Steve Harms

Saturday, September 24, 2011

Collecting past dues: Put payment agreements in writing because it isn't done if it isn't in writing!

Truer words were never spoken. Striking a deal with a debtor who owes you money can be difficult and an absolutely exhausting process. The two parties don’t even have the same goals in mind: the debtor is trying to preserve cash for payment of other bills while your goal is to get your outstanding balance paid off in full. Once the work is done, though, and even if some compromises are made from your perspective, you don’t want to start the whole process over again. You don’t want the debtor to have a “short memory” and come up with something like: “Wasn’t I suppose to pay you $50.00 per month starting March 10th?” when the real deal was $150.00 per month starting February 1st. How could he forget? Because it’s a convenient truth to a debtor struggling to pay other debts.

So, along comes a writing. It doesn’t have to be “legal” – it doesn’t have to be long – it just has to state the terms of the agreement in plain and simple language so both sides understand what the obligations are.

Thinking past the negotiated resolution of the unpaid balance, you are hoping the debtor does honor his or her commitment by making the payments on time. However, a part of you knows that there is a 50/50 chance, at least, that your debtor will default in making payments on this negotiated schedule. You may end up having to file a collection lawsuit and drag the debtor into court.

With this in mind, your goal is not only to arrive at a writing which memorializes the payment agreement, but also to have a clear document signed by the debtor admitting the balance owed and confirming promises to pay it off.

Why would this be important if you’re planning on suing the debtor should defaults in the payment schedule occur? Because the fastest way to obtain a judgment against your debtor is to show the court an admission of the debt and promises to pay it in writing. In other words, courts love to see clear cut writings. Indeed, all of your contracts made with suppliers, customers and other third parties should be clear, concise and contain language that just can’t be misinterpreted. The same reasoning applies: if these matters have to be litigated at some point in the future, you want a slam dunk case to be presented to the judge.

Even after three decades of shoving collection cases under the noses of judges, it is still a real thrill to hear a judge declare, now and then, “Based on what I’ve seen—including written admissions of the debt—it sure seems like the defendant (debtor) owes the money…”

So, we put agreements in writing. The debtor then has a document to refer to should his memory become short and so that, perhaps, a court will make a ruling in your favor if you have to sue to recover your money.

Written agreements have the effect of modifying prior written agreements. If, for example, you have a prior promissory note secured by a mortgage with all sorts of terms allowing for interest, attorney fees, foreclosure rights and the like, you wouldn’t want to replace such an agreement with a weaker (less terms) promissory note or writing having the legal effect of wiping out your remedies under the prior note or agreement. If in doubt, seek professional advise first, before using subsequent written agreements.

Monday, September 19, 2011

Using documents in the extension of credit

You can help keep the odds in your favor by insisting on good documentation throughout the credit and collection process. Good documentation begins with a credit application, which is required before your first sale on credit to any customer, new or old.

Beyond requiring credit applications, you should frequently review credit information for all your customers. Depending on your industry and your history with the customer, reviews might occur every six months or every year, but even with established customers you won’t want to go beyond a two year review schedule. In between reviews, update your customer’s credit information whenever you come across new relevant information. Have your customers complete a new credit application or make appropriate additions and deletions to the old one.

You can avoid a lot of difficulties with defaults if you monitor your clients for changes in their business and financial health. For example, if you find out that a customer’s business has new ownership, or that the owners have formed a new but similar company (John’s Bike Shop is now John and Mary’s Bike Shop), it may be time to thoroughly recheck that customer. Sometimes your clients really don’t want you to find out about changes, and that’s a reason in and of itself to recheck them.

If a customer won’t take the time to fill out a credit application, and you choose (or need) to extend credit to the customer anyway, you can protect yourself. Make sure you interview that customer to obtain the information you need to determine creditworthiness and to use as a resource if the customer’s paying habits deteriorate. If you interview the customer by phone, keep a recording of the call (but be sure you can legally record the call under the laws of your state), or write the answers down on your standard credit application and add the completed document to the client’s credit file. Basic information includes:

* Full, legal name, physical address, and phone numbers.

* E-mail addresses, Web sites, and other online references.

* Contact persons.

* The customer’s legal entity (corporation, limited liability company, partnership, and so on) in case of eventual litigation.

* Agreements concerning payment of interest and costs of collection, together with other written agreements you and the customer enter.

* Bank account information, which is extremely useful if and when you’re looking for assets to attach post judgment.

Even with a formal credit application in hand, you may require other key documents before extending credit, including

* Financial statements, which establish a picture of the applicant’s assets and liabilities as of a certain date.

* Operating statements, which show the applicant’s sales and profits over a certain span of time.

* Personal guaranties, giving your company additional protection should the customer’s business falter.

* Liens that, in the event of default, allow you to take action against the customer’
For a complete discussion on this topic, see this book