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DO
AWAY WITH SLOW-PAY AND NO-PAY
By Angelo J. Bolcato, Esq.
Our
clients who are small business owners complain, almost universally,
that their biggest problem involves customers who practice
slow-pay, or worse yet, no-pay. We live in a no-money-down,
easy-credit world that has fostered a new breed of consumer
who scoffs at dunning letters and thinks nothing of filing
for protection under the debtor-friendly bankruptcy laws.
Following are four tips that should help minimize your exposure
to bad debt.
- Know your customers. The best way to maximize collections
starts with gathering information on your customer. Your
local bank wouldn't think of lending money to someone with
no credit references, no collateral, and no source of income.
When you extend credit, think of it as a loan, and apply
some of the same criteria your bank does when it considers
a loan application. Before you extend credit, insist on
financial information, including your customer's bank references,
current employer, and trade creditors in the case of a business.
When your customer pays you by check, keep a copy of that
check in your files. The bank account information may be
useful in the future if you get a judgment and need an asset
source to tap.
- Develop and enforce a strict receivable policy. Keep
track of all accounts, and send delinquency notices using
a fixed cycle, rather than randomly. Consider using a system
that generates delinquency reminders at 30, 60, and 90 days.
You should also establish an "iron ceiling" - a dollar amount
of debt, above which you will not perform further work or
send any goods to that customer. Don't be afraid to cut
off a customer, even if the customer wants to continue placing
orders and makes an occasional payment. These problem customers
are often juggling a number of suppliers and are making
token payments only when pressured to do so.
- Pursue
active collection. Once you believe a customer has no
plans to pay up voluntarily, you have several options. You
must first decide whether to turn the debt over to an attorney
or a collection agency, or to handle the matter yourself.
Weigh the amount of money owed against the anticipated collection
costs, and factor in the likelihood of success that each
method offers. Some firms will take on collection matters
on a contingency basis, keeping a percentage of any money
recovered plus their out-of-pocket expenses. If you decide
to handle the collection yourself, consider the Small Claims
Division of the Superior Court - Special Civil Part, because
you can easily and inexpensively file a complaint there
if the debt is less than $2,000. Be prepared to testify
what goods or services you provided, and have at the ready
copies of any invoices. When deciding how to attempt to
collect, factor in the possibility that your debtor may
lack assets and owe other people - you may get a judgment
only to find that it is worthless, a so-called paper judgment.
If you suspect that your debtor has limited assets and heavy
debts elsewhere, you may want your attorney to obtain an
asset search before you proceed further. An asset report
generally shows the customer's current address and employment
and credit history. It is easier to make an informed decision
when you are armed with these facts. Keep in mind that an
action to collect a debt is typically considered a contract
action, giving you six years to file suit from the time
the agreement to pay is breached. This is important because
the six-year window may give you time to hold off now and
review the matter in a year or two in when the customer's
financial circumstances may have improved.
- Be prepared for your problem customer to file for bankruptcy.
Nothing is more frustrating than winning a collection lawsuit,
finding an asset to tap into, and then receiving notice
that the customer has filed for bankruptcy - before you
receive payment. The first step is to determine which form
of bankruptcy your debtor has declared: Chapter 7, in which
his non-exempt assets are sold to pay debts, or Chapters
11 or 13, which require the debtor to develop a plan for
repaying all or some portion of the debts. Once you know
which kind of bankruptcy has been filed, you must determine
whether there are any assets available to pay your debt.
Consult an attorney who specializes in commercial collections
and bankruptcy to review the relevant documents and advise
you on how best to proceed. Your lawyer should also be able
to help you formulate the terms of your agreements to provide
goods or services to customers who continue to operate during
the bankruptcy.
The
four steps constitute a general guideline on how to manage
customer debt. Retain an attorney experienced in helping small
businesses avoid and resolve bad debt. Along with your attorney,
develop bad-debt strategies that are tailored to your business.
--
Angelo J. Bolcato
is a partner at Laddey, Clark & Ryan and maintains a specialty
in collections. For more information on him and his practice,
click on the Our Attorneys section of this website.
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