Family Christian Stays Open, $127 Million in Debt Erased

The move will cost creditors millions of dollars

Something about this whole thing just doesn’t site well with me.

[CPHurst]

Something about this whole thing just doesn’t site well with me.

Family Christian’s suppliers will have to cope with being paid cents on the dollar for products they had shipped to the retailer.

Gospel Light Publishing, which sells Sunday school and Vacation Bible School curriculum through Family Christian, filed for bankruptcy last Friday, the same day that creditors voted overwhelmingly to keep Family Christian in business.

“It was a contributing factor in our need to seek court protection,” Gospel Light CEO Dave Thornton told CT. “We had to write off $143,000 in expected income, and we’re a smaller, family-owned Christian publishing company that didn’t have deep enough pockets to sustain that, combined with other unexpected losses this spring.”

I agree 100% with Craig that there is something that doesn’t smell right about this deal, but it ought to be noted that what really reeks about all this is the reason that Family Christian’s bankruptcy will bankrupt suppliers; they are “buying” things on consignment. How does that square up with James 5:4? Wouldn’t it be refreshing if Christians started to pay cash on the barrelhead and avoided this kind of thing?

Shouldn’t have extended them credit… then they wouldn’t have been in this situation!

Look, I don’t think this was a great example of a Christian business, but some act like bankruptcy is a sin. Sometimes people get in over their heads, yes, by stupid actions. But, we all do stupid things. There is a legitimate use of bankruptcy IMHO.

Remember, we all were bankrupt spiritually. God came down and “wiped our debt out” and added “money” to our spiritual account!

For the uninitiated, here’s a picture of what happens with the “Wimpy payment method” like 5th/3rd, net 90 or greater, and consignment. I worked for a secular company with an established supplier base, and they chose to press 5th/3rd and consignment very heard at the same time they demanded aggressive price concessions from all of their suppliers. Since my employer was not a major player like Walmart, a lot of suppliers decided to stop doing business with them, and not surprisingly they were left with third rate suppliers with serious quality issues—the ones who needed to accept those terms to survive, really. Fixing the problems that caused was a big part of my job.

It wasn’t the only thing wrong at that company, but the long and short of it was that after a couple of years, sales were down 40% and they’d come darned near to killing off one of their product lines. They also employed far more accountants and bookkeepers than they did engineers, and have since redeployed their director of engineering to be an ex-pat monitoring quality and delivery from those third rate suppliers.

In other words, it can be a really expensive way to save money, and in my view this, along with James’ curse on rich people who delayed paying their servants, ought to temper our enthusiasm for Wimpy’s “I’ll gladly pay you tomorrow for a hamburger today” kind of structuring of cash flow. I don’t reject credit and debt altogether—I have credit cards and a mortgage myself—but I think we need to be smart about these things.

[Bert Perry]

I agree 100% with Craig that there is something that doesn’t smell right about this deal, but it ought to be noted that what really reeks about all this is the reason that Family Christian’s bankruptcy will bankrupt suppliers; they are “buying” things on consignment. How does that square up with James 5:4? Wouldn’t it be refreshing if Christians started to pay cash on the barrelhead and avoided this kind of thing?

Are you saying that James 5:4 should prevent a Christian from purchasing anything on terms? For example, I work for a steel company and we agree with our suppliers that we will pay them on terms of Net 30 days after delivery of material. Are you saying that violates James 5:4?

This conversation is most strange. Terms are not immoral. When you get your electric bill, you have 20 days to pay it. That is terms. A credit card statement gives you 20 days to pay. That is terms. It is just the way business works.

Consignment is not immoral either. If a vendor agrees to ship product on consignment, they are choosing to shoulder more risk in exchange for potential reward. It is the way that small companies get their first chances.

Again, making this bankruptcy about terms and consignment is just bewildering.

[RickyHorton]

Bert Perry wrote:

I agree 100% with Craig that there is something that doesn’t smell right about this deal, but it ought to be noted that what really reeks about all this is the reason that Family Christian’s bankruptcy will bankrupt suppliers; they are “buying” things on consignment. How does that square up with James 5:4? Wouldn’t it be refreshing if Christians started to pay cash on the barrelhead and avoided this kind of thing?

Are you saying that James 5:4 should prevent a Christian from purchasing anything on terms? For example, I work for a steel company and we agree with our suppliers that we will pay them on terms of Net 30 days after delivery of material. Are you saying that violates James 5:4?

Not quite. “Terms” may not be wrong in themselves; what James is getting at is a case where a poor worker either needs to get a loan to eat or go hungry because the landowner didn’t pay him promptly. So we would infer that terms that force a person to go into debt and pay a fair amount of interest ought to be avoided. We might note that the net 21 or net 30 terms for paychecks parallel the grace period we’ve got on our credit cards before paying interest, no? And we might also posit that since the poor might not be able to get a credit card on such terms, that an employer of the poor might do well to go to net 15.

Now let’s take a look at what’s going on here. Let’s start by noting that net 30 is pretty generous these days—your company’s CFO is driving a good bargain. 5th/3rd works out to about net 100, and consignment works out to about 365/inventory turns plus 30-90 days. In this case, consignment inventory of $20 million (plus whatever other inventory) and sales of $216 million suggest 10-11 inventory turns and thus their terms work out to between net 60 and net 120. Since inventory is generally lowest right after Christmas, however, I’d guess that they’re really only getting 5-7 inventory turns per year and effective terms of net 100 to net 160.

In other words, vendors are carrying that obligation for 3-5 months, and any significant disruption in their cash flow is going to put them out of business. I would guess that Gospel Light could have weathered the “hit” from a month’s lost sales on the net 30 basis you’re talking about. Three to five months? Nope—and most of us would either be digging deeply into retirement savings or risking foreclosure in such a situation. Hence I would argue that excessively long terms do indeed violate the spirit of James 5:4.

Bert, I’m not sure I’m following your reasoning on this. I don’t care what the terms are (and I am the CFO at our company and Net 30 is pretty standard), there is no violation of James 5:4 going on if both parties agree to the terms. Secondly, it is a stretch to apply James 5:4 anyway since it is talking about an employer that refrains from paying its employees due to willful action….it has nothing to do with terms. Getting back on topic, if Family Christian’s suppliers agreed to the terms of sale, then they have to live with the agreement…they didn’t have to agree!!! When Family Christian did not live up to the terms, then they certainly were in the wrong, but once again, it has nothing to do with whether terms are wrong or not.

Ricky, you’re doing well. Sell to Walmart, or do business with companies that sell to Walmart and similar companies (retail in general), and you are going to see very little net 30 these days. Look as well at the delay between medical billing to insurers and when you get your bill for the copay—they appear to be working on a net 45 to net 60 basis, and have been for at least 15 years. (I started to notice this when my second daughter was born) I have a friend in engineering consulting who, ten years back, found that most companies tried to get him on net 45. The company I was referring to in my example does about 24 billion dollars in business annually and employs over 100,000 people; we are not talking about rare instances here. I would guess that that company’s competitors are doing the same to manage cash flow.

Again, you’re doing well—or doing a lot of business with government and/or government contractors—to get a lot of net 30.

Now let’s take a look at your contention that any contract is OK as long as people agreed to it; does that fly in the context of Scripture? Really? So if I loaned a man some money and took his cloak as security, that would be OK? Not according to Deuteronomy 23 and 24. Nor were you to withhold a man’s wages past the day they were earned (this is the James 5:4 scenario to a T), or to loan him money at usury. When the Prophets rebuked Israel for ignoring these laws, they certainly did not buy the argument “but he agreed to the contract, see it’s right here in black and white!”.

And yes, this goes against what most politically conservative evangelicals will say, but the clear witness of Scripture is that there are limits to what kind of contracts we ought to impose on those with whom we do business.

[Bert Perry]

Ricky, you’re doing well. Sell to Walmart, or do business with companies that sell to Walmart and similar companies (retail in general), and you are going to see very little net 30 these days. Look as well at the delay between medical billing to insurers and when you get your bill for the copay—they appear to be working on a net 45 to net 60 basis, and have been for at least 15 years. (I started to notice this when my second daughter was born) I have a friend in engineering consulting who, ten years back, found that most companies tried to get him on net 45. The company I was referring to in my example does about 24 billion dollars in business annually and employs over 100,000 people; we are not talking about rare instances here. I would guess that that company’s competitors are doing the same to manage cash flow.

Again, you’re doing well—or doing a lot of business with government and/or government contractors—to get a lot of net 30.

Now let’s take a look at your contention that any contract is OK as long as people agreed to it; does that fly in the context of Scripture? Really? So if I loaned a man some money and took his cloak as security, that would be OK? Not according to Deuteronomy 23 and 24. Nor were you to withhold a man’s wages past the day they were earned (this is the James 5:4 scenario to a T), or to loan him money at usury. When the Prophets rebuked Israel for ignoring these laws, they certainly did not buy the argument “but he agreed to the contract, see it’s right here in black and white!”.

And yes, this goes against what most politically conservative evangelicals will say, but the clear witness of Scripture is that there are limits to what kind of contracts we ought to impose on those with whom we do business.

I agree with GregH, this is quite a weird discussion. First, 30 day net is not standard. It maybe for a very small company, but every company I have worked for, pushes net 90 days. I don’t see any violation of scripture. A company should have sufficient cash flow or credit lines for doing business in today’s world. You have the right to agree or refuse to work within certain credit conditions. Their suppliers probably made bad choices by looking past their capabilities and seeing the dollar signs, not realizing that their would be risk or that they might not have the reserves to cover their agreement. With that said, bankruptcy is neither moral or immoral. It is a legal way for you to renegotiate with your creditors. It is done under court supervision with a third party trustee. The creditors have significant control over the situation and can choose to liquidate the assets of the company, renegotiate the terms of the credit lines, take control….. The creditors in this case felt that they would receive more money back by keeping the stores open. Resorting to bankruptcy may be no fault of the company. I know companies that are considering bankruptcy because their business has been severely disrupted because the political institutions have put sanctions on certain countries. I find it odd when we take Bible verses out of context and try to apply them to a business situation without really understanding how these things work.