When the Check is Not in the Mail

For many small and mid-sized businesses the control and collection of Accounts Receivables is a major concern, especially in tough economic times. When a business extends credit to a customer it is acting as a bank or lender. If businesses keep this in mind when extending credit, then problem accounts (those that don’t pay as agreed) will be minimized. If a business is not getting paid as agreed, then the cash flow coming into the business is diminished and the ability to pay its vendors in a timely manner is also affected. Discounts which are lost and interest payments incurred will also lessen the “bottom line.”

If a company that extends credit to its customers thinks of itself as a bank, then it needs to act like a bank when extending credit. A bank wouldn’t lend money to one of its customers without a credit application and agreement to pay the money back. If you know of a bank that doesn’t require an application or agreement, I’m sure you will let all your friends and neighbors know about it. The bank would soon be out of business. Once the decision is made to sell on credit a simple application and agreement should be presented to the customer. The customer should be required to provide information about the business, including tax identification number, date it was formed, other creditors, names and addresses of individuals authorized to make purchases, names and addresses of officers of the business (if a corporation or LLC). If the business in a sole proprietorship or partnership, the names, addresses, telephone numbers, birthdates and social security numbers of the owners or partners should be required. If the customer is a corporation or LLC then a personal guarantee may be in order. While corporations and LLC’s can go out of business, the only way an individual can go out of business is by filing a bankruptcy petition or dying. If a person is not willing to sign a personal guarantee, this should be a red flag to the business and the decision to extend credit should be considered very carefully. Your Lacy Katzen attorney can assist you in the preparation and design of the credit application, agreement and personal guarantee.

In those instances when a customer (whether an individual or business) is not paying, there are certain things that should be done before contacting an attorney to assist in the collection of the debt. The most important thing is to communicate with the debtor. Why isn’t the bill being paid? Is the customer unable to pay or is there something wrong with the goods or services provided? Is the customer experiencing cash flow problems and will be able to pay in a month or two? Once a determination is made as to why the bill is not being paid, you should make a decision as to the next step. In any event, monthly statements should be sent to the customer, payment arrangements should be confirmed in writing and follow up calls should be made. The worst thing to do is to ignore the problem. Remember, a bank wouldn’t ignore the problem if one of its customers weren’t paying the loan.

At some point it becomes clear that the customer is not going to pay voluntarily. Ben Franklin said, “Creditors have better memories than Debtors.” Our job at Lacy Katzen is to improve the debtor’s memory. The first thing we do is to get the documentation from the client as well as who we are dealing with. What kind of business entity is the debtor? Is there an agreement to pay interest or finance charges? Is there a personal guarantee? Is there an agreement to pay attorneys’ fees if the account is referred to an attorney for collection? Were monthly statements sent? Was this a bill arising out of the construction of a home or improvement of real estate? Is the filing of a mechanics’ lien appropriate? Once these questions are answered, the next step would be to send a demand letter to the customer. Lacy Katzen complies in all respects with the Fair Debt Collection Practices Act (FDCPA) which governs the collection of consumer debt. The client is sent an acknowledgement of the claim and is advised to contact Lacy Katzen if the customer/debtor contacts the client.

If the demand letter doesn’t “do the trick” then we decide whether suit is a viable alternative. There are several factors involved, including the cost of filing suit, the likelihood of recovery, the relations with the debtor in the future, the location of the debtor and the possibility of a counterclaim. A counterclaim is a claim made in a lawsuit against the person bringing the lawsuit. Once the decision is made to sue, then Lacy Katzen prepares the papers (Summons and Complaint) and sends them to the client to sign and have notarized. Once we receive the papers back, we file them with the appropriate court and send them out to be served on the debtor. Assuming that there is no response from the debtor, a judgment is entered and enforcement proceedings are commenced.

A judgment is a determination by a court as to the liability of a party to the lawsuit. There are several enforcement devices that are available, including bank restraints, sale of property, income executions, executions against bank accounts, depositions of debtors, and installment payment orders. Depending on the size of the judgment, any one or all of the enforcement devices are available. Sometimes the debtors make payment arrangements and those are usually set down in writing with the consent of the client.

If payments are received, the client is paid on a monthly basis and an accounting of the payments is included with the remittance. The attorneys and staff at Lacy Katzen are accessible to answer questions at any time during the process. The Collections and Creditors’ Rights Department is supported by a state of the art computer system so that information is always available to people in the Department and, in turn, to our clients. The Collection and Creditors’ Rights Department has the reputation of being the best in the community for the collection of bad debts. Feel free to call either Michael Schnittman or Mark Stein to assist you in this practice area.