Firm Provides Alternative to Bankruptcy : Debt: Arbitronix negotiates with creditors for easier payments by companies facing prospect of Chapter 11.

The scenario is a familiar one in this recession: A small business is thousands of dollars in debt.

Creditors are calling nonstop. Lawsuits have been filed. Vendors will no longer deliver.

Time to call a lawyer and file for bankruptcy protection?

Not necessarily. Debt management companies, whose numbers are growing, say they can offer a less expensive alternative for small companies teetering on the brink of Chapter 11. They negotiate debt payments with their clients’ creditors in exchange for a share of the savings.

“For years and years and years the debtor has been all by himself,” said David M. Fishman, chairman of Arbitronix Inc. in Huntington Beach. “He’s on his own. Now, for the first time, the debtor community has an expert.”

Arbitronix, along with about half a dozen similar companies in Orange County, has caught on with hundreds of small businesses, for which bankruptcy filing costs can stretch to tens of thousands of dollars. And creditors are finding that the settlements give them a chance to collect at least partial payment. Even if the amount is as little as 25 cents on the dollar, they say, it’s better than nothing at all.

“As more people get burned on (Chapter) 11, they are more willing to negotiate with a debtor,” said William Lobel, a bankruptcy lawyer in Irvine.

Arbitronix has served 500 clients since it opened in January, 1990. Its sales were $1.2 million in 1991, up from about $600,000 the year before. The company, which now has a staff of 65, has opened offices in San Diego, Burbank, Riverside and Santa Clara.

“Debt negotiation is as old as prostitution,” Fishman said. “We are just putting it into a new package.”

Arbitronix charges no hourly fee to its customers but typically collects 35% of the savings that it negotiates. For example, if an arbitrator arranges a payment of 25 cents for every dollar owed, the savings is 75 cents. Arbitronix is paid after each of a client’s debts is settled.

The amount of payment can vary.

“Nothing really is written in stone,” Fishman said. “Everything is negotiable.”

Clients are culled from public records such as creditors’ lawsuits. Then a team of Arbitronix salespeople contacts the troubled companies and offers the service.

When a customer is found, one of the company’s arbitrators will determine the extent of a company’s debt and what it can pay, and then begin negotiations with creditors.

The arbitrators say they have no special tricks or ploys for making deals.

Creditors “are angry, but obviously not at us,” said Eric Van Pragg, chief arbitrator for Arbitronix. “Personalities aren’t involved. There are no emotions.”

Most of Arbitronix’s clients have debts ranging from $500 to $50,000. But in many cases, Fishman said, the major problem is not red ink.

“It’s denial,” Fishman said. “No one wants to talk about debt. It’s a four-letter word. . . . It’s the old ‘I want to think about it. I don’t want to make a decision.’ A guy would sooner tell you that he is a cross-dresser than say he’s in debt.”

In fact, one of the first things one arbitrator asks clients is, “Where’s the drawer?” referring to the place where neglected past-due notices and court summonses are stashed.

“We have to make sure that they can keep their word,” Fishman said. “The only thing we have is psychological impact and our reputation.”

Fishman said his company does not accept every client who comes in or who is contacted. Debt management companies bank on their relationships with creditors, which is not always an easy task.

If a client agrees to a settlement but in the end cannot afford the payments, the debt management company loses face. And the creditors--who often have accounts with dozens of others of a debt management firm’s clients--become even more angry.

“Our biggest concern is, ‘Are they going to be straightforward with us, or are they going to lie about the nature of their claims?’ ” said Mark Miller, senior negotiator at Kaplan & King, a debt management firm in Fullerton. “The creditor is as important to us as our client. . . . There can be a lot of baby-sitting involved in seeing that payments get made.”

Bankruptcy lawyer Lobel said he has seen many debt management settlements come unglued. When that happens, he said, the indebted company usually files for bankruptcy protection. For creditors, such action means that they are likely to recover far less than they were originally owed.

“I think that’s an abuse,” Lobel said. “It’s not fair.”

Debt management companies expressed some concern that, as the business catches on, it will attract charlatans who might tarnish the image of the entire field. Already, creditors have complained that some arbitrators overstate the extent of their clients’ dire straits to try to win a better deal--and a better commission.

To set standards and guidelines, a handful of debt management services are forming a trade association.

The mission of debt managers, Fishman said, is to restore credibility to companies and get them back on their feet.

“It’s a myth that if you try to negotiate with a vendor, that vendor is going to cut them off,” Fishman said. “We’re going to salvage that relationship.”