FDCPA....your letters don't have to use the EXACT language if they mean the same thing!

So, what would happen if your validation letter to a debtor read that the debtor has to respond within "30 days of receiving this letter" rather than within "30 days after receiving this letter"???

A suit was brought on the use of "of" being misleading.

The matter was appealed to the Sixth Circuit Court of Appeals, and lo and behold, score one for the debt collector!   The Sixth Circuit held that using "of" instead of "after" didn't alter the meaning of the validation language, so the court dismissed the suit against the debt collector.

As per a well written article in Inside Arm.com,

the three-judge panel noted that a collector need not parrot the FDCPA to comply with it. “A statement works if it speaks with enough clarity to convey the required information to a reasonable but unsophisticated consumer,” the unanimous panel wrote. “The letter to Wallace did that. It informed him that he had thirty days to dispute the debt, that the clock would start running when he received the letter (rather than, say, when Diversified sent the letter), and that if he did not act the collector would assume the debt’s validity.”

Wallace argued that “of” and “after” are different words, and that they can bear different meanings. The judges agreed, but noted that “this possibility does not make Diversified’s choice of preposition improper. No reasonable consumer, even an unsophisticated one, would read the letter as an instruction to travel back in time (though no more than thirty days back) to dispute the debt.”

The judges also conceded that both “within thirty days of receiving notice” and “within thirty days after receiving notice” are ambiguous about when to start counting. But they said that even if the plaintiff had argued a different point, the result likely would have been the same.  (http://www.insidearm.com/daily/debt-collection-news/debt-collection/debt-collector-wins-appeal-in-precedential-letter-language-case/)

The case is entitled Wallace v Diversified Consultants, Inc.

Fair Debt Collection Practices Act: A bill to modify it

Collection attorneys dealing with consumer debtors in matters of litigation are frustrated endlessly by the FDCPA communication requirements as "communications" are to be conveyed to a debtor only if the debt collector id's himself/herself as a debt collector (following the validation letter).

Well, there may be some, limited relief in the offing:

Summary: H.R.2892 — 113th Congress (2013-2014)

There is one summary for this bill. Bill summaries are authored by CRS.

Shown Here:
Introduced in House (07/31/2013)

Fair Debt Collection Practices Technical Clarification Act of 2013 - Amends the Fair Debt Collection Practices Act to exclude from the definition of "debt collector" any law firm or licensed attorney: (1) serving, filing, or conveying formal legal pleadings, discovery requests, or other documents pursuant to the applicable rules of civil procedure; or (2) communicating in, or at the direction of, a court of law or in depositions or settlement conferences, in connection with a pending legal action to collect a debt on behalf of a client.

(NOTE: the Summary content is credited to Congress.Gov, a web site)

Collection through garnishment: there are some exemptions

In prior postings on this site, I've expressed the need to be creative and be willing to develop strategies as to the most effective forms of post judgment collection remedies.

Be aware that numerous resources are exempt in whole or in part from garnishment. Some major exemptions, such as Social Security, unemployment compensation, and worker’s compensation benefits.

 

Generally, pensions such as IRAs and the like are exempt as well.  As a related matter, some of your garnishments may be met with statements that a higher priority writ is in effect. For example, child support debts, tax liens, loans to the bank you are garnishing, and prior writs issued before yours may have the effect of bumping you down the line. You won’t receive payment on your garnishment until those claims are satisfied.

Contracts: every business relationship requires enforceable contracts!

A contract generally consists of an offer, acceptance, and consideration. In business, the offer typically consists of a purchase order, and the acceptance is the shipping of the goods or the providing of services named in the purchase order. The consideration is the purchase price. Offer, acceptance, and consideration can be implied depending on the circumstances.

With some important exceptions (such as sales of real property), contracts do not have to be in writing. Although the UCC provides that all contracts over $1,000 should be in writing, UCC 2-201(1), MCL 440.2201(1), there is a notable exception to this rule. Where a seller of goods ships to a buyer and the buyer receives and retains those goods, there is an implication that a contract exists. If the buyer fails to timely return the goods, no writing is needed to imply that the buyer intended to contract for the purchase price of the goods. UCC 2-201(3)(c), MCL 440.2201(3)(c). The UCC also provides for substitutes for a writing or exceptions to the writing requirement where there is a written confirmation between merchants, UCC 2-201(2), MCL 440.2201(2); specially manufactured goods, UCC 2-201(3)(a), MCL 440.2201(3)(a); an agreement admitted in court, UCC 2-201(3)(b), MCL 440.2201(3)(b); and partially performed agreements, UCC 2-201(3)(c), MCL 440.2201(3)(c).

The UCC does not require price terms, delivery terms, or other details for the sale of goods. Past experience of the parties and other statutory default provisions will help to determine most of the terms of a contract, including a purchase price. Therefore, it is fairly easy under the UCC to establish the existence of a contract without having to prove specifically the elements of offer, acceptance, and consideration.

The contract has to be entered into before the goods are delivered or services are provided. For that reason, the purchase order and the documentation before the sale, including the credit application, become the contract between the parties. The credit application is an often overlooked but important document. Credit applications often set forth extremely important terms such as interest rates to be paid should the account become delinquent, personal guaranties to be invoked if the account becomes delinquent, the parties’ agreement concerning full settlement checks, etc. For a sample credit application, see .

A common misconception among business people is that an invoice is a contract. An invoice may contain a description of the goods, shipping dates, and price terms, but it is not a contract. The invoice is prepared and mailed out after the goods are shipped and after the contract is entered into. For this reason, the terms printed on the back of invoices (most companies insist on filling up the back of their invoices with various terms in small print: immediate inspection, immediate return of any defective goods, a return authorization number on any defective goods, and so forth) are generally not enforceable. See Power Press Sales Co v MSI Battle Creek Stamping, 238 Mich App 173, 183, 604 NW2d 772 (1999). Thus, for example, if a customer voluntarily agrees to pay interest on a delinquent account based on the terms set forth in the invoice, that is all well and good, but if the customer later decides not to pay the interest, it is likely that a court will not enforce the interest terms if they are only in the invoice.

The courts will generally enforce contracts that are within the parties’ expectations. If there is a one-sided (unilateral) mistake, the contract is enforceable. However, if there is a mutual mistake, the court will generally not enforce it. For example, if both parties thought that the steel was Grade A worth $57.00 per pound and it turned out, by mistake of both parties, that the steel was Grade B, then the court will not enforce the contract.

Sometimes contracts are purely unilateral. In other words, acceptance of the contract occurs through performance. For example, if someone offers to pay $500 if the contracting party drives a car to California, acceptance occurs when the car is driven to California.

Consideration is difficult to measure and courts often will not bother to measure it at all. If there is the existence of any legal consideration, the contract will most likely be enforced. Thus, if the buyer overpays for a product, a court will not question the overpayment unless there was actual fraud or a mutual mistake.

Bankrupcy issues when a personal guaranty is involved

Questions have been raised regarding a discharge in a business bankruptcy and the recourse to a personal guarantor on a commercial debt which is discharged in bankruptcy.  In addition a question has been raised as to the application of the automatic stay to the personal guarantor when there is a bankruptcy filed by the corporate (or other artificial entity).  This blog is fortunate enough to be treated to a detailed answer to that inquiry by none other than Wanda Borges, whose credentials in this area of law are tremendous.  Her contact information follows as well.  Here is Wanda's take on the issue:

 There are several provisions in the Bankruptcy Code which address the issue of discharge:

 Bankruptcy Code §727 says “The court shall grant the debtor a discharge, unless – (1) the debtor is not an individual.  It is quite clear, therefore, that there is no discharge of a business which files a chapter 7 proceeding.  This makes perfect sense because if a business files a Chapter 7 proceeding, it closes its doors and no longer exists so there is no entity remaining that would benefit from the discharge

 Bankruptcy Code §1141(d)(1)(A) provides that Confirmation of a Plan “discharges the debtor from any debt that arose before the date of such confirmation…”

 There is no distinction in that provision between a chapter 11 of a corporate (or other artificial entity) debtor or an individual debtor.  Confirmation of a Plan bars creditors from going after that entity for anything other than what the Plan provides.

 Bankruptcy Code §362 of the Bankruptcy Code  provides that any bankruptcy petition operates as a stay, “applicable to all entities” of

 

1.         the commencement or continuation of any action against the debtor to collect or recover a claim which could have been commenced prior to the filing of the petition

2.         the enforcement against property of the debtor of any judgment obtained before the filing of the petition

3.         any act or action to obtain possession of property of the debtor

4.         any act or action to perfect a lien against property of the debtor’s estate

5.         any action to enforce a lien created before the filing of the bankruptcy petition

6.         any act to collect or recover a claim that arose before the filing of the petition

7.         any setoff of any debt owed to the debtor that arose before the filing of the petition

8.         the commencement or continuation of a Tax Court proceeding concerning a tax liability for a period ending prior to the filing of the petition.

 

Each of these provisions is specifically aimed at the bar of any action against the debtor which has filed a bankruptcy petition.

 The automatic stay does not prevent any action against the personal guarantor when the artificial entity (i.e. corporation, limited liability company, limited partnership, etc) files a chapter 7 or chapter 11 proceeding.  Creditors are within their rights to proceed to pursue the personal guarantor to collect the debt originally owed by the artificial entity.

 There is an exception to this in the case of a Chapter 13 filing.  Bankruptcy Code §1301 provides that “a creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor…” from a co-debtor.  However, if this co-debtor became liable as part of its own ordinary course of business (e.g. signed a promissory note individually and not merely as a co-debtor), then the creditor is free to pursue that debt.  Notice also that this only applies to consumer debts.

 Be aware, however, that although it is true that a personal guaranty will survive an artificial entity/business chapter 7 proceeding and a chapter 11 proceeding it has become commonplace for a chapter 11 debtor to include within its Plan, an exculpation clause that effectively releases an individual guarantor.  One must be extremely diligent when reading a chapter 11 plan to be certain that it does not contain a release of the guarantors.  If the Plan does contain that kind of exculpation or release language, a creditor should immediately seek advice from a bankruptcy practitioner to determine if grounds exist to object to that Plan.

 Another cautionary note is to be aware of a chapter 11 business which continues operating after confirmation of its plan.  If you have a personal guarantor and a debt from a business exists on a given date (e.g. $10,000 owing on 1/3/14), that guaranty survives the business bankruptcy for that sum of money when the bankruptcy is filed after that date.  HOWEVER, I have seen cases where a business chapter 11 has been filed so the personal guarantor's debt to the creditor is $10,000 prior to the bankruptcy filing and then the business debtor continues business operations AFTER the confirmation of a chapter 11 Plan.  I would not rely on the personal guaranty continuing in effect after the chapter 11 proceeding for new debt incurred by the post-confirmation debtor. 

 There is one final question raised which states "While the Bankruptcy Code looks pretty clear in that the automatic stay pertains to debtors (not guarantors) courts have started to jump on a catch-all in the code to support a broader premise that the automatic stay should apply to non-bankruptcy guarantors of corporate debt in some Chapter 11 situations. … the rationale of that approach is that personal guarantors typically act as a source of funding for the corporation and the preservation of their credit is instrumental in the recapitalization process. Also, personal guarantors also typically manage the corporation and having to defend themselves against debt collection action distracts them from efforts to effectively operate and reorganize the debtor entity."

 Let me address that scenario.  Bankruptcy Code §105 gives the Bankruptcy Judge broad equitable powers to do whatever it takes to enable a chapter 11 to proceed towards confirmation of a Plan.  Specifically, §105 states “The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.”  In certain instances Bankruptcy Judges have expanded the automatic stay to cover the principal(s) of a debtor when the court believes that the principal needs that protection in order to properly run the business without having to fight his personal creditors (those holding guaranties).  A debtor must show extremely good cause in order to get the Bankruptcy Judge to grant this expanded automatic stay protection.  This was done in the Philadelphia Newspapers wherein the Bankruptcy Judge cited the impact that a lawsuit against the principals would have on the debtor’s ability to manage its reorganization process.  The automatic stay was extended also in the AH Robins case and in the Brier Creek case.  However, in each of these cases and in any other case wherein the automatic stay is expanded beyond the debtor, the circumstances must be such that would cause “adverse economic consequences” to the debtor or some other “unusual circumstances” which would warrant such expansion.

 On the other hand, we have recently been involved with a case in the State Court wherein we sued two corporate entities who were the primary debtors, two personal guarantors and a corporate guarantor.  The primary corporate debtors each filed chapter 11 proceedings.  The State Court Judge would not let us proceed with the litigation against the guarantors because the State Court Judge said the automatic stay of the Bankruptcy Code prohibited him from proceeding even against the guarantors.  We were compelled to file a motion with the Bankruptcy Court showing that the automatic stay is not applicable to the non-debtor guarantors except in unusual circumstances.  Citing the AH Robins case as well as Calpine and other cases of note readily persuaded Bankruptcy Judge Craig to issue an Order finding that the automatic stay was inapplicable to the third-party non-debtor guarantors. 

 As an aside, once the Bankruptcy Court Order finding the automatic stay to be inapplicable was filed with the State Court, settlement discussions ensued.

 

WANDA BORGES

BORGES & ASSOCIATES, LLC

575 UNDERHILL BLVD., STE. 118

SYOSSET, NEW YORK 11791

516-677-8200 x225

516-677-0806 fax

wborges@borgeslawllc.com

www.borgeslawllc.com

 

 

Credit Risks Require Current Financial Information!

Every extension of credit is a risk. Some customers are worthy of more risk than others. Making a decision of whether or not to extend credit is really an art more than a science and is a tricky business. Much of the process is rooted in your instincts toward a customer and conditions in general. Your instincts are guided by the credit risk factors and the five Cs of credit (character, collateral, capacity, capital, and conditions).

The core concept isn’t complicated: Some customers are better credit risks than others because of their financial condition, age, payment history, industry, quality of management, or willingness to provide liens or guaranties make them more likely to pay for their purchases.

But after you trust a customer enough to extend credit, how much credit should you give? The answer varies by business and industry. A $50,000 line of credit may be a minimal risk for some businesses, but a $5,000 line of credit may be high for others. The key here is your margin of profit; your ability to take risks while extending credit rises and falls with your profit margins. The smaller your margins, the less risk you can afford.

So you track credit information, apply the five Cs, and carefully consider your customer’s situation and industry trends. You set up a system to gradually extend credit to customers who are newly formed or are just new to you. You watch for red flags that indicate trouble ahead.

Your customer may suddenly want to double or triple credit purchases. Your sales department wants the increase in business, but your credit department is going to have to deal with any credit headaches that result. Whether you’re evaluating a new customer or large orders, conducting a routine periodic credit review, or responding to concerns about a customer that’s slowing down in its paying habits, you need your customer’s financial information to evaluate credit.

The most important reason to maintain current credit information (such as tax returns, balance sheets, operating statements, credit reports, and aging sheets on payment history with your firm) in your customer’s file is to spot trends. Downward trends are red flags that indicate increased credit risk and require action.

Collection law...a little knowlege goes a long way...

Often times a collector is on the phone trying to convince a delinquent debtor to pay up for goods which were sold and delivered, but not paid for.  The debtor often uses a tactic of tying to throw the collector off track by claiming a "legal defense" to the claim.  A little legal knowlege on collection topics may go a long way to helping battle debtor claims.  The following are  a few common examples:

·         You waited too long to try and collect, I’m not going to pay you because I have no legal obligation to do so.  All claims have an expiration period.  Under the UCC, the expiration (statute of limitations) is 4 years for an action under breach of contract for the sale of your product.  The parties can even reduce the period of limitations to not less than 1 year but may not extend it.  Obviously, a seller/creditor that waits more than 4 years to bring a contract action involving the sale of goods is likely to be met with that defense. 

·         I’m not going to pay because you never told me the price you were going to charge.  The good news is this is generally not a valid defense under the UCC.  The parties do not have to include terms.  The essential elements of a contract for the sale of goods is a description of the items and the quantity of the items.  Price can be presumed based on a reasonable price at the time of delivery for those particular goods, prices charged in the past to that customer for similar goods or whatever is the standard or market price in the industry.

·         You failed to honor your warranties so I’m not going to pay you.  If you sell product, you must honor your warranty concerning that product.  However, if the debtor hasn’t paid for that product, the warranty becomes a “which came first, the chicken or the egg” situation.  You don’t want to honor the warranty until the product is paid for and that’s a reasonable approach because you don’t want to throw good money after bad in fixing the product.  On the other hand, the debtor was entitled to a produce that worked and therefore is entitled to warranty repairs when the product breaks.

Another wrinkle is if you are a leasing company.  The UCC provides that leasing companies can waive any obligations which would normally be raised.  If the debtor defaults on the lease payment plan and starts making claims of defective goods like delivery, etc., the creditor/leasing company has no further obligation, and the debtor/lessee, must look exclusively to the manufacturer for all warranties and issues concerning the product itself. 

·         Your contract is over bearing and I’m not going to honor it.  In cases of commercial businesses dealing with other commercial businesses, courts pretty much give free rain to the parties to contract for whatever they wish.  Therefore, this would not be a valid defense.

If the debtor is a consumer, however, they sometimes have a defense of unconscionability as a defense to a contract or a particular clause in a contract.  This usually arises in a situation where one party has a huge negotiating advantage over the other such as the typical credit card or bank contract where the bank establishes the contractual terms and the consumer either accepts them or rejects them.  There really is no negotiation.  It is simply “take it or leave it”.  Well, if the credit card agreement contains strongly unfair terms, a court might refuse to enforce those particular terms as unconscionable.  However, although a specific clause may be unfair, the debtor is going to have a hard time convincing the court that the whole contract should be tossed out because of one unfair clause.  In other words, the defense will mostly fail.

Why do I need a collection professional for debt collection?

To answer this question, often asked by clients and sales prospects, the following comments may be helpful.

 

Debts which are six months old only have a 50% chance of being collected.  Once a debt is 12 months old, you’re lucky if it has even a 10% chance of being collected. The older a debt gets, the more uncollectible it becomes.  A debt is not fine wine and it doesn’t become more enchanting with age.

 

 If a debtor has broken numerous promises or is just simply refusing to honor a commitment, it just may be time to bring in a professional to assist in the collection process and to take it to the next level.

 

During difficult economic times, you may even be facing a situation where a number of debtors are breaking promises and your accounts receivable are building to uncomfortable levels.  It just may be time to bring in a professional to handle your collections so you can move onto your other responsibilities.

 

You need to know who to hire, how to find debt collecting professionals, what to look for in terms of credentials and ultimately how the system really works so you can get your money’s worth.

 

A collection specialist who is who we look to when we are at wits end.  In the credit and collection business, wits end is usually arrived at following a series of broken promises.

 

Far and away the biggest mistake credit executives make is to wait too long before engaging collection professionals.  Whether the debt is a business debt or a consumer debt, many factors occur as the debt becomes older making it more and more difficult to collect including:

· Relocating (skipping) to parts unknown.

· Loss of motivation to pay—the more time which elapses, the less motivated debtors are to pay.

· Faded memories—they forgot all about this debt.

· Statute of limitations concerns—legally, the claim is no longer enforceable.

· Businesses go under—the lifespan of a troubled company is short, especially in difficult economic times.

· Here today gone tomorrow—some debtors intentionally run up debts, take the goods and services and run (or form new businesses with new legal identities which make collections difficult or impossible).

 Doesn’t the collection professional go about bill collecting the same way I do?  Yes, in many instances the procedures are very similar but just the impact of having a third party involved can be very effective coupled with the very specialized training and techniques developed by collection professionals to bring about results.

 

Collection professionals know what to say and when to say it.  They use their instinct, imagination and creativity, within the bounds of state and federal regulations (which they are trained to follow) and they are highly motivated and have sufficient time to become familiar with your files, familiar with your debtors, and learn and determine what collection techniques work the best.

 

 

Collection Techniques: Keep YOUR promises…don’t make idle threats

If you’ve spent time around a toddler, you know that you should never, ever make an idle threat. As soon as the little one knows you’re flexible and won't really enforce the threats you make, she’ll start pushing the limits to see when (if ever) you’ll actually carry out your threat. Yes, I’m going to say it: Customers are like toddlers.

Threats like, “I’m going to sue you with the biggest lawsuit you’ve ever seen if you don’t send me my $500 by Friday,” or, “I’m cutting you off Friday and you’ll never purchase from us again, unless I receive $500 . . .” are more often made by a hotheaded credit executive than by a calm collections professional.

What can happen if you make a hollow threat?

                           *  If the debtor doesn’t believe you, or you don’t in fact do what you threatened, expect further abuses of your credit policies by your slow-paying customer. You’ll have thrown away your credibility.

                           *  Threats made in the heat of the moment can alienate good customers and cause them to take their business elsewhere.

Either way, cash flow suffers.

 

Credit Risk: how much can you stand?

Savvy credit managers know that new customers almost always pay for their first few orders in order to build up their reputation as good pay. But then the third or fourth credit extensions show signs of slipping. Payments slow to 30 days or so beyond your selling terms. Without careful monitoring and close follow up, your new customer can quickly become your new headache.

Appearances may deceiving. The trappings of wealth, including luxury cars, fancy offices, the latest and greatest of all gadgets and gizmos, sometimes signal that the customer is a poor risk, not a good one. Some folks just have to look successful, even when there’s no money in the till to pay bills. Your goal is to discern which customers are worthy of credit without being deceived by appearances.

Your biggest risks come from

                           *  New Accounts: Whether newly in business, or established business and simply new to you; and

                           *  Marginal accounts: Customers in some degree of financial instability, or start-ups with unknown finances.

Monitor risky accounts often –  really often – for any change in payment patterns and any red flag events, including their general attitude toward your business relationship, drops in orders, new management, or changes of address or phone numbers.

Be on guard for the customer who is always in a rush, the “We need it today” or “Please help us get this done over the weekend” customer. All too often, you will pour your body, soul and direct disproportionate company resources into that customer to make them look good, only to find they had no idea what they were doing. Next, you hear that you won’t get paid until they’re paid by their own customer, and their customer is upset. You’ve incurred bills of your own to pay for materials and owe overtime pay to your own employees, and now you may get nothing back.

When a customer introduces pandemonium to your business, avoid being set up by slowing down the process, and don’t make no exceptions to your credit policies (including a credit application, financials, and a full credit evaluation).

When you extend credit, the type of legal entity you are extending credit to is a key factor in the decision of how much credit to grant. There are huge differences between lending to an individual versus a corporation. Many business entities, including corporations, provide a significant shield against collections, allowing their owners or shareholders to avoid any personal responsibility for their unpaid debts.

For example, you’re about to start doing business with a famous, wealthy, well-respected person. Or should I say, that person’s newly formed corporation. Their wealth and fame leads you to extend considerable credit. The next thing you know, you find yourself down in the dumps when the corporation goes out of business leaving its debts unpaid, and the “respected” person behind the company has neither the responsibility nor the inclination to pay your bill. Famous people can fail in business, just like anybody else. Remember that over 90% of all new businesses fail in the first five years, and some of those are… er… were owned by successful and highly respected folks.