In the current economy, an increasing number of otherwise good customers are falling behind on their bills. As a creditor, taking a proactive approach can increase your return and profitability. Commencing litigation to collect the account should always be the last resort, but there are several preparatory steps summarized in this article that can be taken to help minimize the costs of an attorney and to maximize the return.
Collection Starts With The Contract
Contracts do not have to be lengthy to include terms that may aid in collection. Many companies include terms in their signed agreements or in the "terms and conditions" that they print on their quotations, purchase orders, acknowledgments and invoices. These provisions include: (1) the date payment is due; (2) the ability to recover attorneys' fees in the event of default; (3) specifying the rate of interest or late fees for delinquent payments; and (4) the State law, jurisdiction and venue for any disputes. These are just a few common provisions but they can be surprisingly helpful to avoid disputes and streamline the collection process.
Realistically, it is not always possible to have a formal written master contract including all of the ideal terms with each customer. If an account starts to show signs of trouble, you may be able to take steps to strengthen your position depending upon the circumstances and the contract. For example, you could consider stopping further work or deliveries, convert the account to COD, or require personal guarantees for continued sales. Thus, it is certainly recommended to at least periodically review the existing contracts, particularly for accounts that have a history of delinquency, to help to minimize potential exposure.
Know Your Debtors
Beyond the terms of the contract, it is important to identify exactly who the responsible party is before commencing efforts to collect a delinquent account. In fact, many creditors do not know who is legally responsible for their debt. This has become more of a problem as larger businesses create more subsidiaries, divisions or affiliates. Your contracts and sales documents should identify all of the parties who will be liable, using their legal and assumed business names whenever possible. The Secretary of State will provide the information online but you may need an attorney or paralegal to help interpret the information.
Many times, creditors do not research a customer's name until the account is delinquent. Even then it is better to list all of the potentially responsible parties. But beware: a creditor must have a legal basis for making a claim against any business or person that is not listed in the sales documents themselves.
Liens or Collection Agencies As Alternatives To a Lawsuit
Statutory liens can be an effective alternative to a lawsuit. These liens are highly specific in nature and often require continued possession of the goods. In fact, the loss of possession without a Court order or some other specific writing could inadvertently result in the release of the lien and loss of priority. Another important consideration is whether there are any additional steps necessary to perfect the lien and its priority. The specifics of what and where something needs to be filed depends on the goods at issue and the law of the State where the buyer and goods are located.
Some companies hire collection agencies to assist them. Shop around for the best return and read the fine print. At the same time, it is important to consider other possible risks and costs when selecting a third party to pursue the collection of your accounts. There are a number of consumer protection statutes which impose a barrage of disclosure requirements and additional steps to lawfully collect an account. While the potential fines for non-compliance with the consumer protection statutes are nominal, the statutes do impose the potentially hefty liability of payment of the consumer's attorneys' fees if a violation is found. The consumer protection statutes are highly technical and there are limited narrow defenses in the event of a violation. The most efficient and commonly used statutory mechanism to avoid the potential liability under the consumer protection statutes is to undertake the collection efforts internally. If it is not possible to attempt to the collect the obligation internally, it is important to keep in mind this potential liability arises only with consumer transactions and that it is critical to select a respectable collection agency or attorney in order to minimize the overall costs of collection.
Prompt Action Upon Default
There are two reasons why it is necessary to promptly act once an account begins to become delinquent. First, prompt action and repeated contact with the customer gives you a better understanding of their financial circumstances. This information can prove to be indispensable when evaluating how aggressively and how quickly to pursue collection. Second, there are maximum timeframes established by each state to commence a suit (also called statutes of limitation). Missing these statutory deadlines could eliminate any ability to collect the account. The application and calculation of the statutory timeframes can be quite technical and factually specific. Thus, it is advisable to be aware of the potential timeframes for commencing a suit and to consult with an attorney well before the statute of limitations approaches.
Lawsuit Options
If you decide to sue, consider your options. Some contracts have a mandatory arbitration provision that may control. Otherwise, if the amount is relatively small, start the lawsuit in conciliation (small claims) court. Each State varies; conciliation courts in Minnesota may hear claims of up to $7,500.00. Typically, these claims can be pursued without an attorney. Information about the forms, the fees, and the process can often be found at the Court's website . At the same time, it is important to keep in mind that the defendant still has the opportunity to dispute the debt and may even have the ability to move the action to district court. Thus, even though small claims court tends to be less expensive such claims are not without risk or expense.
Another option is to proceed in state district court, especially if the debt exceeds the limits of conciliation court. Before doing so, check whether your company must be represented by an attorney. If proceeding in District Court, Minnesota offers you the unique ability to start a lawsuit without immediately filing it in State Court. This "pocket service" can be an effective tool in settlement negotiations because the information about the debt does not become "public" until you file the lawsuit. In some situations, Minnesota also allows creditors to obtain payment before the judgment is entered. At the same time, the use of these post-suit remedies requires a careful consideration of the circumstances to determine whether it is more important to obtain the priority of immediate judgment entry or the satisfaction of immediate payment.
Finally, consider starting a lawsuit in federal court if the amount in controversy exceeds $75,000.00 and the debtor is located in a different State. Proceeding in federal court may provide some strategic advantages depending upon the particular product at issue. However, litigation in federal court tends to be a more involved process and can be more expensive.
Conclusion
The key to collecting delinquent accounts is putting the right tools in place at the beginning. A precise contract can help to alleviate the often expensive and avoidable disputes while providing the opportunity for recovery of attorneys' fees. Successful collection is always about communicating with the debtor, considering options for payment, and evaluating the parties' financial positions. Despite all of this hard work, it may still be necessary to contact an attorney to protect your ability to collect on the account. However, early involvement of an attorney does not have to mean that the process has to be expensive to make progress in collecting the account. In these cases, the return can be maximized if the right groundwork has been laid and there has been prompt action towards collection.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.