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Pre-Lawsuit Collection Strategies

By Geoffrey E. Marr, Esq.

The collection of commercial business accounts is an integral part in the success of any company.  If done correctly, it will save time, expense and even preserve customer relationships. One of the key aspects in developing a successful debt collection strategy for any business is the development of sound practices or policies that once implemented – should be routinely followed by those who are responsible for collecting the debts.

Because many companies have differing products or services the debt collection strategy that is formulated into practice will often depend upon the type of debt being collected.  Generally, most debts are either secured or unsecured and the rights and remedies associated with each differ greatly. Secured debts often take the form of mortgages, car or equipment loans, or loans in which a creditor takes a “security interest” in identified collateral.  While many of the steps taken to collect secured debts are similar to unsecured debts – this article will focus on the collection of unsecured business debts arising from a product or service provided to a customer.

The best “offense” in collecting unsecured debts is often dependent upon your initial contact when the customer first seeks your product or service.  Often a customer will ask for an extension of credit. There is cardinal rule in this regard “Find out who you are dealing with first!” before you grant credit.  This is the time to have them thoroughly complete a well written credit application and/or personal guaranty if you can obtain them from the customer.  Similarly, obtain a business credit report and take the time to ask for company documentation if a corporation or LLC.  This will include the Articles of Incorporation or Organization, Bylaws, Statement of Directors & Officers. If they are initially requesting credit – you can likely obtain this information without any difficulty of losing the sale.  But you won’t have the same level of cooperation obtaining this information/documentation once the debt is past due or in default. All too often creditors overlook this essential step at the beginning of the customer relationship – only to discover they are hampered in successfully collecting the debt later.

Develop good business forms for use in your company such as the credit application, credit agreement, personal guaranty, bank or trade references, invoices or statements.  Not only will these standardize your business sales, but they are essential if you later have to collect the debt or file a lawsuit. Take the time to make sure the forms are thoroughly completed and the information agrees with your own investigation or background check.  Often customers are in a hurry to just complete the forms and provide inadequate or incomplete information. When it comes time to collect the debt or file the lawsuit that is exactly what you have – information that is inadequate or incomplete. Now you’re not really sure who you have been dealing with all along!  This will also affect the ability to obtain a proper judgment or be successful in collecting the judgment if it requires post-judgment execution.

Your company should have established policies relative to collection phone calls or collections letters.  If you are a large business the more you can standardize these policies the more likely you will have success and the less likely you will be accused of violating any relevant debt collection laws.  While debt collection laws are primarily limited to “consumer or personal” debts – it is often possible that collection of a business debt can overlap with debt collection laws. This often occurs if you have an individual, sole proprietor or personal guarantor involved.  Accordingly, it is essential to make sure the collection staff has a basic understanding of relevant debt collection laws and any prohibited collection practices.

One of the most essential tools used in the collection of business debts will be your collection letters.  It certainly makes sense to send several collection letters prior to commencing any lawsuit. Often a routine “past due” letter {less aggressive} can be sent first in the early stages of the collection process.  If that fails, the collection letters can become more aggressive and stress the urgency in resolving the matter as the debt ages. There are two common mistakes in this area. Do not send out an endless stream of collection letters and let the debt age beyond a set time limit – such as 6 months.  Also, do not threaten to take a “specific” collection action and then fail to do so. That is likely to demonstrate your lack or resolve and communicates potential weakness to the customer. You can be professional yet firm in your demand at the same time.

If you receive contact from the customer from your collection efforts, you will often need to discuss settlement or repayment terms related to the debt.  Some customers will be forthright and come to agreement quickly and honor those terms. Regrettably, many customers that become involved in the collection process only have their own interests at heart.  That requires you to “listen” carefully to what they are offering. Many times customers want large discounts coupled with meager repayment terms. To determine the truthfulness of their statements and sincerity of their commitment to resolve the debt owed to your company – require them to provide current financial information to verify their income or asset statements.  If they agree to provide such information you can make a well reasoned decision regarding any settlement or repayment terms. If they refuse, then you most likely you have already determined the truthfulness of their statements and sincerity of their commitment to resolve the debt owed to your company.

If these steps fail to result in the successful collection of the debt owed your company, you will then need to consider placement of the account with a professional collection agency or legal counsel.  While this decision will often be determined by the amount of the debt or legal budget of the company, it is important that this decision be made at the appropriate time. While you should follow the normal collection practices you have established for most debts – do not hesitate to accelerate the process on any particular debt if it is a large amount or the customer may go out of business or declare bankruptcy.
Geoffrey Marr is a San Diego-based attorney who has represented lenders, financial institutions, leasing companies and creditors for over 25 years.

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