1 It IS, s| 11 ►J < > o p o 3 o 2: <: z 2 b! u O \ w S s 1 FoU Here Form 17. "Self-contained" Property Statement — Individual, FORMS 2SS ^ "O « g ° § -a •- I i- =^ ■•^- -s I § a- a Of a (0 o 2 ,<» >> o" 3 *; o in to ■" ^ ;3 S 2 i^^ V . I |i II s Partnership, or Corporation. (See page 246.) 256 APPENDIX g 1 ,t 1 "1 ^ i 1 1 p 1 j 1 1 ■-5 1 i 1 1 '•^ 1 g 1 gj 1 . .... ■ ■ — 1 ^ j • • 1 1 1 •> >- .! 1 ; i i 1 : Z 1 1 i 1 i ■ < '■■ i i Du ': I i 2 1 ; [ i ! i : i : j i ; ', UJ 1 ' : f en 1 i_ \ ■ 1 1 X CO i j '-' i ^ : - - - • *l Z ^ 1 • & . i 1 > i J i : ! • -;? - if; 1 1 ■ )■ m . j \ 3 s 2 01 ■ c ? z 5 j 1 j 1 1" 1 § « .E U3 1 i 1 i ill •- / n "^ 1 ! 1 ^ i i' - ^11. : . . S c i 1 i i he . i 1 ■0 B 1 d d r 0: -S - - ? E. S = - S 5 r - • - > < < < Form 18. Financial Statement. This is an excellent form of not a question on it but which can and should be readily answered because of the space provided on the back of the sheet (not shown) FORMS 257 1 ,,3 . 1^1 !' \ i ^ s •a \ 1 ^ ^ (3 j g|| ■ i-i 1 g ■ 1 •*-• 3 (A '1 15 ' en £) n . i ■ . ] i 1 i £.« .i 1 5 3! s !-■< S I J 11 f^ f s ^ 5 ^ 1 rt « , , 3 ■ s 1 i f J 1 Is i' ."2 z 2 - : : : V — it ■ .S 5 : w " 1 Sir III s •s 1 ■-■■■■■■ h- ^ t . . . ! ::.: = = . 1 _. 2 r 1 1 2.. .2 ■1 •0 B 2 ■0 ill. mi mi 1 3- flt. 3 3 w. g s 5 1 1 III •5 financial statement, and while it goes into details thoroughly, there is even by small country merchant. This form of statement is desirable for a list of references. 258 APPENDIX STATEMENT OF M. C. KISER Co'mPANY, Atlanta. Ga. Firm Name •. — •*■ O Partner's Name - .— When commenced business Capital invested $ Amount annual business $ Ever tailed? If so, how. settled Amount of insurance on stock of goods, $ _, , on buildings, J, Are you security on any bond, or do you endorse? 1 ASSETS Amount of stock now on hand and when invoiced ■ ^.J ^ __ I Amo>in^ of good notes and accounts now on hand valued at . S " doubtful " " " ' $ valued at.... $ Cash on hand ^ $ Value of real estate and in whose name .— « $ $ Other Assets, consisting of * ■• .: ^ % - t. tive Stock r - ^-- * , Total assets - — — S - LIABILITIES Amount owing for merchandise on open account, and not due _ . $ ■ — " ". " " " " " past due... $..-^ " " ■• " closed by note, not due - $ " " " "' " " past due i $ Amount owing for borrowed money, and when due . ... $ " " fpr borrowed money ,to friends and relatives not included in above $ " " on real esti^te, and when due ^ u . $ Amount owing in any other manner -...- * '^ Total liabilities r— »- Amount mortgages or other liens on real estate . Amount of mortgage or other liens on stock of ijierchandise ^ . _ To whom given and when due -— — .. Amount of notes and accounts held as collateral security by other creditors, or in any way pledged to security, and to whom. To whom indebted, and amounts due each largest creditofs ; .. What property in wife's name ^. The abovtj statement is made for the purpose of obtaining credit from M. C. KISER COMPANY, now, or hereafter, and the same shall stand good as to subsequent purchases, unless there should I making further purchases from them* And as a f ""-' *" ning creoit rrom m. i^. rwi&t^K J-umrArti, now, or nerearter, ana ine same snail Id be a material change, in which case (I or we) will notify them in writing before I to obtaining credit from said M. C. KISER COMPANY, now or hereafter, (T or w«> waive any and all homestead or exemption rights, that (I or either of us) may have under or by virtue of the Constitution or Laws of Georgia or any other State, or the United States, as against any debt which we may owe the said M. C. KlSER COMPANY, and fail to pay them therefor. Sixn here full name of firm... . Date . 191 .. By whom alKned. Form No. 1 nber of the firm Form 19. Financial Statement. This form is interesting in that it contains what is known as the "Georgia Waiver" clause. The Con- stitution of Georgia allows a man to waive his homestead rights, and it is the custom to have the waiver clause in contracts in this state. The same is applicable to any other state which by law permits the waiving of homestead exemptions. FORMS 259 To ANDERSON-DULIN-VARNELL CO- Memorandum of the Financial Condition of ASSETS DoIIk Ctf. UABIUTIES Dolb. CU. Stock of Merchandise on hand .... Notes and Accounts collectable .... Cash on hand and in Bank Real Estate • • • - For Merchandise . . For Borrowed Money Due Bank ..... . . Wh^n- dii» For Borrowed Money Due elsewhere . . Wh-n fill" For money due depositors Encumbrance on Real Estate Encumbrance on Stock Other UabiliUes . .. Other Assets • . • Total Assets . . . ^ .... TotalLiabilities TotalLiabilities 1 Does the above statement show all your debts and liabilities of every kind whatsoever?- When did you take an inventory? -. What amount of your merchandise obligations is past due?- To whom do you owe overdue bills? — ., : — ^ — Other insurance, $- Insurance on stock of goods, $ , Annual sales. $. — Clerk hire, per year, $ Store rent, per year, $- From what firms have you been making your largest purchases in the past year or two? Name of each partner REMARKS: Date- -191 ANDERSON-DULIN-VARNELL CO, KnoxviUe, Tenn.: Gentlemen— The above statement and answers to interrogations are reliable, and are made to your firm in good faith, and understand and admit that any credit which you may grant to now or hereafter, is based on an absolute assurance of their correctness Sign. Form 20. Financial Statement. This statement is used by a large dry-goods house, principally among small merchants. It is easily filled out, the questions being few and simple. It meets all the requirements of the false-statement laws of the different states, and was used by the author for a number of years in handling credits for this house. 26o APPENDIX Some Good Reasons Why Yoa Should Make a Statement 1. You are doubtless aware that it is an invariable rule with merchants to inquire into the commercial standing of their customers, it being as necessary for them to know the responsibility of a customer (probably never seen) as it is for a banker to know the responsibility of an applicant for a loan. 2. Information as to the standing of merchants is obtained largely through local correspondents, but such information is often found to be incorrect, for the reason that correspondents either do not possess the facts, or, through preju- dice, wilfully misrepresent them, and as a result the credit of those reported is often unjustly impaired. Our object in addressing you direct is to remedy this injustice by giving you an opportunity to furnish a statement of the facts in your own behalf, 3. We receive statements from merchants, rich and poor, those who dis- count, and those less fortunate, and we find that seldom is the merchant's own statement of the facts not more favorable as a basis of credit than the informa- tion received from other sources, which furnishes a good reason why a merchant should recommend himself rather than leave it to some disinterested person to do. 4. Every merchant knows that, to buy on time, he must have credit; that anything unfavorably affecting that credit decreases his purchasing power. A willingness to furnish a statement of his business condition, even though the capital be small, always strengthens the confidence of the trade in a merchant's honest intention, which is a strong factor in establishing or sustaining a credit, especially to those of limited means. 5. A merchant who is perfectly solvent, and who fails to furnish a state- ment of his condition because he is behind in payments, makes a great mistake, for the reason that by other methods that fact is uncovered, which if reported alone would of course be decidedly unfavorable, while an explanation as to the cause of the delay from the merchant himself, together with a showing of his assets and liabilities, might prove him to be perfectly safe and deserving of further credit, thus allaying any fear or apprehension of creditors, which the withholding of a statement would only still further increase, 6. While merchants require a capital in proportion to the volume of their business, it is a mistake to suppose that those of small means cannot be in good credit. Any merchant who can (and will) show that he is in a condition to succeed, is entitled to and will receive credit for his needs, and a merchant who is unwilling or will not take the trouble to recommend himself cannot reason- ably expect the confidence or recommendation of others, nor will any good business house knowingly extend credit to a concern of doubtful means and uncertain promptitude. 7. Our object in asking this information is solely to enable us to give de- serving merchants the credit to which they are justly entitled. Trusting you will appreciate our fairness, and in your own interest comply with our request, we are, Yours respectfully, GEO. D. WITT SHOE COMPANY Form 21. Financial Statement — Introduction. This is the first page of a three-page statement blank used by a manufacturing com- pany. The inside pages, as well as this first page, are similar to the N, A. C. M. blank, Form 14. This first page is interesting and con- tains much that is good for any merchant to know. FORMS 261 €uei<^ From, To Hulman & Co , of Terre Haute, Indiana For value received, and in consideration that you shall here- after give credit to from time to time in the course of h business as retail grocer in , I, do hereby undertake and guarantee the payment of any sums that "the said may become indebted to you, not to exceed the sum of dollars $( ) This instrument is intended as a general, unlimited, continuing guaranty, whereby I undertake and guarantee as a primary liability uponjne, any and all balance of indebtedness due you from — or that may hereafter become due and any contract entered into by. and Hulman & Co creating or extending such indebtedness, or chang- ing the form thereof, shall be binding upon us, without notice, and render us liable under this guaranty (S'ign full name) — — (Postoffice Address). (County). (Date) . (State)- Form 22. Guarantee Letter. This form of guaranty was sup- plied by the National Association of Credit Men. It is recommended for its simplicity as well as for the fact, as stated in the form, that it is a "general, unlimited, continuing guaranty." 262 APPENDIX GUARANTY The Undersigned, for and in consideration of one dollar ($1.00) in hand, paid by of hereinafter called the Purchaser, the receipt whereof is hereby acknowledged, and the further consideration of enabling the said Purchaser to buy goods, wares, and merchandise on credit of Green & De Laittre Company, Minneapolis, Minnesota, hereinafter called the Vendor, hereby jointly and severally, whether signed by more than one person or not, guarantee the payment of, and bind ourselves per- sonally, our heirs, executors, and administrators to said Vendor, for the payment of all debts of every kind, name, and nature, including interest, which the said Purchaser is now owing, or may hereafter owe, the said Vendor, whether due or not due, provided, however, that the liability of the undersigned here- under shall not be for a greater amount than Dollars ($ ) and interest. The undersigned agree that the debts, payment of which is hereby guaranteed, may, by note or otherwise, be changed in form, extended, or renewed at the option of said Vendor without notice to the undersigned, and the liability of the undersigned shall not be affected by such change, extension, or renewal ; that this guaranty shall remain in full force and effect up to such date as the said Vendor shall have received at its office in Minneapolis, Minnesota, written notice from the undersigned to cease selling the said Purchaser on the strength of his guaranty ; that the Vendor may at its option extend credit to the Purchaser to an amount in excess of the limit to this guaranty without impairing our joint and several liabilities hereunder; that should said Vendor commence suit against the Purchaser, or against the undersigned on this guaranty, to pay a reasonable attorney fee, and that the same may be taxed against the undersigned as part of the costs in said action. The undersigned hereby waives notice from the Vendor of the amount of indebtedness, default in payment, or of the accept- ance of this guaranty. In Witness Whereof, We have hereunto subscribed our names at on this day of , A. D., 19 Witness Witness Form 23. Guaranty. This form is used and recommended by the National Association of Credit Men. It covers all necessary legal points. FORMS 263 o o >- o UJ LiJ ■ U > < o UJ a: Q Q < h < - z ui _ S D D I < q: Z O U >-i C »-! j_. occ O o >- Q UJ z z HI UJ > '^.ti .2 0)^ bo a fe S ^ £ "5 rt 264 APMNDIX 14^R. S.-4-28 THE CREDIT CLEARING HOUSE REPORT May 8, 1914 o $ J 320 210 320 discounts D 250 first order B 275 123 when due M 40 40 when due nn REFUSED B 370 158 discounts B 378 discounts Dd 300 first order C 700 1661 700 discounts D UU D 1840 350 110 1840 250 first order first order little slow UU 104 slow B 558 slow CHICAGO DISTRICT in 30 days-sold 10/22/13 to 5/4/14 -terms 60 days-due 8/1/14-for shipment 9/1/14. LOUISVILLE DISTRICT for shipment. ST. LOUIS DISTRICT sold Fall 1913 to date- terms, May. sold Oct. 21/13 to May 16/14-terms 2-10-30 net. CINCINNATI DISTRICT $86.00 March, 1914-un- SATISFACTORY REPORTS. in 30 days-sold March 1914 to present-terms reg., due Jan. in 10 days-sold Nov., 1913, to Feb., 1914- terms 90 days. BALTIMORE DISTRICT sold since Fall 1913- terms regular. sold Aug., 1913 - terms reg. 60 days-sold Fall 1913- terms reg. 30 to 90 days-sold Aug., 1913, to Oct., 1913- terms reg. Form 25. Credit Clearing House Report. This report illustrates House report on a firm in Alabama which began to place orders warning notice to subscribers as soon as this report was cleared. In a nurnber of references report this party as "discounting." In this lack of space, the report from the Southeastern District, which ap- $ 1 i-i O $ 1 s O P $ $ 183 discounts FORMS 265 NEW YORK DISTRICT in 30 days-sold 1913- terms 2-10-60 net. F 89 89 89 slow sold 1913-terms 2-10, due Dec. J 180 180 180 IN HANDS OF ATTY. sold one bill Nov. 1913- terms reg., due Feb. B 254 ORDER REFUSED 4/10/14-$254.00. E 632 first order for shipment 8/15/14. PHILADELPHIA DISTRICT C REFUSED a/c credit $452.00 Spring 1914. dd 2045 2045 slow 60 days-sold Aug., 1913, to March, 1914-terms reg. NN 75 first order B 240 first order for shipment 8/15/13. B 173 173 first trans. sold 5/27/14-terms reg., due 5/27/14. NEW ORLEANS DISTRICT d 262 262 247 first trans. sold 2/20/14 to 3/10/14- terms 60 days - due April 20 and May 10. d 226 COLL. BY ATTY. sold Oct., 1913-terms 60 days. MEMPHIS DISTRICT D 871 750 21 21 paid $200.00 cash and by in- stalments on balance, and on which are still paying-sold one bill October, 1913. CLEVELAND DISTRICT E 130 first order for shipment 3/1/14. BOSTON DISTRICT B 130 130 130 when due sold two bills-terms 3-30 -net 60-due July, 1914. cj 450 first order dd BALTIMORE DISTRICT coll. BY DRAFT $165.00, Feb., 1914. the importance of securing credit information. It is a Credit Clearing throughout the United States. The Credit Clearing House issued a June, 1914, the subject of the report went into bankruptcy. Note that report the usual first column of index figures has been omitted. For peared in the original report, has been omitted. 266 APPENDIX In the United States District Court for the Eastern District of Tennessee, Northern Division In the Matter of ) No John Doe, l Alleged Bankrupt ) I" Bankruptcy To the Honorable , Judge of Said Court : The Petition of Richman Company, a Corporation organized and existing under the laws of the State of New York, doing business at 75 Union Street, New York City; Richard Roe, an individual doing business in Lynchburg, Virginia; and Jones & Smith, a partnership, comprised of Thomas Jones and John Smith, doing business in Bristol, Tennessee, respectfully shows: 1. — That John Doe, for the greater portion of six months next preceding the date of the filing of this petition has had his place of business and has resided in Jonesville, Union County, Tennessee, and District aforesaid, having been engaged in the general merchandise business and owes debts to the amount of $1,000.00 and over. 2. — Your Petitioners are creditors of the said John Doe, having provable claims, amounting in the aggregate in the excess of securities held by them in the sum of $500,00, and that neither of your Petitioners is entitled to priority of payment on its said claim within the meaning of Section 64-B of the Bankruptcy Act of 1898, nor has either of your Petitioners received a preference within the meaning of Section 60- AB of said law as amended. 3. — That said John Doe is neither a wage earner nor person engaged chiefly in the tillage of the soil. 4. — That the nature and amount of your Petitioners' claims are as follows : Richman Company, notes for merchandise $528.00 Richard Roe, open account for merchandise 27.50 Jones & Smith, open account for merchandise 150.00 5. — ^Your Petitioners further represent that the said John Doe is insolvent, and that within four months next preceding the date of the filing of this petition, the said John Doe committed an Act of Bank- ruptcy in that he did heretofore on or about the 14th day of October, 1914, transfer a certain portion of his property, to wit : his entire stock of goods including fixtures located at Jonesville, Tennessee, to Blank Form 26. Petition in Bankruptcy. A similar oath is made by the sample petition, Samuel Adams, Attorney-at-Law, makes a similar oath Petitioning Creditors. FORMS 267 Grocery Co., one of his creditors, with intent to prefer such creditor over his other creditors; said transfer consisting in the execution and deHvery of a chattel mortgage for $3,000.00 to the said Blank Grocery Co., the same being dated October 1, 1914, but was not filed for record until October 14, 1914, and your Petitioners did not know of the existence of said mortgage until after October 14, 1914. Wherefore, your Petitioners pray that service of this petition with a subpoena may be made upon said John Doe, as provided by said Bankruptcy Law of 1898, as amended, and that said John Doe may be adjudged a Bankrupt within the purview of said Law. Rich MAN Company, By Samuel Adams, Attorney-at-Law for said Co. Richard Roe, By Samuel Adams, Attorney-at-Law for said R. Roe Jones & Smith, By John Smith, A member of the firm Samuel Adams, Attorney for Petitioning Creditors, Address, Knoxville, Tennessee. United States of America Northern District of Tennessee County of Sullivan In person before the undersigned, came John Smith, who on oath said that he is a member of the firm of Jones & Smith, being one of the Petitioners mentioned and described in the foregoing petition and does make solemn oath that the statements of fact contained in the foregoing petition are true. John Smith Sworn to and subscribed before me this the 10th day of December, 1914, J. Y. Hopkins, Notary Public, Sullivan County, Tenn. other creditors in this petition where practicable. Also, as in this as to the statements of fact, alleging that he is Attorney-at-Law for the 268 APPENDIX UNITED STATES OF AMERICA, EASTERN DISTRICT OF TENNESSEE, NORTHERN DIVISION In the United States District Court, in and for said District. In the matter of JOHN DOE Jonesville, Tenn. Bankrupt No. In Bankruptcy, Proof of Claim. State of New York, County of Kings, ss. At New York, in said County and State, on the 12th day of December A. D., 1914, came JOHN RICHMAN and made oath and says : That he is Treasurer of the RICHMAN COMPANY, a corporation incorporated by and under the laws of the State of New York, and carrying on business at New York, in the County of Kings and State of New York, and that he is duly authorized to make this proof. That the above named bankrupt, the person by or against whom a petition for adjudication of bankruptcy has been filed, was at and before the filing of said petition, and is still justly and truly indebted to said RICHMAN COMPANY, in the sum of Five Hundred and Twenty-eight Dollars, including $1.25 interest to date of adjudication. That the nature and consideration of said debt is as follows : Dry Goods and Notions as per itemized statement attached hereto sold and delivered to the bankrupt at his special instance and request. That no part of said debt has been paid ; that there are no set-offs or counter claims to the same and that claimant has not nor has any person by its order or to the knowledge or belief of said deponent, for claimant's use, had or received any manner of security for said debt, whatever, nor has any note been given therefor, nor has any judgment been rendered thereon. And this deponent further says that he is duly authorized by his principal to make this affidavit, and that it is within his knowledge that the aforesaid debt was incurred as and for the consideration above stated, and that such debt to the best of his knowl- edge and belief, still remains unpaid and unsatisfied. JOHN RICHMAN, (Treasurer Richman Company) Subscribed and sworn to before me, this 12th day of December, 1914, John McAllister, Notary Public, Kings County, New York. My commission expires April 20, 1915. Form 27 (face). Claim in Bankruptcy. FORMS POWER OF ATTORNEY 269 In the Matter of JOHN DOE Jonesville, Tenn. Bankrupt. In Bankruptcy. To Samuel Adams, Attorney, Knoxville, Tenn. The RICHMAN COMPANY, a corporation of New York, doing business at New York, Kings County, New York, by its Treasurer , JOHN RICHMAN , of said State and County, does hereby authorize you or any of you to attend the meeting of creditors in this matter, advertised or directed to be holden at Jonesville, Tennessee, on the 20th day of December, 191 4, before Hon. P. H. ADAMS, referee in bankruptcy, or any adjourn- ment thereof, and then and there for said RICHMAN COMPANY, and in its name to vote for or against any proposal or resolution that may be lawfully made or passed at such meeting or adjourned meeting and in the choice of trustee or trustees of the estate of said bankrupt. In Witness Whereof, the RICHMAN COMPANY has caused this Power of Attorney to be signed and its seal affixed, this 12th day of December, 191 4. RICHMAN COMPANY, (Seal) By John Richman, Treasurer. Signed, sealed and delivered in presence of William Russell, Acknowledged before me, this 12th day of December, 1914. John McAllister, Notary Public, Kings County, New York. Form 27 (reverse). Power of Attorney. 270 APPENDIX THE NATIONAL BANKRUPTCY ACT An Act to Establish a Uniform System of Bankruptcy Throughout the United States.* CHAPTER I. DEFINITIONS. § 1. Meaning of Words and Phrases. — a. The words and phrases used in this act and in proceedings pursuant hereto shall, unless the same be inconsistent with the context, be construed as follows: (1) "A person against whom a petition has been filed" shall include a person who has filed a voluntary petition; (2) "ad- judication" shall mean the date of the entry of a decree that the defendant, in a bankruptcy proceeding, is a bankrupt, or if such decree is appealed from, then the date when such decree is finally confirmed; (3) "appellate courts" shall include the circuit courts of appeals of the United States, the supreme courts of the Terri- tories, and the supreme court of the United States; (4) "bankrupt" shall include a person against whom an involuntary petition or an application to set a composition aside or to revoke a discharge has been filed, or who has filed a voluntary petition, or who has been adjudged a bankrupt; (5) "clerk" shall mean the clerk of a court of bankruptcy; (6) "corporations" shall mean all bodies hav- ing any of the powers and privileges of private corporations not possessed by individuals or partnerships, and shall include limited or other partnership associations organized under laws making the capital subscribed alone responsible for the debts of the associa- tion; (7) "court" shall mean the court of bankruptcy in which the proceedings are pending, and may include the referee; (8) "courts of bankruptcy" shall include the district courts of the United States and of the Territories, the supreme court of the District of Colum- bia, and the United States court of the Indian Territory, and of Alaska; (9) "creditor" shall include anyone who owns a demand or claim provable in bankruptcy, and may include his duly authorized agent, attorney, or proxy; (10) "date of bankruptcy," or "time of bankruptcy," or "commencement of proceedings," or "bankruptcy," with reference to time, shall mean the date when the petition was filed; (11) "debt" shall include any debt, demand, or claim provable in bankruptcy; (12) "discharge" shall mean the release of a bank- rupt from all of his debts which are provable in bankruptcy, except such as are excepted by this act; (13) "document" shall in- • The National Bankruptcy Act was approved July 1, 1898, and amended February 5, 1903, June 15, 1906, and June 25, 1910. The Act as given herewith contains all of these amendments. THE NATIONAL BANKRUPTCY ACT 271 elude any book, deed, or instrument in writing; (14) "holiday" shall include Christmas, the Fourth of July, the Twenty-second day of February and any day appointed by the President of the United States or the Congress of the United States as a holiday or as a day of public fasting or thanksgiving; (15) a person shall be deemed insolvent within the provisions of this act whenever the aggregate of his property, exclusive of any property which he may have conveyed, transferred, concealed, or removed, or permitted to be concealed or removed, with intent to defraud, hinder or delay his creditors, shall not, at a fair valuation, be sufficient in amount to pay his debts; (16) "judge" shall mean a judge of a court of bankruptcy, not including the referee; (17) "oath" shall include affirmation; (18) "officer" shall include clerk, marshal, receiver, referee, and trustee, and the imposing of a duty upon or the for- bidding of an act by any officer shall include his successor and any person authorized by law to perform the duties of such officer; (19) "persons" shall include corporations, except where otherwise specified, and officers, partnerships, and women, and when used with reference to the commission of acts which are herein forbid- den shall include persons who are participants in the forbidden acts, and the agents, officers, and members of the board of direc- tors or trustees, or other similar controlling bodies of corpora- tions; (20) "petition" shall mean a paper filed in a court of bank- ruptcy or with a clerk or deputy clerk by a debtor praying for the benefits of this act, or by creditors alleging the commission of an act of bankruptcy by a debtor therein named; (21) "referee" shall mean the referee who has jurisdiction of the case or to whom the case has been referred, or anyone acting in his stead; (22) "con- ceal" shall include secrete, falsify, and mutilate; (23) "secured creditor" shall include a creditor who has security for his debt upon the property of the bankrupt of a nature to be assignable under this act, or who owns such a debt for which some indorser, surety, or other persons secondarily liable for the bankrupt has such security upon the bankrupt's assets; (24) "States" shall in- clude the Territories, the Indian Territory, Alaska, and the District of Columbia; (25) "transfer" shall include the sale and every other and different mode of disposing of or parting with property, or the possession of property, absolutely or conditionally, as a payment, pledge, mortgage, gift, or security; (26) "trustee" shall include all of the trustees of an estate; (27) "wage-earner" shall mean an individual who works for wages, salary, or hire, at a rate of com- pensation not exceeding one thousand five hundred dollars per year; (28) words importing the masculine gender may be applied to and include corporations, partnerships, and women; (29) words 2^2. APPENDIX importing the plural number may be applied to and mean only a single person or thing; (30) words importing the singular number may be applied to and mean several persons or things. CHAPTER II. CREATION OF COURTS OF BANKRUPTCY AND THEIR JURISDICTION. §2. Courts and Jurisdiction. — That tke courts of bankruptcy as hereinbefore defined, viz., the district courts of the United States in the several States, the supreme court of the District of Colum- bia, the district courts of the several Territories, and the United States courts in the Indian Territory and the District of Alaska, are hereby made courts of bankruptcy, and are hereby invested, within their respective territorial limits as now established, or as they may be hereafter changed, with such jurisdiction at law and in equity as will enable them to exercise original jurisdiction in bankruptcy proceedings, in vacation in chambers and during their respective terms, as they are now or may be hereafter held, to (1) adjudged persons bankrupt who have had their principal place of business, resided, or had their domicile within their respective territorial jurisdictions for the preceding six months, or the greater portion thereof, or who do not have their principal place of busi- ness, reside, or have their domicile within the United States, but have property within their jurisdiction, or who have been adjudged bankrupts by courts of competent jurisdiction without the United States and have property within their jurisdiction; (2) allow claims, disallow claims, reconsider allowed or disallowed claims and allow or disallow them against bankrupt estates; (3) appoint receivers or the marshals, upon application of parties in interest, in case the courts shall find it absolutely necessary, for the preservation of estates, to take charge of the property of bankrupts after the filing of the petition and until it is dismissed or the trustee is qualified; (4) arraign, try, and punish bankrupts, officers, and other persons, and agents, officers, members of the board of directors or trustees, or other similar controlling bodies of corporations for violations of this act, in accordance with the laws of procedure of the United States now in force, or such as may be hereafter enacted, regulating trials for the alleged violation of laws of the United States; (5) authorize the business of bankrupts to be conducted for limited periods by receivers, the marshals, or trustees, if necessary in the best inter- ests of the estates, and allow such officers additional compensation for such services, as provided in section forty-eight of this act; (6) bring in and substitute additional persons or parties in pro- THE NATIONAL BANKRUPTCY ACT 273 ceedings in bankruptcy when necessary for the complete determi- nation of a matter in controversy; (7) cause the estates of bank- rupts to be collected, reduced to money and distributed, and deter- mine controversies in relation thereto, except as herein otherwise provided; (8) close estates, whenever it appears that they have been fully administered, by approving the final accounts and dis- charging the trustees, and reopen them whenever it appears they were closed before being fully administered; (9) confirm or reject compositions between debtors and their creditors, and set aside compositions and reinstate the cases; (10) consider and confirm, modify or overrule, or return, with instructions for further pro- ceedings, records and findings certified to them by referees; (11) determine all claims of bankrupts to their exemptions; (12) dis- charge or refuse to discharge bankrupts and set aside discharges and reinstate the cases; (13) enforce obedience by bankrupts, offi- cers, and other persons to all lawful orders, by fine or imprison- ment or fine and imprisonment; (14) extradite bankrupts from their respective districts to other districts; (15) make such orders, issue such process, and enter such judgments in addition to those specifically provided for as may be necessary for the enforcement of the provisions of this act; (16) punish persons for contempts committed before referees; (17) pursuant to the recommendation of creditors, or when they neglect to recommend the appointment of trustees, appoint trustees, and upon complaints of creditors, remove trustees for cause upon hearings and after notices to them; (18) tax costs, whenever they are allowed by law, and render judg- ments therefor against the unsuccessful party, or the successful party for cause, or in part against each of the parties, and against estates, in proceedings in bankruptcy; (19) transfer cases to other courts of bankruptcy; and (20) exercise ancillary jurisdiction over persons or property within their respective territorial limits in aid of a receiver or trustee appointed in any bankruptcy proceedings pending in any other court of bankruptcy. Nothing in this section contained shall be construed to deprive a court of bankruptcy of any power it would possess were certain specific powers not herein enumerated. CHAPTER III. BANKRUPTS. §3. Acts of Bankruptcy. — a. Acts of bankruptcy by a person shall consist of his having (1) conveyed, transferred, concealed, or removed, or permitted to be concealed or removed, any part of 274 APPENDIX his property with intent to hinder, delay, or defraud his creditors, or any of them; or (2) transferred, while insolvent, any portion of his property to one or more of his creditors with intent to prefer such creditors over his other creditors; or (3) suffered or permit- ted, while insolvent, any creditor to obtain a preference through legal proceedings, and not having at least five days before a sale or final disposition of any property affected by such preference vacated or discharged such preference; or (4) made a general as- signment for the benefit of his creditors, or, being insolvent, applied for a receiver or trustee for his property or because of insolvency a receiver or trustee has been put in charge of his property under the laws of a State, of a Territory, or of the United States; or (5) admitted in writing his inability to pay his debts and his willingness to be adjudged a bankrupt on that ground. b. A petition may be filed against a person who is insolvent and who has committed an act of bankruptcy within four months after the commission of such act. Such time shall not expire until four months after (1) the date of the recording or registering of the transfer or assignment when the act consists in having made a transfer of any of his property with intent to hinder, delay, or defraud his creditors or for the purpose of giving a preference as hereinbefore provided, or a general assignment for the benefit of his creditors, if by law such recording or registering is required or permitted, or, if it is not, from the date when the beneficiary takes notorious, exclusive, or continuous possession of the property unless the petitioning creditors have received actual notice of such transfer or assignment. c. It shall be a complete defense to any proceedings in bank- ruptcy instituted under the first subdivision of this section to allege and prove that the party proceeded against was not insolvent as defined in this act at the time of the filing the petition against him, and if solvency at such date is proved by the alleged bankrupt the proceedings shall be dismissed, and under said subdivision one the burden of proving solvency shall be on the alleged bankrupt. d. Whenever a person against whom a petition has been filed as hereinbefore provided under the second and third subdivisions of this section takes issue with and denies the allegation of his insolvency, it shall be his duty to appear in court on the hearing, with his books, papers, and accounts, and submit to an examina- tion, and give testimony as to all matters tending to establish sol- vency or insolvency, and in case of his failure to so attend and submit to examination the burden of proving his solvency shall rest upon him. e. Whenever a petition is filed by any person for the purpose THE NATIONAL BANKRUPTCY ACT 275 of having another adjudged a bankrupt, and an application is made to take charge of and hold the property of the alleged bankrupt, or any part of the same prior to the adjudication and pending a hearing on the petition, the petitioner or applicant shall file in the same court a bond with at least two good and sufficient sureties who shall reside within the jurisdiction of said court, to be ap- proved by the court or a judge thereof, in such sum as the court shall direct, conditioned for the payment, in case such petition is dismissed, to the respondent, his or her personal representatives, of all costs, expenses and damages occasioned by such seizure, tak- ing, and detention of the property of the alleged bankrupt. If such petition be dismissed by the court or withdrawn by the petitioner, the respondent or respondents shall be allowed all costs, counsel fees, expenses, and damages occasioned by such seizure, taking, or detention of such property. Counsel fees, costs, expenses, and damages shall be fixed and allowed by the court, and paid by the obligors in such bond. §4. Who May Become Bankrupts. — a. Any person, except a municipal, railroad, insurance or banking corporation, shall be entitled to the benefits of this act as a voluntary bankrupt. b. Any natural person, except a wage-earner or a person en- gaged chiefly in farming or the tillage of the soil; any un- incorporated company, and any moneyed business or commercial corporation, except a municipal, railroad, insurance, or banking corporation, owing debts to the amount of one thousand dollars or over, may be adjudged an involuntary bankrupt upon default or an impartial trial, and shall be subject to the provisions and entitled to the benefits of this act. The bankruptcy of a corpora- tion shall not release its officers, directors, or stockholders, as such, from any liability under the laws of a State or Territory or of the United States. § 5. Partners. — a. A partnership during the continuation of the partnership business, or after its dissolution and before the final settlement thereof, may be adjudged a bankrupt. b. The creditors of the partnership shall appoint the trustee; in other respects so far as possible the estate shall be adminis- tered as herein provided for other estates. c. The court of bankruptcy which has jurisdiction of one of the partners may have jurisdiction of all the partners and of the administration of the partnership and Individual property. d. The trustee shall keep separate accounts of the partnership property and of the property belonging to the individual partners. 276 APPENDIX e. The expenses shall be paid from the partnership property and the individual property in such proportions as the court shall determine. /. The net proceeds of the partnership property shall be ap- propriated to the payment of the partnership debts, and the net proceeds of the individual estate of each partner to the payment of his individual debts. Should any surplus remain of the property of any partner after paying his individual debts, such surplus shall be added to the partnership assets and be applied to the payment of the partnership debts. Should any surplus of the partnership property remain after paying the partnership debts, such surplus shall be added to the assets of the individual partners in the pro- portion of their respective interests in the partnership. g. The court may permit the proof of the claim of the part- nership estate against the individual estates, and vice versa, and may marshal the assets of the partnership estate and individual estates so as to prevent preferences and secure the equitable dis- tribution of the property of the several estates. h. In the event of one or more but not all of the members of a partnership being adjudged bankrupt, the partnership property shall not be administered in bankruptcy, unless by consent of the partner or partners not adjudged bankrupt; but such partner or partners not adjudged bankrupt shall settle the partnership busi- ness as expeditiously as its nature will permit and account for the interest of the partner or partners adjudged bankrupt. § 6. Exemptions of Bankrupts. — a. This act shall not affect the allowance to bankrupts of the exemptions which are prescribed by the State laws in force at the time of the filing of the petition in the State wherein they have had their domicile for the six months or the greater portion thereof immediately preceding the filing of the petition. § 7. Duties of Bankrupts. — a. The bankrupt shall (1) attend the first meeting of his creditors if directed by the court or a judge thereof to do so, and the hearing upon his application for a discharge, if filed; (2) comply with all lawful orders of the court; (3) examine the correctness of all proofs of claims filed against his estate; (4) execute and deliver such papers as shall be ordered by the court; (5) execute to his trustee transfers of all his property in foreign countries; (6) immediately inform his trustee of any attempt, by his creditors or other persons, to evade the provisions of this act, coming to his knowledge; (7) in case of any person having to his knowledge proved a false claim . THE NATIONAL BANKRUPTCY ACT 277 against his estate, disclose that fact immediately to his trustee; (8) prepare, make oath to, and file in court within ten days, unless further time is granted, after the adjudication, if an involuntary bankrupt, and with the petition if a voluntary bankrupt, a schedule of his property, showing the amount and kind of property, the location thereof, its money value in detail, and a list of his creditors showing their residences, if known, if unknown, that fact to be stated, the amounts due each of them, the consideration thereof, the security held by them, if any, and a claim for such exemptions as he may be entitled to, all in triplicate, one copy of each for the clerk, one for the referee, and one for the trustee; and (9) when present at the first meeting of his creditors, and at such other times as the court shall order, submit to an exam- ination concerning the conducting of his business, the cause of his bankruptcy, his dealings with his creditors and other persons, the amount, kind, and whereabouts of his property, and in ad- dition, all matters which may affect the administration and settle- ment of his estate; but no testimony given by him shall be offered in evidence against him in any criminal proceeding. Provided, however, That he shall not be required to attend a meeting of his creditors, or at or for an examination at a place more than one hundred and fifty miles distant from his home or principal place of business, or to examine claims except when pre- sented to him, unless ordered by the court, or a judge thereof, for cause shown, and the bankrupt shall be paid his actual expenses from the estate when examined or required to attend at any place other than the city, town, or village of his residence. § 8. Death or Insanity of Bankrupts. — a. The death or insan- ity of a bankrupt shall not abate the proceedings, but the same shall be conducted and concluded in the same manner, so far as possible, as though he had not died or become insane: Provided, That in case of death the widow and children shall be entitled to all rights of dower and allowance fixed by the laws of the State of the bankrupt's residence. § 9. Protection and Detention of Bankrupts. — a. A bankrupt shall be exempt from arrest upon civil process except in the fol- lowing cases: (1) When issued from a court of bankruptcy for contempt or disobedience of its lawful orders; (2) when issued from a State court having jurisdiction, and served within such State, upon a debt or claim from which his discharge in bankruptcy would not be a release, and in such case he shall be exempt from 278 APPENDIX such arrest when in attendance upon a court of bankruptcy or engaged in the performance of a duty imposed by this act. b. The judge may, at any time after the filing of a petition by or against a person, and before the expiration of one month after the qualification of the trustee, upon satisfactory proof by the affi- davits of at least two persons that such bankrupt is about to leave the district in which he resides or has his principal place of busi- ness to avoid examination, and that his departure will defeat the proceedings in bankruptcy, issue a warrant to the marshal directing him to bring such bankrupt forthwith before the court for exami- nation. If upon hearing the evidence of the parties it shall appear to the court or a judge thereof that the allegations are true and that it is necessary, he shall order such marshal to keep such bank- rupt in custody not exceeding ten days, but not imprison him, until he shall be examined and released or give bail conditioned for his appearance for examination, from time to time, not exceeding in all ten days, as required by the court, and for his obedience to all lawful orders made in reference thereto. § 10. Extradition of Bankrupts. — a. Whenever a warrant for the apprehension of a bankrupt shall have been issued, and he shall have been found within the jurisdiction of a court other than the one issuing the warrant, he may be extradited in the same manner in which persons under indictment are now extradited from one district within which a district court has jurisdiction to another. §11. Suits by and against Bankrupts. — a. A suit which is founded upon a claim from which a discharge would be a release, and which is pending against a person at the time of a filing of a petition against him, shall be stayed until after an adjudication or the dismissal of the petition; if such person is adjudged a bankrupt, such action may be further stayed until twelve months after the date of such adjudication, or, if within that time such person applies for a discharge, then until the question of such discharge is determined. b. The court may order the trustee to enter his appearance and defend any pending suit against the bankrupt. c. A trustee may, with the approval of the court, be permitted to prosecute as trustee any suit commenced by the bankrupt prior to the adjudication, with like force and effect as though it had been commenced by him. d. Suits shall not be brought by or against a trustee of a bankrupt estate subsequent to two years after the estate has been closed. THE NATIONAL BANKRUPTCY ACT 279 § 12. Compositions, when Confirmed. — a. A bankrupt may offer either before or after adjudication, terms of composition to his creditors after, but not before, he has been examined in open court or at a meeting of his creditors, and has filed in court the schedule of his property and the list of his creditors required to be filed by bankrupts. In compositions before adjudication the bank- rupt shall file the required schedules, and thereupon the court shall call a meeting of creditors for the allowance of claims, examina- tion of the bankrupt, and preservation or conduct of estates, at which meeting the judge or referee shall preside; and action upon the petition for adjudication shall be delayed until it shall be deter- mined whether such composition shall be confirmed. b. An application for the confirmation of a composition may be filed in the court of bankruptcy after, but not before, it has been accepted in writing by a majority in number of all creditors whose claims have been allowed, which number must represent a major- ity in amount of such claims, and the consideration to be paid by the bankrupt to his creditors, and the money necessary to pay all debts which have priority and the cost of the proceedings, have been deposited in such place as shall be designated by and subject to the order of the judge. c. A date and place, with reference to the convenience of the parties in interest, shall be fixed for the hearing upon each appli- cation for the confirmation of a composition, and such objections as may be made to its confirmation. d. The judge shall confirm a composition if satisfied that (1) it is for the best interests of the creditors; (2) the bankrupt has not been guilty of any of the acts or failed to perform any of the duties which would be a bar to his discharge; and (3) the offer and its acceptance are in good faith and have not been made or procured except as herein provided, or by any means, promises, or acts herein forbidden. e. Upon the confirmation of a composition, the consideration shall be distributed as the judge shall direct, and the case dis- missed. Whenever a composition is not confirmed, the estate shall be administered in bankruptcy as herein provided. § 13. Compositions, when set aside. — a. The judge may, upon the application of parties in interest filed at any time within six months after a composition has been confirmed, set the same aside and reinstate the case if it shall be made to appear upon a trial that fraud was practiced in the procuring of such composition, and that the knowledge thereof has come to the petitioners since the confirmation of such composition. 28o APPENDIX § 14. Discharges, when Granted. — a. Any person may, after the expiration of one month and within the next twelve months subsequent to being adjudged a bankrupt, file an application for a discharge in the court of bankruptcy in which the proceedings are pending; if it shall be made to appear to the judge that the bank- rupt was unavoidably prevented from filing it within such time, it may be filed within but not after the expiration of the next six months. b. The judge shall hear application for a discharge and such proofs and pleas as may be made in opposition thereto by the trustee or other parties in interest, at such time as will give the trustee or parties in interest a reasonable opportunity to be heard, and investigate the merits of the application and discharge the applicant unless he has (1) committed an offense punishable by imprisonment as herein provided; or (2) with intent to conceal his financial condition, destroyed, concealed, or failed to keep books of account or records from which such condition might be ascer- tained; or (3) obtained money or property on credit upon a materi- ally false statement in writing, made by him to any person or his representative for the purpose of obtaining credit from such per- son; or (4) at any time subsequent to the first day of the four months immediately preceding the filing of the petition transferred, removed, destroyed, or concealed, or permitted to be removed, de- stroyed, or concealed, any of his property, with intent to hinder, delay, or defraud his creditors; or (5) in voluntary proceedings been granted a discharge in bankruptcy within six years; or (6) in the course of the proceedings in bankruptcy refused to obey any lawful order of, or to answer any material question approved by the court: Provided, That a trustee shall not interpose objections to a bankrupt's discharge until he shall be authorized so to do at a meeting of creditors called for that purpose. c. The confirmation of a composition shall discharge the bankrupt from his debts, other than those agreed to be paid by the terms of the composition and those not affected by a discharge. § 15. Discharges, when Revoked. — a. The judge may, upon the application of parties in interest who have not been guilty of undue laches, filed at any time within one year after a discharge shall have been granted, revoke it upon a trial if it shall be made to appear that it was obtained through the fraud of the bankrupt, and that the knowledge of the fraud has come to the petitioners since the granting of the discharge, and that the actual facts did not warrant the discharge. THE NATIONAL BANKRUPTCY ACT 281 § 16. Co-Debtors of Bankrupts.— a. The liability of a person who is a co-debtor with, or guarantor or in any manner a surety for, a bankrupt shall not be altered by the discharge of such bankrupt. § 17. Debts not Affected by a Discharge.— a. A discharge in bankruptcy shall release a bankrupt from all of his provable debts, except such as (1) are due as a tax levied by the United States, the State, county, district, or municipality in which he resides; (2) are liabilities for obtaining property by false pretenses or false repre- sentations, or for willful and malicious injuries to the person or property of another, or for alimony due or to become due, or for maintenance or support of wife or child, or for seduction of an unmarried female, or for criminal conversation; (3) have not been duly scheduled in time for proof and allowance, with the name of the creditor if known to the bankrupt, unless such creditor had notice or actual knowledge of the proceedings in bankruptcy; or (4) were created by his fraud, embezzlement, misappropriation, or defalcation while acting as an officer or in any fiduciary capacity. CHAPTER IV. COURTS AND PROCEDURE THEREIN. § 18. Process, Pleadings, and Adjudications. — a. Upon the filing of a petition for involuntary bankruptcy service thereof, with a writ of subpoena, shall be made upon the person therein named as defendant in the same manner that service of such process is now had upon the commencement of a suit in equity in the courts of the United States, except that it shall be returnable within fifteen days, unless the judge shall for cause fix a longer time; but in case personal service cannot be made, then notice shall be given by publication in the same manner and for the same time as pro- vided by law for notice by publication in suits to enforce a legal or equitable lien, in courts of the United States, except that, unless the judge shall otherwise direct, the order shall be published not more than once a week for two consecutive weeks, and the return day shall be ten days after the last publication unless the judge shall for cause fix a longer time. h. The bankrupt, or any creditor, may appear and plead to the petition within five days after the return day, or within such fur- ther time as the court may allow. c. All pleadings setting up matters of fact shall be verified under oath. 282 APPENDIX d. If the bankrupt, or any of his creditors, shall appear, within the time limited, and controvert the facts alleged in the petition, the judge shall determine, as soon as may be, the issues presented by the pleadings, without the intervention of a jury, except in cases where a jury trial is given by this act, and make the adjudication or dismiss the petition.. e. If on the last day within which pleadings may be filed none are filed by the bankrupt or any of his creditors, the judge shall on the next day, if present, or as soon thereafter as practicable, make the adjudication or dismiss the petition. /. If the judge is absent from the district, or the division of the district in which the petition is pending, on the next day after the last day on which pleadings may be filed, and none have been filed by the bankrupt or any of his creditors, the clerk shall forth- with refer the case to the referee. g. Upon the filing of a voluntary petition the judge shall hear the petition and make the adjudication or dismiss the petition. If the judge is absent from the district, or the division of the district in which the petition is filed at the time of the filing, the clerk shall forthwith refer the case to the referee. § 19. Jury Trials. — a. A person against whom an involuntary petition has been filed shall be entitled to have a trial by jury in respect to the question of his insolvency, except as herein other- wise provided, and any act of bankruptcy alleged in such petition to have been committed, upon filing a written application therefor at or before the time within which an answer may be filed. If such application is not filed within such time, a trial by jury shall be deemed to have been waived. b. If a jury is not in attendance upon the court, one may be specially summoned for the trial, or the case may be postponed, or, if the case is pending in one of the district courts within the juris- diction of a circuit court of the United States, it may be certified for trial to the circuit court sitting at the same place, or by consent of parties when sitting at any other place in the same district, if such circuit court has or is to have a jury first in attendance. c. The right to submit matters in controversy, or an alleged offense under this act, to a jury shall be determined and enjoyed, except as provided by this act, according to the United States laws now in force or such as may be hereafter enacted in relation to trials by jury. § 20. Oaths, Affirmations. — a. Oaths required by this act, except upon hearings in court, may be administered by (1) ref- THE NATIONAL BANKRUPTCY ACT 283 crces; (2) officers authorized to administer oaths in proceedings before the courts of the United States, or under the laws of the State where the same are to be taken; and (3) diplomatic or con- sular officers of the United States in any foreign country. h. Any person conscientiously opposed to taking an oath may, in lieu thereof, affirm. Any person who shall affirm falsely shall be punished as for the making of a false oath. §21. Evidence. — a. A court of bankruptcy may, upon appli- cation of any officer, bankrupt, or creditor, by order require any designated person, including the bankrupt and his wife, to appear in court or before a referee or the judge of any State court, to be examined concerning the acts, conduct, or property of a bankrupt whose estate is in process of administration under this act: Pro- vided, That the wife may be examined only touching business transacted by her or to which she is a party, and to determine the fact whether she has transacted or been a party to any business of the bankrupt. h. The right to take depositions in proceedings under this act shall be determined and enjoyed according to the United States laws now in force, or such as may be hereafter enacted relating to the taking of depositions, except as herein provided. c. Notice of the taking of depositions shall be filed with the referee in every case. When depositions are to be taken in opposi- tion to the allowance of a claim notice shall also be served upon the claimant, and when in opposition to a discharge notice shall also be served upon the bankrupt. d. Certified copies of proceedings before a referee, or of papers, when issued by the clerk or referee, shall be admitted as evidence with like force and effect as certified copies of the records of district courts of the United States are now or may hereafter be admitted as evidence. e. A certified copy of the order approving the bond of a trustee shall constitute conclusive evidence of the vesting in him of the title to the property of the bankrupt, and if recorded shall im- part the same notice that a deed from the bankrupt to the trustee if recorded would have imparted had not bankruptcy proceedings intervened. /. A certified copy qf an order confirming or setting aside a composition, or granting or setting aside a discharge, not revoked shall be evidence of the jurisdiction of the court, the regularity of the proceedings, and of the fact that the order was made. g. A certified copy of an order confirming a composition shall constitute evidence of the revesting of the title of his property in 284 APPENDIX the bankrupt, and if recorded shall impart the same notice that a deed from the trustee to the bankrupt if recorded would impart. § 22. Reference of Cases after Adjudication. — a. After a person has been adjudged a bankrupt the judge may cause the trustee to proceed with the administration of the estate, or refer it (1) gen- erally to the referee or specially with only limited authority to act in the premises or to consider and report upon specified issues; or (2) to any referee within the territorial jurisdiction of the court, if the convenience of parties in interest will be served thereby, or for cause, or if the bankrupt does not do business, reside, or have his domicile in the district. b. The judge may, at any time, for the convenience of parties or for cause, transfer a case from one referee to another. §23. Jurisdiction of United States and State Courts.— a. The United States circuit courts shall have jurisdiction of all contro- versies at law and in equity, as distinguished from proceedings in bankruptcy, between trustees as such and adverse claimants con- cerning the property acquired or claimed by the trustees, in the same manner and to the same extent only as though bankruptcy proceedings had not been instituted and such controversies, had been between the bankrupts and such adverse claimants. b. Suits by the trustee shall only be brought or prosecuted in the courts where the bankrupt, whose estate is being administered by such trustee, might have brought or prosecuted them if pro- ceedings in bankruptcy had not been instituted, unless by consent of the proposed defendant, except suits for the recovery of property under section sixty, subdivision b; section sixty-seven, subdivision e; and section seventy, subdivision e. c. The United States circuit courts shall have concurrent juris- diction with the courts of bankruptcy, within their respective territorial limits, of the offenses enumerated in this act. § 24. Jurisdiction of Appellate Courts. — a. The Supreme Court of the United States, the circuit courts of appeals of the United States, and the supreme courts of the Territories, in vacation in chambers and during their respective terms, as now or as they may be hereafter held, are hereby invested with appellate jurisdiction of controversies arising in bankruptcy proceedings from the courts of bankruptcy from which they have appellate jurisdiction in other cases. The Supreme Court of the United States shall exercise a like jurisdiction from courts of bankruptcy not within any organized THE NATIONAL BANKRUPTCY ACT 285 circuit of the United States and from the supreme court of the District of Columbia. b. The several circuit courts of appeal shall have jurisdiction in equity, either interlocutory or final, to superintend and revise in matter of law the proceedings of the several inferior courts of bank- ruptcy within their jurisdiction. Such power shall be exercised on due notice and petition by any party aggrieved. §25. Appeals and Writs of Error. — a. That appeals, as in equity cases, may be taken in bankruptcy proceedings from the courts of bankruptcy to the circuit court of appeals of the United States, and to the supreme courts of Territories, in the following cases, to wit, (1) from a judgment adjudging or refusing to adjudge the defendant a bankrupt; (2) from a judgment granting or denying a discharge; and (3) from a judgment allowing or rejecting a debt or claim of five hundred dollars or over. Such appeal shall be taken within ten days after the judgment appealed from has been rendered, and may be heard and determined by the appellate court in term or vacation, as the case may be. b. From any final decision of a court of appeals, allowing or rejecting a claim under this act, an appeal may be had under such rules and within such time as may be prescribed by the Supreme Court of the United States, in the following cases and no other: 1. Where the amount in controversy exceeds the sum of two thousand dollars, and the question involved is one which might have been taken on appeal or writ of error from the highest courts of a State to the Supreme Court of the United States; or 2. Where some Justice of the Supreme Court of the United States shall certify that in his opinion the determination of the question or questions involved in the allowance or rejection of such claim is essential to a uniform construction of this act throughout the United States. c. Trustees shall not be required to give bonds when they take appeals or sue out writs of error. d. Controversies may be certified to the Supreme Court of the United States from other courts of the United States, and the former court may exercise jurisdiction thereof and issue writs of certiorari pursuant to the provisions of the United States laws now in force or such as may be hereafter enacted. § 26. Arbitration of Controversies. — a. The trustee may, pursuant to the direction of the' court, submit to arbitration any controversy arising in the settlement of the estate. b. Three arbitrators shall be chosen by mutual consent, or one 286 APPENDIX by the trustee; one by the other party to the controversy, and the third by the two so chosen, or if they fail to agree in five days after their appointment the court shall appoint the third arbitrator. c. The written finding of the arbitrators, or a majority of them, as to the issues presented, may be filed in court and shall have like force and effect as the verdict of a jury. § 27. Compromises. — a. The trustee may, with the approval of the court, compromise any controversy arising in the administra- tion of the estate upon such terms as he may deem for the best interest of the estate. §28. Designation of Newspapers. — a. Courts of bankruptcy shall by order designate a newspaper published within their re- spective territorial districts, and in the county in which the bank- rupt resides or the major part of his property is situated, in which notices required to be published by this act and orders which the court may direct to be published shall be inserted. Any court may in a particular case, for the convenience of parties in interest, designate some additional newspaper in which notices and orders in such case shall be published. §29. Offenses. — a. A person shall be punished, by imprison- ment for a period not to exceed five years, upon conviction of the offense of having knowingly and fraudulently appropriated to his own use, embezzled, spent, or unlawfully transferred any property or secreted or destroyed any document belonging to a bankrupt estate which came into his charge as trustee. h. A person shall be punished, by imprisonment for a period not to exceed two years, upon conviction of the offense of having knowingly and fraudulently (1) concealed while a bankrupt, or after his discharge, from his trustee any of the property belonging to his estate in bankruptcy; or (2) made a false oath or account in, or in relation to, any proceeding in bankruptcy; (3) presented under oath any false claim for proof against the estate of a bank- rupt, or used any such claim in composition personally or by agent, proxy, or attorney, or as agent, proxy, or attorney; or (4) received any material amount of property from a bankrupt after the filing of the petition, with intent to defeat this act; or (5) extorted or at- tempted to extort any money or property from any person as a consideration for acting or forbearing to act in bankruptcy pro- ceedings. c. A person shall be punished by fine, not to exceed five hun- dred dollars, and forfeit his office, and the same shall hereupon THE NATIONAL BANKRUPTCY ACT 287 become vacant, upon conviction of the offense of, having know- ingly (1) acted as a referee in a case in which he is directly or indirectly interested; or (2) purchased, while a referee, directly or indirectly, any property of the estate in bankruptcy of which he is referee; or (3) refused, while a referee or trustee, to permit a reasonable opportunity for the inspection of the accounts relating to the affairs of, and the papers and records of, estates in his charge by parties in interest when directed by the court so to do. d. A person shall not be prosecuted for any offense arising under this act unless the indictment is found or the information is filed in court within one year after the commission of the offense. § 30. Rules, Forms, and Ofders. — a. All necessary rules, forms, and orders as to procedure and for carrying this act into force and effect shall be prescribed, and may be amended from time to time, by the Supreme Court of the United States. §31. Computation of Time. — a. Whenever time is enumerated by days in this act, or in any proceeding in bankruptcy, the number of days shall be computed by excluding the first and including the last, unless the last fall on a Sunday or holiday, in which event the day last included shall be the next day thereafter which is not a Sunday or a legal holiday. § 32. Transfer of Cases. — a. In the event petitions are filed against the same person, or against different members of a part- nership, in different courts of bankruptcy each of which has juris- diction, the cases shall be transferred, by order of the courts re- linquishing jurisdiction, to and be consolidated by the one of such courts which can proceed with the same for the greatest con- venience of parties in interest. CHAPTER V. OFFICERS, THEIR DUTIES AND COMPENSATION. § 33. Creation of Two Officers. — a. The offices of referee and trustee are hereby created. §34. Appointment, Removal, and Districts of Referees. — a. Courts of bankruptcy shall, within the territorial limits of which they respectively have jurisdiction, (1) appoint referees each for a term of two years, and may, in their discretion, remove them because their services are not needed or for other cause; and (2) designate. 288 APPENDIX and from time to time change, the limits of the districts of referees, so that each county, where the services of a referee are needed, may- constitute at least one district. §35. Qualifications of Referees. — a. Individuals shall not be eligible to appointment as referees unless they are respectively (1) competent to perform the duties of that office; (2) not holding any office of profit or emolument under the laws of the United States or of any State other than commissioners of deeds, justices of the peace, masters in chancery, or notaries public; (3) not related by consanguinity or affinity, within the third degree as determined by the common law, to any of the judges of the courts of bankruptcy or circuit courts of the United States, or of the justices or judges of the appellate courts of the districts wherein they may be appointed; and (4) residents of, or have their offices in, the territorial districts for which they are to be appointed. § 36. Oaths of Office of Referees. — a. Referees shall take the same oath of office as that prescribed for judges of United States courts. § 37. Number of Referees. — a. Such number of referees shall be appointed as may be necessary to assist in expeditiously transact- ing the bankruptcy business pending in the various courts of bank- ruptcy. § 38. Jurisdiction of Referees. — a. Referees respectively are hereby invested, subject always to a review by the judge, within the limits of their districts as established from time to time, with jurisdiction to (1) consider all petitions referred to them by the clerks and make the adjudications or dismiss the petitions; (2) exercise the powers vested in courts of bankruptcy for the ad- niinistering of oaths to and the examination of persons as witnesses and for requiring the production of documents in proceedings be- fore them, except the power of commitment; (3) exercise the powers of the judge for the taking possession and releasing of the property of the bankrupt in the event of the issuance by the clerk of a certificate showing the absence of a judge from the judicial district, or the division of the district, or his sickness, or inability to act; (4) perform such part of the duties except as to questions arising out of the applications of bankrupts for compositions or discharges, as are by this act conferred on courts of bankruptcy and as shall be prescribed by rules or orders of the courts of bank- ruptcy of their respective districts, except as herein otherwise pro- THE NATIONAL BANKRUPTCY ACT 289 vided; and (5) upon the application of the trustee during the ex- amination of the bankrupts, or other proceedings, authorize the employment of stenographers at the expense of the estates at a compensation not to exceed ten cents per folio for reporting and transcribing the proceedings. § 39. Duties of Referees. — a. Referees shall (1) declare divi- dends and prepare and deliver to trustees dividend sheets showing the dividends declared and to whom payable; (2) examine all schedules of property and list of creditors filed by bankrupts and cause such as are incomplete or defective to be amended; (3) furnish such information concerning the estates in process of administra- tion before them as may be requested by the parties in interest; (4) give notices to creditors as herein provided; (5) make up records embodying the evidence, or the substance thereof, as agreed upon by the parties in all contested matters arising before them, whenever requested to do so by either of the parties thereto, to- gether with their findings therein, and transmit them to the judges; (6) prepare and file the schedules of property and lists of creditors required to be filed by the bankrupts, or cause the same to be done, when the bankrupts fail, refuse, or neglect to do so;' (7) safely keep, perfect, and transmit to the clerks the records, herein required to be kept by them, when the cases are concluded; (8) transmit to the clerks such papers as may be on file before them whenever the same are needed in any proceedings in courts, and in like manner secure the return of such papers after they have been used, or, if it be impracticable to transmit the original papers, transmit certified copies thereof by mail; (9) upon application of any party in interest preserve the evidence taken or the substance thereof as agreed upon by the parties before them when a sten- ographer is not in attendance; and (10) whenever their respective offices are in the same cities or towns where the courts of bank- ruptcy convene, call upon and receive from the clerks all papers filed in courts of bankruptcy which have been referred to them. b. Referees shall not (1) act in cases in which they are directly or indirectly interested; (2) practice as attorneys and counselors- at-law in any bankruptcy proceedings; or (3) purchase, directly or indirectly, any property of an estate in bankruptcy. § 40. Compensation of Referees. — a. Referees shall receive as full compensation for their services, payable after they are ren- dered, a fee of fifteen dollars deposited with the clerk at the time the petition is filed in each case, except when a fee is not required from a voluntary bankrupt, and twenty-five cents for every proof 290 APPENDIX of claim filed for allowance, to be paid from the estate, if any, as a part of the cost of administration, and from estates which have been administered before them one per centum commissions on all moneys disbursed to creditors by the trustee, or one-half of one per centum on the amount to be paid to creditors upon the con- firmation of a composition. b. Whenever a case is transferred from one referee to another, the judge shall determine the proportion in which the fee and com- missions therefor shall be divided between the referees. c. In the event of the reference of the case being revoked before it is concluded, and when the case is especially referred, the judge shall determine what part of the fee and commissions shall be paid to the referee. §41. Contempts before Referees. — a. A person shall not, in proceedings before a referee, (1) disobey or resist any lawful order, process or writ; (2) misbehave during a hearing or so near the place thereof as to obstruct the same; (3) neglect to produce, after having been ordered to do so, any pertinent document; or (4) refuse to appear after having been subpoenaed, or, upon appearing, refuse to take the oaths as a witness, or, after having taken the oath, refuse to be examined according to law: Provided, That no person shall be required to attend as a witness before a referee at a place outside of the State of his residence, and more than one hundred miles from such place of residence, and only in case his lawful mileage and fee for one day's attendance shall be first paid or tendered to him. b. The referee shall certify the facts to the judge, if any person shall do any of the things forbidden in this section. The judge shall thereupon, in a summary manner, hear the evidence as to the acts complained of, and, if it is such as to warrant him in so doing, punish such person in the same manner and to the same extent as for a contempt committed before the court of bank- ruptcy, or commit such person upon the same conditions as if the doing of the forbidden act had occurred with reference to the pro- cess of, or in the presence of, the court. §42. Records of Referees. — a. The records of all proceedings in each case before a referee shall be kept as nearly as may be in the same manner as records are now kept in equity cases in circuit courts of the United States. b. A record of the proceedings in each case shall be kept in a separate book or books, and shall, together with the papers on file, constitute the records of the case. THE NATIONAL BANKRUPTCY ACT 29 1 c. The book or books containing a record of the proceedings shall, when the case is concluded before the referee, be certified to by him, and, together with such papers as are on file before him, be transmitted to the court of bankruptcy and shall there remain as a part of the records of the court. § 43. Referee's Absence or Disability. — a. Whenever the office of a referee is vacant, or its occupant is absent or disqualified to act, the judge may act, or may appoint another referee, or another referee holding an appointment under the same court may, by order of the judge, temporarily fill the vacancy. § 44. Appointment of Trustees. — a. The creditors of a bank- rupt estate shall, at their first meeting after the adjudication or after a vacancy has occurred in the office of trustee, or after an estate has been reopened, or after a composition has been set aside or a discharge revoked, or if there is a vacancy in the office of trustee, appoint one trustee or three trustees of such estate. If the creditors do not appoint a trustee or trustees as herein provided, the court shall do so. §45. Qualifications of Trustees. — a. Trustees may be (1) in- dividuals who are respectively competent to perform the duties of that office, and reside or have an office in the judicial district within which they are appointed, or (2) corporations authorized by their charters or by law to act in such capacity and having an office in the judicial district within which they are appointed. §46. Death or Removal of Trustees. — a. The death or re- moval of a trustee shall not abate any suit or proceeding which he is prosecuting or defending at the time of his death or removal, but the same may be proceeded with or defended by his joint trustee or successor in the same manner, as though the same had been commenced or was being defended by such joint trustee alone or by such successor. §47. Duties of Trustees. — a. Trustees shall respectively (1) account for and pay over to the estates under their control all inter- est received by them upon property of such estates; (2) collect and reduce to money the property of the estates for which they are trustees, under the direction of the court, and close up the estate as expeditiously as is compatible with the best interests of the parties in interest; and such trustees, as to all property in the custody or coming into the custody of the bankruptcy court, shall 292 APPENDIX be deemed vested with all the rights, remedies, and powers of a creditor holding a lien by legal or equitable proceedings thereon; and also, as to all property not in the custody of the bankruptcy court, shall be deemed vested with all the rights, remedies, and powers of a judgment creditor holding an execution duly returned unsatisfied; (3) deposit all money received by them in one of the designated depositories; (4) disburse money only by check or draft on the depositories in which it has been deposited; (5) furnish such information concerning the estates of which they are trustees and their administration as may be requested by parties in interest; (6) keep regular accounts showing all amounts received and from what sources and all amounts expended and on what accounts; (7) lay before the final meeting of the creditors detailed statements of the administration of the estate; (8) make final reports and file final accounts with the courts fifteen days before the days fixed for the final meetings of the creditors; (9) pay dividends within ten days after they are declared by the referees; (10) report to the courts, in writing, the condition of the estates and the amounts of money on hand, and such other details as may be required by the courts, within the first month after their appointment and every two months thereafter, unless otherwise ordered by the courts; and (11) set apart the bankrupt's exemptions and report the items and estimated value thereof to the court as soon as practicable after their appointment. b. Whenever three trustees have been appointed for an estate, the concurrence of at least two of them shall be necessary to the validity of their every act concerning the administration of the estate. c. The trustee shall, within thirty days after the adjudication, file a certified copy of the decree of adjudication in the office where conveyances of real estate are recorded in every county where the bankrupt owns real estate not exempt from execution, and pay the fee for such filing, and he shall receive a compensation of fifty cents for each copy so filed, which, together with the filing fee, shall be paid out of the estate of the bankrupt as a part of the cost and disbursements of the proceedings. § 48. Compensation of Trustees, Receivers and Marshals. — a. Trustees shall receive for their services payable after they are rendered, a fee of five dollars deposited with the clerk at the time the petition is filed in each case, except when a fee is not required from a voluntary bankrupt, and such commissions on all moneys disbursed or turned over .to any person, including Hen holders, by them, as may be allowed by the courts, not to exceed six per THE NATIONAL BANKRUPTCY ACT 293 centum on the first five hundred dollars or less, four per centum on moneys in excess of five hundred dollars and less than fifteen hun- dred dollars, two per centum on moneys in excess of fifteen hun- dred dollars and less than ten thousand dollars, and one per centum on moneys in excess of ten thousand dollars. And in case of the confirmation of a composition after the trustee has qualified the court may allow him, as compensation, not to exceed one-half of one per centum of the amount to be paid the creditors on such composition. b. In the event of an estate being administered by three trustees instead of one trustee or by successive trustees, the court shall apportion the fees and commissions between them according to the services actually rendered, so that there shall not be paid to trustees for the administering of any estate a greater amount than one trustee would be entitled to. c. The court may, in its discretion, withhold all compensation from any trustee who has been removed for cause. d. Receivers or marshals appointed pursuant to section two, subdivision three, of this act shall receive for their services, payable after they are rendered, compensation by way of commissions upon the moneys disbursed or turned over to any person, including lien holders, by them, and also upon the moneys turned over by them or afterwards realized by the trustees from property turned over in kind by them to the trustees, as the court may allow, not to exceed six per centum on the first five hundred dollars or less, four per centum on moneys in excess of five hundred dollars and less than one thousand five hundred dollars, two per centum on moneys in excess of one thousand five hundred dollars and less than ten thousand dollars, and one per centum on moneys in excess of ten thousand dollars: Provided, That in case of the confirmation of a composition such commissions shall not exceed one-half of one per centum of the amount to be paid creditors on such compositions: Provided further, That when the receiver or marshal acts as a mere custodian and does not carry on the business of the bankrupt as provided in clause five of section two of this act, he shall not receive nor be allowed in any form or guise more than two per centum on the first thousand dollars or less, and one-half of one per centum on all above one thousand dollars on moneys disbursed by him or turned over by him to the trustee and on moneys subse- quently realized from property turned over by him in kind to the trustee: Provided further, That before the allowance of compensa- tion notice of application therefor, specifying the amount asked, shall be given to creditors in the manner indicated in section fifty- eight of this act. 294 APPENDIX e. Where the business is conducted by trustees, marshals, or receivers, as provided in clause five of section two of this act, the court may allov^ such officers additional compensation for such services by way of commissions upon the moneys disbursed or turned over to any person, including lien holders, by them, and, in cases of receivers or marshals, also upon the moneys turned over by them or afterwards realized by the trustees from property turned over in kind by them to the trustees; such commissions not to exceed six per centum on the first five hundred dollars or less, four per centum on moneys in excess of five hundred dollars and less than one thousand five hundred dollars, two per centum on moneys in excess of one thousand five hundred dollars and less than ten thousand dollars, and one per centum on moneys in excess of ten thousand dollars: Provided, That in case of the confirmation of a composition such commissions shall not exceed one-half of one per centum of the amount to be paid creditors on such composition: Provided further, That before the allowance of compensation notice of application therefor, specifying the amount asked, shall be given to creditors in the manner indicated in section fifty-eight of this act. § 49. Accounts and Papers of Trustees. — a. The accounts and papers of trustees shall be open to the inspection of officers and all parties in interest. § 50. Bonds of Referees and Trustees. — a. Referees, before assuming the duties of their offices, and within such time as the district courts of the United States having jurisdiction shall pre- scribe, shall respectively q.ualify by entering into bond to the United States in such sum as shall be fixed by such courts, not to exceed five thousand dollars, with such sureties, as shall be ap- proved by such courts, conditioned for the faithful performance of their official duties. b. Trustees, before entering upon the performance of their official duties, and within ten days after their appointment, or within such further time, not to exceed five days, as the court may permit, shall respectively qualify by entering into bond to the United States, with such sureties as shall be approved by the courts, conditioned for the faithful performance of their official duties. c. The creditors of a bankrupt estate, at their first meeting after the adjudication, or after a vacancy has occurred in the office of trustee, or after an estate has been reopened, or after a composition has been set aside or a discharge revoked, if there is a vacancy in the office of trustee, shall fix the amount of the THE NATIONAL BANKRUPTCY ACT 295 bond of the trustee; they may at any time increase the amount of the bond. If the creditors do not fix the amount of the bond of the trustee as herein provided the court shall do so. d. The court shall require evidence as to the actual value of the property of sureties. e. There shall be at least two sureties upon each bond. f. The actual value of the property of the sureties, over and above their liabilities and exemptions, on each bond shall equal at least the amount of such bond. g. Corporations organized for the purpose of becoming sureties upon bonds, or authorized by law to do so, may be accepted as sureties upon the bonds of referees and trustees whenever the courts are satisfied that the rights of all parties in interest will be thereby amply protected. h. Bonds of referees, trustees, and designated depositories shall be filed of record in the office of the clerk of the court, and may be sued upon in the name of the United States for the use of any person injured by a breach of their conditions. i. Trustees shall not be liable, personally or on their bonds, to the United States, for any penalties or forfeitures incurred by the bankrupts under this act, of whose estates they are respectively trustees. y. Joint trustees may give joint or several bonds. k. If any referee or trustee shall fail to give bond, as herein provided and within the time limited, he shall be deemed to have declined his appointment, and such failure shall create a vacancy in his office. /. Suits upon referees' bonds shall not be brought subsequent to two years after the alleged breach of the bond. m. Suits upon trustees' bonds shall not be brought subsequent to two years after the estate has been closed. § 51. Duties of Clerks. — a. Clerks shall respectively (1) ac- count for, as for other fees received by them, the clerk's fee paid in each case and such other fees as may be received for certified copies of records which may be prepared for persons other than officers; (2) collect the fees of the clerk, referee, and trustee in each case instituted before filing the petition, except the petition of a proposed voluntary bankrupt which is accompanied by an affidavit stating that the petitioner is without, and cannot obtain, the money with which to pay such fees; (3) deliver to the referees upon ap- plication all papers which may be referred to them, or, if the offices of such i-eferees are not in the same cities or towns as the offices of such clerks, transmit such papers by mail, and in like 296 APPENDIX manner return papers which were received from such referees after they have been used; (4) and within ten days after each case has been closed pay to the referee, if the case was referred, the fee collected for him, and to the trustee the fee collected for him at the time of filing the petition. § 52. Compensation of Clerks and Marshals. — a. Clerks shall respectively receive as full compensation for their services to each estate, a filing fee of ten dollars, except when a fee is not required from a voluntary bankrupt. b. Marshals shall respectively receive from the estate where an adjudication in bankruptcy is made, except as herein otherwise provided, for the performance of their service in proceedings in bankruptcy, the same fees, and account for them in the same way, as they are entitled to receive for the performance of the same or similar services in other cases in accordance with laws now in force, or such as may be hereafter enacted, fixing the compensation of marshals. § 53. Duties of Attorney-General. — a. The Attorney-General shall annually lay before Congress statistical tables showing for the whole country, and by States, the number of cases during the year of voluntary and involuntary bankruptcy; the amount of the prop- erty of the estates; the dividends paid and the expenses of ad- ministering such estates; and such other like information as he may deem important. §54. Statistics of Bankruptcy Proceedings. — a. Officers shall furnish in writing and transmit by mail such information as is within their knowledge, and as may be shown by the records and papers in their possession, to the Attorney-General, for statistical purposes, within ten days after being requested by him to do so. CHAPTER VI. CREDITORS. § 55. Meetings of Creditors. — a. The court shall cause the first meeting of the creditors of a bankrupt to be held, not less than ten nor more than thirty days after the adjudication, at the county seat of the county in which the bankrupt has had his prin- cipal place of business, resided, or had his domicile; or if that place would be manifestly inconvenient as a place of meeting for the parties in interest, or if the bankrupt is one who does not do THE NATIONAL BANKRUPTCY ACT 297 business, reside, or have his domicile within the United States, the court shall fix a place for the meeting which is the most convenient for parties in interest. If such meeting should by any mischance not be held within such time, the court shall fix the date, as soon as may be thereafter, when it shall be held. b. At the first meeting of creditors the judge or referee shall preside, and, before proceeding with the other business, may allow or disallow the claims of creditors there presented, and may pub- licly examine the bankrupt or cause him to be examined at the instance of any creditor. c. The creditors shall at each meeting take such steps as may be pertinent and necessary for the promotion of the best interests of the estate and the enforcement of this act. d. A meeting of creditors, subsequent to the first one, may be held at any time and place when all of the creditors who have secured the allowance of their claims sign a written consent to hold a meeting at such time and place. e. The court shall call a meeting of creditors whenever one- fourth or more in number of those who have proven their claims shall file a written request to that effect; if such request is signed by a majority of such creditors, which number represents a majority in amount of such claims, and contains a request for such meeting to be held at a designated place, the court shall call such meeting at such place within thirty days after the date of the filing of the request. f. Whenever the affairs of the estate are ready to be closed a final meeting of creditors shall be ordered. § 56. Voters at Meetings of Creditors. — a. Creditors shall pass upon matters submitted to them at their meetings by a majority vote in number and amount of claims of all creditors whose claims have been allowed and are present, except as herein otherwise provided. b. Creditors holding claims which are secured or have priority shall not, in respect to such claims, be entitled to vote at creditors' meetings, nor shall such claims be counted in computing either the number of creditors or the amount of their claims, unless the amounts of such claims exceed the values of such securities or priorities, and then only for such excess. § 57. Proof and Allowance of Claims. — a. Proof of claims shall consist of a statement under oath, in writing, signed by a creditor setting forth the claim, the consideration therefor, and whether any, and, if so what, securities are held therefor, and whether any, 298 APPENDIX and, if so what, payments have been made thereon, and that the sum claimed is justly owing from the bankrupt to the creditor. b. Whenever a claim is founded upon an instrument of writ- ing, such instrument, unless lost or destroyed, shall be filed with the proof of claim. If such instrument is lost or destroyed, a state- ment of such fact and of the circumstances of such loss or destruc- tion shall be filed under oath with the claim. After the claim is allowed or disallowed, such instrument may be withdrawn by permission of the court, upon leaving a copy thereof on file with the claim. c. Claims after being proved may, for the purpose of allow- ance, be filed by the claimants in the court where the proceedings are pending, or before the referee if the case has been referred. d. Claims which have been duly proved shall be allowed, upon receipt by or upon presentation to the court, unless objection to their allowance shall be made by parties in interest, or their consideration be continued for cause by the court upon its own motion. e. Claims of secured creditors and those who have priority may be allowed to enable such creditors to participate in the pro- ceedings at creditors' meetings held prior to the determination of the value of their securities or priorities, but shall be allowed for such sums only as to the courts seem to be owing over and above the value of their securities or priorities. f. Objections to claims shall be heard and determined as soon as the convenience of the court and the best interests of the estates and the claimants will permit. g. The claims of creditors who have received preferences, voidable under section sixty, subdivision b, or to whom convey- ances, transfers, assignments, or encumbrances, void or voidable under section sixty-seven, subdivision e, have been made or given, shall not be allowed unless such creditors shall surrender such preferences, conveyances, transfers, assignments, or encumbrances. h. The value of securities held by secured creditors shall be determined by converting the same into money according to the terms of the agreement pursuant to which such securities were de- livered to such creditors or by such creditors and the trustee, by agreement, arbitration, compromise, or litigation, as the court may direct, and the amount of such value shall be credited upon such claims, and a dividend shall be paid only on the unpaid balance. t. Whenever a creditor, whose claim against a bankrupt estate is secured by the individual undertaking of any person, fails to prove such claim, such person may do so in the creditor's name. THE NATIONAL BANKRUPTCY ACT 299 and if he discharge such undertaking in whole or in part he shall be subrogated to that extent to the rights of the creditor. ;'. Debts owing to the United States, a State, a county, a district, or a municipality as a penalty or forfeiture shall not be allowed, except for the amount of the pecuniary loss sustained by the act, transaction, or proceeding out of which the penalty or for- feiture arose, with reasonable and actual costs occasioned thereby and such interest as may have accrued thereon according to law. k. Claims which have been allowed may be reconsidered for cause and reallowed or rejected in whole or in part, according to the equities of the case, before but not after the estate has been closed. /. Whenever a claim shall have been reconsidered and rejected, in whole or in part, upon which a dividend has been paid, the trustee may recover from the creditor the amount of the dividend received upon the claim if rejected in whole or the proportional part thereof if rejected only in part. m. The claim of any estate which is being administered in bankruptcy against any like estate may be proved by the trustee and allowed by the court in the same manner and upon like terms as the claims of other creditors. n. Claims shall not be proved against a bankrupt estate sub- sequent to one year after the adjudication; or if they are liquidated by litigation and the final judgment therein is rendered within thirty days before or after the expiration of such time, then within sixty days after the rendition of such judgment: Provided, That the right of infants and insane persons without guardians, without notice of the proceedings, may continue six months longer. § 58. Notice to Creditors. — a. Creditors shall have at least ten days' notice by mail, to their respective addresses as they appear in the list of creditors of the bankrupt, or as afterwards filed with the papers in the case by the creditors, unless they waive notice in writing, of (1) all examinations of the bankrupt; (2) all hearings upon applications for the confirmation of compositions; (3) all meetings of creditors; (4) all proposed sales of property; (5) the declaration and time of payment of dividends; (6) the filing of the final accounts of the trustee, and the time when and the place where they will be examined and passed upon; (7) the proposed compromise of any controversy; (8) the proposed dismissal of the proceedings; and (9) there shall be thirty days* notice of all applica- tions for the discharge of bankrupts. b. Notice to creditors of the first meeting shall be published at least once and may be published such number of additional times 300 APPENDIX as the court may direct; the last publication shall be at least one week prior to the date fixed for the meeting. Other notices may be published as the court shall direct. c. All notices shall be given by the referee, unless otherwise ordered by the judge. § 59. Who May File and Dismiss Petitions. — a. Any qualified person may file a petition to be adjudged a voluntary bankrupt. h. Three or more creditors who have provable claims against any person which amount in the aggregate in excess of the value of securities held by them, if any, to five hundred dollars or over; or if all of the creditors of such person are less than twelve in num- ber, then one of such creditors whose claim equals such amount may file a petition to have him adjudged a bankrupt. c. Petitions shall be filed in duplicate, one copy for the clerk and one for service on the bankrupt. d. If it be averred in the petition that the creditors of the bankrupt are less than twelve in number, and less than three creditors have joined as petitioners therein, and the answer avers the existence of a larger number of creditors, there shall be filed with the answer a list under oath of all the creditors, with their addresses, and thereupon the court shall cause all such creditors to be notified of the pendency of such petition and shall delay the hearing upon such petition for a reasonable time, to the end that parties in interest shall have an opportunity to be heard; if upon such hearing it shall appear that a sufficient number have joined in such petition, or if prior to or during such hearing a sufficient num- ber shall join therein, the case may be proceeded with, but other- wise it shall be dismissed. e. In computing the number of creditors of a bankrupt for the purpose of determining how many creditors must join in the petition, such creditors as were employed by him at the time of the filing of the petition or are related to him by consanguinity or affinity within the third degree, as determined by the common law, and have not joined in the petition, shall not be counted. f. Creditors other than original petitioners may at any time enter their appearance and join in the petition, or file an answer and be heard in opposition to the prayer of the petition. g. A voluntary or involuntary petition shall not be dismissed by the petitioner or petitioners or for want of prosecution or by consent of parties until after notice to the creditors, and to that end the court shall) before entertaining an application for dismissal, require the bankrupt to file a list, under oath, of all his creditors, with their addresses, and shall cause notice to be sent to all such THE NATIONAL BANKRUPTCY ACT 301 creditors of the pendency of such application, and shall delay the hearing thereon for a reasonable time to allow all creditors and parties in interest opportunity to be heard. §60. Preferred Creditors. — a. A person shall be deemed to have given a preference if, being insolvent, he has, within four months before the filing of the petition, or after the filing of the petition and before the adjudication, procured or suffered a judg- ment to be entered against himself in favor of any person, or made a transfer of any of his property, and the effect of the enforcement of such judgment or transfer will be to enable any one of his creditors to obtain a greater percentage of his debt than any other of such creditors of the same class. Where the preference con- sists in a transfer, such period of four months shall not expire until four months after the date of the recording or registering of the transfer, if by law such recording or registering is required. b. If a bankrupt shall have procured or suffered a judgment to be entered against him in favor of any person or have made a transfer of any of his property, and if, at the time of the transfer, or of the entry of the judgment, or of the recording or registering of the transfer if by law recording or registering thereof is required, and being within four months before the filing of the petition in bankruptcy or after the filing thereof, and before the adjudication, the bankrupt be insolvent and the judgment or transfer then operate as a preference, and the person receiving it or to be bene- fited thereby, or his agent acting therein, shall then have reason- able cause to believe that the enforcement of such judgment or transfer would effect a preference, it shall be voidable by the trus- tee and he may recover the property or its value from such person. And for the purpose of such recovery any court of bankruptcy, as hereinbefore defined, and any State court which would have had jurisdiction if bankruptcy had not intervened, shall have concurrent jurisdiction. c. If a creditor has been preferred, and afterwards in good faith gives the debtor further credit without security of any kind for property which becomes a part of the debtor's estates, the amount of such new credit remaining unpaid at the time of the adjudication in bankruptcy may be set off against the amount which would otherwise be recoverable from him. d. If a debtor shall, directly or indirectly, in contemplation of the filing of a petition by or against him, pay money or transfer property to an attorney and counsellor-at-law, solicitor in equity, or proctor in admiralty for services to be rendered, the transaction shall be re-examined by the court on petition of the trustee or any 302 APPENDIX creditor and shall only be held valid to the extent of a reasonable amount to be determined by the court, and the excess may be re- covered by the trustee for the benefit of the estate. CHAPTER VII. ESTATES. § 61. Depositories for Money. — a. Courts of bankruptcy shall designate, by order, banking institutions as depositories for the money of bankrupt estates, as convenient as may be to the resi- dences of trustees, and shall require bonds to the United States, subject to their approval, to be given by such banking institutions, and may from time to time as occasion may require, by like order increase the number of depositories or the amount of any bond or change such depositories. § 62. Expenses of Administering Estates. — a. The actual and necessary expenses incurred by officers in the administration of estates shall, except where other provisions are made for their payment, be reported in detail, under oath, and examined and approved or disapproved by the court. If approved, they shall be paid or allowed out of the estates in which they were incurred. ^63. Debts Which May Be Proved.— a. Debts of the bank- rupt may be proved and allowed against his estate which are (1) a fixed liability, as evidenced by a judgment or an instrument in writing, absolutely owing at the time of the filing of the petition against him, whether then payable or not, with any interest thereon which would have been recoverable at that date or with a rebate of interest upon such as were not then payable and did not bear interest; (2) due as costs taxable against an involuntary bankrupt who was at the time of the filing of the petition against the plain- tiff in a cause of action which would pass to the trustee and which the trustee declines to prosecute after notice; (3) founded upon a claim for taxable costs incurred in good faith by a creditor before the filing of the petition in an action to recover a provable debt; (4) founded upon an open account, or upon a contract express or implied; and (5) founded upon provable debts reduced to judgments after the filing of the petition and before the consideration of the bankrupt's application for a discharge, less costs incurred and interest accrued after the filing of the petition and up to the time of the entry of such judgments. b. Unliquidated claims against the bankrupt may, pursuant to THE NATIONAL BANKRUPTCY ACT 303 application to the court, be liquidated in such manner as it shall direct, and may thereafter be proved and allowed against his estate. §64. Debts Which Have Priority. — a. The court shall order the trustee to pay all taxes legally due and owing by the bankrupt to the United States, State, county, district, or municipality in advance of the payment of dividends to creditors, and upon filing the receipts of the proper public officers for such payment he shall be credited with the amount thereof, and in case any question arises as to the amount or legality of any such tax the same shall be heard and determined by the court. b. The debts to have priority, except as herein provided and to be paid in full out of bankrupt estates, and the order of pay- ment shall be (1) the actual and the necessary cost of preserving the estate subsequent to filing the petition; (2) the filing fees paid by creditors in involuntary cases, and where property of the bankrupt, transferred or concealed by him either before or after the filing of the petition, shall have been recovered for the benefit of the estate of the bankrupt by the efforts and at the expense of one or more creditors, the reasonable expenses of such recovery; (3) the cost of administration, including the fees and mileage pay- able to witnesses as now or hereafter provided by the laws of the United States, and one reasonable attorney's fee, for the profes- sional services actually rendered, irrespective of the number of attorneys employed, to the petitioning creditors in involuntary cases, to the bankrupt in involuntary cases while performing the duties herein prescribed, and to the bankrupt in voluntary cases as the court may allow; (4) wages due to workmen, clerks, travel- ing or city salesmen, or servants which have been earned within three months before the date of the commencement of proceedings, not to exceed three hundred dollars to each claimant; and (5) debts owing to any person who by the laws of the States or the United States is entitled to priority. c. In the event of the confirmation of a composition being set aside, or a discharge revoked, the property acquired by the bankrupt in addition to his estate at the time the composition was confirmed or the adjudication was made shall be applied to the payment in full of the claims of creditors for property sold to him on credit, in good faith, while such composition or discharge was in force, and the residue, if any, shall be applied to the pay- ment of the debts which were owing at the time of the adjudication. § 65. Declaration and Payment of Dividends. — a. Dividends 304 APPENDIX of an equal per centum shall be declared and paid on all allowed claims, except such as have priority or are secured. b. The first dividend shall be declared within thirty days after the adjudication, if the money of the estate in excess of the amount necessary to pay the debts which have priority and such claims as have not been, but probably will be, allowed equals five per centum or more of such allowed claims. Dividends subsequent to the first shall be declared upon like terms as the first and as often as the amount shall equal ten per centum or more and upon closing the estate. Dividends may be declared oftener and in smaller pro- portions if the judge shall so order; Provided, That the first divi- dend shall not include more than fifty per centum of the money of the estate ,in excess of the amount necessary to pay the debts which have priority and such claims as probably will be allowed: And provided further. That the final dividend shall not be declared within three months after the first dividend shall be declared. c. The rights of creditors who have received dividends, or in whose favor final dividends have been declared, shall not be affected by the proof and allowance of claims subsequent to the date of such payment or declaration of dividends; but the creditors proving and securing the allowance of such claims shall be paid dividends equal in amount to those already received by the other creditors if the estate equals so much before such other creditors are paid any further dividends. d. Whenever a person shall have been adjudged a bankrupt by a court without the United States and also by a court of bank- ruptcy, creditors residing within the United States shall first be paid a dividend equal to that received in the court without the United States by other creditors before creditors who have re- ceived a dividend in such court shall be paid any amounts, e. A claimant shall not be entitled to collect from a bankrupt estate any greater amount than shall accrue pursuant to the pro- visions of this act. § 66. Unclaimed Dividends. — a. Dividends which remain un- claimed for six months after the final dividend has been declared shall be paid by the trustee into court. b. Dividends remaining unclaimed for one year shall under the direction of the court be distributed to the creditors whose claims have been allowed but not paid in full, and after such claims have been paid in full the balance shall be paid to the bankrupt; Provided, That in case unclaimed dividends belong to minors such minors may have one year after arriving at majority to claim such dividends. THE NATIONAL BANKRUPTCY ACT 305 § 67. Liens. — a. Claims which for want of record or for other reasons would not have been valid liens as against the claims of the creditors of the bankrupt shall not be liens against his estate. b. Whenever a creditor is prevented from enforcing his rights as against a lien created, or attempted to be created, by his debtor, who afterwards becomes a bankrupt, the trustee of the estate of such bankrupt shall be subrogated to and may enforce such rights of such creditor for the benefit of the estate. c. A lien created by or obtained in or pursuant to any suit or proceeding at law or in equity, including an attachment upon mesne process or a judgment by confession, which was begun against a person within four months before the filing of a petition in bankruptcy by or against such person shall be dissolved by the adjudication of such person to be a bankrupt if (1) it appears that said lien was obtained and permitted while the defendant was insolvent and that its existence and enforcement will work a prefer- ence, or (2) the party or parties to be benefited thereby had rea- sonable cause to believe the defendant was insolvent and in con- templation of bankruptcy, or (3) that such lien was sought and permitted in fraud of the provisions of this act; or if the dissolution of such lien would militate against the best interests of the estate of such person the same shall not be dissolved, but the trustee of the estate of such person, for the benefit of the estate, shall be subrogated to the rights of the holder of such lien and empowered to perfect and enforce the same in his name as trustee with like force and effect as such holder might have done had not bankruptcy proceedings intervened. d. Liens given or accepted in good faith and not in contem- plation of or in fraud upon this act, and for a present consideration, which have been recorded according to law, if record thereof was necessary in order to impart notice, shall, to the extent of such present consideration only, not be affected by this act. e. That all conveyances, transfers, assignments, or incum- brances of his property, or any part thereof, made or given by a person adjudged a bankrupt under the provisions of this act sub- sequent to the passage of this act and within four months prior to the filing of the petition, with the intent and purpose on his part to hinder, delay, or defraud his creditors, or any of them, shall be null and void as against the creditors of such debtor, except as to purchasers in good faith and for a present fair con- sideration; and all property of the debtor conveyed, transferred, assigned, or encumbered as aforesaid shall, if he be adjudged a bankrupt, and the same is not exempt from execution and liability 3o6 APPENDIX for debts by the law of his domicile, be and remain a part of the assets and estate of the bankrupt and shall pass to his said trustee, whose duty it shall be to recover and reclaim the same by legal proceedings or otherwise for the benefit of the creditors. And all conveyances, transfers, or encumbrances of his property made by a debtor at any time within four months prior to the filing of the petition against him, and while insolvent, which are held null and void as against the creditors of such debtor by the laws of the State, Territory, or District in which such property is situate, shall be deemed null and void under this act against the creditors of such debtor if he be adjudged a bankrupt, and such property shall pass to the assignee and be by him reclaimed and recovered for the benefit of the creditors of the bankrupt. For the purpose of such recovery any court of bankruptcy as hereinbefore defined, and any State court which would have had jurisdiction if bankruptcy had not intervened, shall have concurrent jurisdiction. f. That all levies, judgments, attachments, or other liens, ob- tained through legal proceedings against a person who is insolvent, at any time within four months prior to the filing of a petition in bankruptcy against him, shall be deemed null and void in case he is adjudged a bankrupt, and the property affected by the levy, judg- ment, attachment, or other lien shall be deemed wholly discharged and released from the same, and shall pass to the trustee as a part of the estate of the bankrupt, unless the court shall, on due notice, order that the right under such levy, judgment, attachment, or other lien shall be preserved for the benefit of the estate; and thereupon the same may pass to and shall be preserved by the trustee for the benefit of the estate as aforesaid. And the court may order such conveyance as shall be necessary to carry the purposes of this section into effect: Provided, That nothing herein contained shall have the effect to destroy or impair the title ob- tained by such levy, judgment, attachment, or other lien of a bona fide purchaser for value who shall have acquired the same without notice or reasonable cause for inquiry. §68. Set-offs and Counterclaims.— a. In all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor the account shall be stated and one debt shall be set off against the other, and the balance only shall be allowed or paid. b. A set-off or counterclaim shall not be allowed in favor of any debtor of the bankrupt which (1) is not provable against the estate; or (2) was purchased by or transferred to him after the filing of the petition, or within four months before such filing, with THE NATIONAL BANKRUPTCY ACT 307 a view to such use and with knowledge or notice that such bankrupt was insolvent, or had committed an act of bankruptcy. § 69. Possession of Property. — a. A judge may, upon satis- factory proof, by affidavit, that a bankrupt against whom an in- voluntary petition has been filed and is pending has committed an act of bankruptcy, or has neglected or is neglecting, or is about to so neglect his property that it has thereby deteriorated or is thereby deteriorating or is about thereby to deteriorate in value, issue a warrant to the marshal to seize and hold it subject to further orders. Before such warrant is issued the petitioners applying therefor shall enter into a bond in such an amount as the judge shall fix, with such sureties as he shall approve, con- ditioned to indemnify such bankrupt for such damages as he shall sustain in the event such seizure shall prove to have been wrong- fully obtained. Such propeity shall be released, if such bankrupt shall give bond in a sum which shall be fixed by the judge, with such sureties as he shall approve, conditioned to turn over such property, or pay the value thereof in money to the trustee, in the event he is adjudged a bankrupt pursuant to such petition. §70. Title to Property.— a. The trustee of the estate of a bankrupt, upon his appointment and qualification, and his suc- cessor or successors, if he shall have one or more, upon his or their appointment and qualification shall in turn be vested by operation of law with the title of the bankrupt, as of the date he was adjudged a bankrupt, except in so far as it is to property which is exempt, to all (1) documents relating to his property; (2) interests in patents, patent rights, copyrights, and trade-marks; (3) powers which he might have exercised for his own benefit, but not those which he might have exercised for some other person; (4) property trans- ferred by him in fraud of his creditors; (5) property which prior to the filing of the petition he could by any means have transferred or which might have been levied upon and sold under judicial process against him: Provided, That when any bankrupt shall have any insurance policy which has a cash surrender value payable to himself, his estate, or personal representatives, he may, within thirty days after the cash surrender value has been ascertained and stated to the trustee by the company issuing the same, pay or secure to the trustee the sum so ascertained and stated, and con- tinue to hold, own, and carry such policy free from the claims of the creditors participating in the distribution of his estate under the bankruptcy proceedings, otherwise the policy shall pass to the trustee as assets; and (6) rights of action arising upon contracts 3o8 APPENDIX or from the unlawful taking or detention of, or injury to, his property. b. All real and personal property belonging to bankrupt estates shall be appraised by three disinterested appraisers; they shall be appointed by, and report to, the court. Real and personal property shall, when practicable, be sold subject to the approval of the court; it shall not be sold otherwise than subject to the approval of the court for less than seventy-five per centum of its appraised value. c. The title to property of a bankrupt estate which has been sold, as herein provided, shall be conveyed to the purchaser by the trustee. d. Whenever a composition shall be set aside, or discharge revoked, the trustee shall, upon his appointment and qualification, be vested as herein provided with the title to all of the property of the bankrupt as of the date of the final decree setting aside the composition or revoking the discharge. e. The trustee may avoid any transfer by the bankrupt of his property which any creditor of such bankrupt might have avoided, and may recover the property so transferred, or its value, from the person to whom it was transferred unless he was a bona fide holder for value prior to the date of the adjudication. Such prop- erty may be recovered or its value collected from whoever may have received it, except a bona fide holder for value. For the purpose of such recovery any court of bankruptcy as hereinbefore defined, and any State court which would have had jurisdiction if bankruptcy had not intervened, shall have concurrent jurisdic- tion. f. Upon the confirmation of a composition offered by a bank- rupt, the title to his property shall thereupon revest in him. § 71. That the clerks of the several district courts of the United States shall prepare and keep in their respective offices complete and convenient indexes of all petitions and discharges in bankruptcy heretofore or hereafter filed in the said courts, and shall, when requested so to do, issue certificates of search certifying as to whether or not any such petitions or discharges have been filed; and said clerks shall be entitled to receive for such certificates the same fees as now allowed by law for certificates as to judg- ments in said courts: Provided, That said bankruptcy indexes and dockets shall at all times be open to inspection and examination by all persons or corporations without any fee or charge therefor. § 72. That neither the referee, receiver, marshal, nor trustee THE NATIONAL BANKRUPTCY ACT 309 shall in any form or guise receive, nor shall the court allow him, any other or further compensation for his services than that ex- pressly authorized and prescribed in this act. THE TIME WHEN THIS ACT SHALL GO INTO EFFECT o. This act shall go into full force and effect upon its passage: Provided, however. That no petition for voluntary bankruptcy shall be filed within one month of the passage thereof, and no petition for involuntary bankruptcy shall be filed within four months of the passage thereof. b. Proceedings commenced under State insolvency laws before the passage of this act shall not be affected by it. The amendatory act of 1903 provides as follows: § 19. That the provisions of this amendatory act shall not apply to bankruptcy cases pending when this act takes effect, but such cases shall be adjudicated and disposed of conformably to the provisions of the said act of July first, eighteen hundred and ninety-eight. The amendatory act of 1910 provides as follows: § 14. That the provisions of this amendatory act shall not apply to bankruptcy cases pending when this act takes effect, but such cases shall be adjudicated and disposed of conformably to the provisions of said act approved July first, eighteen hundred and ninety-eight, as amended by said act approved February fifth, nineteen hundred and three, and as further amended by said act approved June fifteenth, nineteen hundred and six. INDEX Abuses (trade), effect on credit standingr, 145 Advance fee collection agencies, 166 Adjustments and adjustment bureaus, 167, 170-180 adjuster, 170 credit man as, 172 qualifications of, 170 bankruptcy method, 176 definition of adjustment, 170 elements of adjustment, 171 National Association of Credit Men method, 174, 177-180 "real" adjustment, details and advantages of, 173 Affidavit to claim, 204-2G6 Agency, commercial (see "Com- mercial Agency") Agent, credit insurance (see "Credit Insurance") "Allowed" claims, 197, 204-206 Anti-Commercial Statute as to notes, 161 Assets of customer, effect on credits, 49 Assigned claims, 206 Attorney, power of in bank- ruptcy, 210 forms, 269 Attorneys (collection), 154, 168 B Bad risks for credit, 27 Bank, as source of credit informa- tion, 41 report on customer, forms, 242 Bank credits, 66-79 basis o^ 66 broker^s relation to, 75 commercial paper, 74-78 comparison with mercantile credits, 66 credit men, 67, 73, 78 effect on business principles, 73 French method of filing infor- mation, 71 function of department, 68 information essential for cred- it-granting, 69 mutual interest of bank and its customers, 78 practical uses of bank records, 72 stock and bond hmrcstments. Bankrupt, 211-220 duties o^ 214 examination oii, 211 false statements o^ 215 protection of, 219 rights of, 213 settlement by composition, 215 Bankruptcy Act, statutes, 270 Bankruptcy as a method of settlement with debtors, 175 Bankruptcy^-causes of foilure, 181-186 analysis, 181-186 3" 312 INDEX Bankruptcy — continued disaster and competition, 185 fraud, 184 incompetence, 182 lack of capital, 183 neglect, speculation, and ex- travagance, 184 Bankruptcy — claims, 204-210 forms, 268 assigned claims, 206 filing, 196, 209 proof, 204-210 affidavit, 204-208 power of attorney, 210 forms, 269 who makes, 207 provable debts, 208 secured claims, 206 Bankruptcy court, 196 Bankruptcy, discharge in, 221- 228 acts barring, 223 concealment of financial condition, 224 false statement, 225 fraudulent conveyance of property, 226 refusal to obey court, 227 opposition to, 221 Bankruptcy law and proceed- ings, 187-195 statutes, 270 credit man and the law, 189, 227 involuntary bankruptcy, 190 jurisprudence, 189 National Bankruptcy Act, 187 statutes, 270 petition, 192 forms, 266, 267 filing, 192 procedure in bankruptcy, 191 referee, 194 state laws, 188 Bankruptcy — proceedings, o f creditors, 196-203 bankruptcy court, 196 filing claims, 196 meetings, 198 trustee, duties of, 201 trustee, election of, 200 Blanks, credit (see "Inquiry Blanks") Blanks, property statement (see "Statements") Bradstreet Co. (see "Commer- cial Agency") analysis of failures, 181 Brief (credit), 37 Broker, relation to bank credit man, 75 Bureaus (adjustment) and ad- justments, 617, 170-180 Bureaus, trade (see "Ledger E X p e r i e nee, Interchange of") Cancellations, 145 Capital and expenses of custom- er, effect on credits, 48 Capital, lack of as cause of fail- ure, 183 Causes of failure, 181-186 (see also "Bankruptcy") Checking orders for credit (see "Orders") Claims in bankruptcy, 204-210 (see also "Bankruptcy") forms, 268 Claims by customers, 143 Classification of credit informa- tion, forms, 263 Clearing house (see "Credit Clearing House") INDEX 313 Collection agencies, 152, 163-169 adjustments, 167 (see also "Adjustments") advance fee, 166 definition of terms, 163 Dun's and the Clearing House, 163 "fake," 151 work of, 164 Collection attorneys, 154, 155, 168 Collection correspondence (see "Correspondence") Collection department, 147-180 Collector and his methods, 147- 155 attitude toward customer, 149, 156 attitude toward delinquent debtor, 150 collection agency, 152 "collection agency" method, 151 draft method, 152 legal proceedings, 152 qualifications, 147, 156 relation to collection attor- ney, 154 relation to credit department, 148 Commercial agency, 40, 46-48, 80-87 Bradstreet's analysis of fail- ures, 181 contracts with, 87 Dun's collection department, 163 organization, 83 district reporter, 84 property statements, 84-86 rating books, 82 reports by, 47, 82-86, 110-112 forms, 110, 111 use of, 80 Commercial Law League of America, 169 Commercial paper as investment for banks, 74-78 indorsed, 11 rating, 76 Competition as cause of failure, 185 Competitors, attitude of credit department toward, 19 Complaints from customers, re- plying to, 162 Compositions, 215-217 Concealment of financial condi- dition by bankrupt, 224 Contracts with commercial agencies, 87 Corporation claim, affidavit to, 208 Corporation property state- ments, 245, 246 forms, 250, 251, 254, 255 Correspondence, collection and credit, 156-162 answers to complaints, 162 attitude of collector toward the customer, 156 first request for payment, 158 form collection letters, 159 notes as evidence, 161 refusal of order, 161 requests for — credit information, 159 security, 160 Court of bankruptcy, 196 Credit clearing house, 99-106 advantages, 103 collection department, 163 compared with commercial agency, 106 methods — the district office, 100 reports, 101, 102, 112-115 forms, 114, 264, 265 3H INDEX Credit correspondence (see "Correspondence") Credit department, 13-21, 118-126 attitude toward competitors, 19 expense allowance, 16 old methods and new, 13 policy, 17, 139-146 relation to collection depart- ment, 148 relations with other depart- ments, 15 safety appliances in, 118-126 reclamations, 124 recoveries, 123 replevin, 124 statements, 118-123 (see also "Statements") Credit-granting, 44-65 (see also "Bank Credits") Credit-Granting — the customer, 44-53 (see also "Credit In- formation") assets, 49 capital and expenses, 48 confidence and credit, 44 effect of trade abuses, 145 general business conditions, 52 insurance, 51 investigation, 46-52, 107-117 liabilities, 50 local conditions, 51 Credit-Granting — the house, 54- 65 bad risks, 27 classification of business as to credit, 45-65 large jobbing house, 59 local jobbing house, 54-59 manufacturer, 60-65 Credit guaranty, forms, 261, 262 Credit information, 40-43, 80-126 (see also "Credit-granting") checking orders, 107-117 classification of, forms, 263 sources, banks, 41 commercial agency, 46-48, 80-87 (see also "Commer- cial Agency") customer's references, 43 interchange of ledger ex- perience, 95-106 (see also "Ledger Experience, In- terchange of") National Association of Credit Men, 88-94 (see also "National Associa- tion of Credit Men") salesmen's reports, 42 forms, 231, 232 Credit inquiry blanks (see "In- quiry Blanks") Credit insurance, 126-138 advantages and objections, 134-137 function, 126 limitations, 131 origin and methods, 127 precautionary measure, 127 scope, 129 work of insurance agent, 129 wrong view, 133 Credit man, 14-16, 22-35 as adjuster, 172 as business advisor, 29 attitude of, 25, 32 attitude toward competing credit men, 19 bank credit man, (il , 72), 78 caution a requisite, 33 knowledge of the bankruptcy law, 189, 227 policy, 136 problems, 139-146 INDEX 315 Credit man — continued qualifications, 24, 27, 30, 33, 34, 139 responsibilities of in manu- facturing house, 62 selection, 22 tact an asset, 30 watching the accounts, 34 work of, 14-16 Credit office machinery, 36-43 credit brief, 37 forms and blanks, 38 methods and equipment, 38 office force, 36 Credit office routine, 13-79 Creditors' claims in bankruptcy (see "Bankruptcy — claims") Creditors, proceedings of, 196- 203 (see also "Bankruptcy") Credit protection (see "Credit Department, Safety Appli- ances in," also "Credit In- surance") Customer (see also "Credit- Granting") attitude of collector toward, 149, 156 checking orders for credit, 107-117 (see "Orders") credit man keeping in touch with accounts, 34 investigation for credit, 46- 52, 107-117 problems of credit man as to, 139-146 references as source of infor- mation, 43 reports on (see "Reports") statements (see "Statements") Debtors (see "Collection Agen- cies" and "Collector") Debts, provable, 208 Disaster as cause of business failure, 185 Discharge in bankruptcy, 221- 228 (see also "Bankruptcy") Discounts (excessive), 141 District reporter of commercial agency, 84 Draft method of collecting ac- count, 152 Dun, R. G. & Co. (see "Com- mercial Agency") collection department, 163 Duties of credit man, 14-16 Employees in the credit depart- ment, 36 Envelope containing customer's statement, 119 Examination of bankrupt, 211 Expense of credit department, 16 F Failure, causes of, 181-186 (see also "Bankruptcy") Filing claims by creditors, 196, 209 Filing devices for credit office, 38 Filing petitions in bankruptcy, 193 Financial statements (see "Statements of Customer") Fire insurance, 137 Form collection letters, 159 Forms, bankruptcy, 266-269 credit, 231-265 Fraud as cause of business fail- ure, 184 Fraudulent conveyance of prop- erty by bankrupt, 226 3i6 INDEX Fraudulent statement by bank- rupt, 215, 225 Fraudulent statement by cus- tomer, 121-123 French method of filing credit information, 71 Furniture trade, 96 Granting credit (see "Credit- granting") Guaranty, forms, 261, 262 Incompetence as cause of fail- ure, 182 Information (see "Credit Infor- mation") classification of, forms, 263 Inquiry blanks, 38 forms, 233-244 classification of information of, forms, 263 for attorney, forms, 243, 244 for bank, forms, 242 general, forms, 241 trade, forms, 233-240 Insolvency, 181-228 (see "Bank- ruptcy") Instalment business, 64 Insurance, credit, 126-138 (see "Credit Insurance") effect on credits, 51 fire, 137 Interchange of ledger experi- ence (see "Ledger") Interest, failure to pay by cus- tomer, 140 Investigation for credit (see "Credit Information," also "Credit-Granting") Investigation of credit state- ment, 48, 120 Investigation of orders, 107 Investments by bank, commercial paper, 74-78 stock and bonds, IZ Involuntary bankruptcy, 190 Jobbing house granting credit, 54-65 large, advantages, 59 rating, 59 local constructive credits, 58 credit conditions, 54-57 credit precautions, 57 Jurisprudence, bankruptcy, 189 Law, bankruptcy (see "Bank- ruptcy") Lawyers (see "Attorneys") Ledger experience, interchange of, 19, 95-106 Credit Clearing House, 99-106 trade bureau, 95 Legal proceedings in collecting account, 153-155 Letters (see "Correspondence") Liabilities of customer, effect on credits, 50 Loveland, 213 M Manufacturer, credit conditions, 60, dZ INDEX 317 Manufacturer — continued effect of mill conditions on credit, 62 instalment trade, 64 responsibilities of credit man, 62 Methods of credit office, 13 Mill conditions, effect on credit, 62 N National Association of Credit Men, 15, 43, 88-94 forms, 234, 235, 247-255, 261, 262 adjustment bureaus, 174, 177- 180 benefits, 93 committees, 91 guaranty, forms, 261, 262 origin and ideals, 88 purpose, 88 property statements, 245, 246 forms, 247-255 trade inquiry blank, forms, 234, 235 work, 90 National Bankruptcy Act, 187 statutes, 270 Neglect as cause of failure, 184 New customer, salesman's re- port on, 42 forms, 232 Notes as evidence, 161 Office, credit (see "Credit Office") Orders, checking for credit, 46- 52, 107-117 classification of orders, 107 collateral data, 115 commercial agency reports, 82-86, 110-112 forms, 110 Credit Clearing House re- ports, 101, 102, 112-115 forms, 114, 264, 265 handling order, 116 incoming orders, 107 investigation of orders, 107 refusal of orders, 161 reports, 110-116 Partnership property state- ments, 245, 246 forms, 247-249, 252-259 Petition in bankruptcy, 192-194 forms, 266, 267 Policy of credit department, 17- 21 Policy of credit man, 25-35, 55- 65, 78, 87 Power of attorney, in bank- ruptcy, 210 forms, 269 Proceedings of creditors, 196- 203 (see also "Bankruptcy") Proof of claim, 204-210 Property statements (see "State- ments") Prosecutions for false custom- er's statement, 122, 123 Protection, credit (see "Credit Department, Safety Appli- ances in," also "Credit In- surance") Provable debts, 208 Publications of commercial agencies, 82 3i8 INDEX Qualifications, of adjuster, 170 of collector, 147, 156 of credit man, 24, 27, 30, 33, 34. 139 Rating books of commercial agencies, 82 Reclamations, 124 Recoveries, 123 Referee in bankruptcy, 194, 202 References of customers as source of credit informa- tion, 43 Refusal of customer's order, 108, 161 Remington. Harold, 189 Replevin, 124 Reporter (district) of commer- cial agency, 84 Reports on customer (see also "Statements") attorney's, forms, 243, 244 bank's, forms, 242 commercial agency, 47, 82-86, 110-112 forms, 110, 111 Credit Clearing House, 101- 102, 112-115 forms, 114, 264, 265 general, forms, 241 salesman's, 42 forms, 231, 232 trade, forms, 233-240 Returned merchandise, 144 Rights of bankrupt, 213 Routine of credit office, 13-79 S Safety appliances in credit de- partment (see "Credit De- partment") Salesman's report on customer, 42 forms, 231, 232 Schulman, 214 Secured claims, 206 Selection of credit man, 22 Settlement with debtors (see "Adjustments") Shoe trade, 95 State bankruptcy laws, 188 Statements of bankrupt, fraudulent, 215 bar to discharge, 225 Statements of customers, 47, 84- 86, 118-123, 245, 246 (see also "Reports") forms, 247-260 commercial agency, 47, 84-86 "container," 119 corporation, 245, 246 forms, 250, 251, 254, 255 credit office form, 48 forms, 256-260 false statements laws, 121 prosecutions, 122 getting statement, 119 individual or partnership, 245, 246 forms, 247-249, 252-259 investigation, 48, 120 National Association of Credit Men, 245, 246 forms, 247-255 "self-contained," 118 verbal, 118 waiver clause, forms, 258 written, 50, 118 Stocks and bond investments by bank. 73 INDEX 319 Trade abuses, eflPcct on credit sfandinfi^ 145 Trade bnreans, 95 Trade iaqmry blanks, forms, 233-240 Trustee, dnties and prcrogatrres, 201 election of, 20O Verbal cnstomei's statement, 113 Waiver forms. 258 IViitten cnstomer's 50. 118 state- 'TTY O' '*T ^rri •S RETURN TO nii^^^ USE ™«N TO DESK FROM WHICH BORRO,^,^ LOAN DEPT. 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