Small Business and Debt Collection

JohnTaylor October 18, 2013 0

Nearly all small businesses will have to deal with customers who are late in making payment or who refuse to make payment on bills owed to the business. As a small business owner, it is imperative that you collect the money owed to you, but retrieve it in a way that is legal and will not mar the public image of your company.

It’s not surprising in the current economic climate that many individuals and businesses are delaying or trying to avoid paying debts they owe. However, you have bills of your own to pay and should be dilligent in collecting money owed to your business. And collecting debt actually saves your customers money in the long run as collecting the money owed to you will prevent you from having to raise prices to cover your losses from bad debt. According to collection industry sources, the debt collection industry saved the average American household $354 last year in money they would have spent on higher prices had the industry not collected nearly $40.4 billion in debts last year. Clearly, making sure your debtors pay up on time can help you keep your prices low as you are not forced to compensate for losses caused by unpaid debts.

Have policies in place

Good debt collection practices start in your company’s policies for billing and debts. It’s important for you to have solid policies regarding billing and customer debt, and making sure that they’re followed by yourself and your employees. Having written policies helps employees and customers understand what the rules are, and provides helpful documentation should you have to take a debt collection case to court.

If possible, avoid bill collection issues by insisting that customers pay for products or services rendered at the point of sale. While this may not be practical for all businesses, the more you can cut down on outstanding bills, the less you will have to handle debt collection issues. Your policies concerning billing and payment should cover which customers can be issued credit, when payment is due, how bills will be processed and sent to customers and what steps will be taken to address delinquent bills. Your policies should also cover checks, and what steps will be taken if a customer writes a bounced check to your business. Be sure to be aware of your state’s laws regarding checks and debt collection when crafting your policies.

Contacting the debtor

When it becomes necessary to collect a debt, you should first attempt collection by contacting the customer and informing him or her of the debt and his or her repayment options. This will typically occur 30 days after the account becomes delinquent. Be ready to provide information such as the amount of the debt, when it was incurred and when it is due to the customer.

Keep the call friendly and professional and avoid making threats or providing misleading information to the customer, however, you may inform them of the legal remedies available to settle unresolved debts. The Federal Fair Debt Collections Act puts limitations on debt collections activities, regulating when debt collectors can call debtors, how often they can call and forbidding abusive or harassing activity. Familiarize yourself and any employees who may be involved in debt collection activity with the law and what it forbids. Violating the law may damage your case in court if you pursue the debt through litigation and could open your business to a suit from the debtor.

Typically, the FDCA:

- Allows debt collection calls only between 9 a.m. and 8 p.m.

- Forbids threats of violence or physical intimidation.

- Forbids discussing debts with neighbors or employers.

- Forbids contacting the debtor at work if the debtor requests not to be contacted at work, or if the employer has a policy against debt collection calls.

- Forbids failure to cease communication at the debtors request. If debtors request the debt collector to cease a conversation, the collector must comply.

- Forbids causing frequent telephone rings to harass or annoy the debtor.

If the debt remains unresolved, follow up with contacts at the 60 and 90 day mark. If these efforts are unsuccessful, you will likely need to consider turning the debt over to a collection agency or attorney, or you may pursue it in small claims court on your own.

Take them to court

Small claims court is a low cost option that business owners can pursue if they feel they can handle the process on their own and is perfect for small-dollar diputes. In most jurisdictions, all you need to do is contact the small claims court and request paperwork to file an action.  Most of the time, the paperwork is simple and many courts will help guide you through the process. If you can handle the debt this way, you don’t incur costs involved with hiring an attorney or debt collection agency. Filing fees for small claims court are usually inexpensive, and by obtaining a judgement you get a legal remedy to the outstanding debt.

However, there is a limit to the dollar amount you can pursue in small claims court and you will be expected to understand the law regarding small claims and produce evidence and documentation to pursue your claim. Another drawback is the amount of time you will spend getting your documentation together and in court, as the wheels of justice can often grind slowly. In many cases, it may simply not be worth your time and money to pursue a small debt in small claims court when your time and resources can be better spent elsewhere.

Call in the professionals

Hiring a collection agency is another tactic you can use to collect unpaid bills. Delinquent debts are typically turned over to collections agencies after the 120-day mark. Collections agencies will pursue the debt by sending letters and making phone calls, and can also report the debt to credit bureaus. Often the prospect of having their credit score damaged by a negative report will prompt debtors to pay their unpaid bills.

The downside of using a debt collector is that they will typically charge a commission on the debt they recover for your business. The debt collection process typically takes 90 days, and the age of the debt affects how successful the process will be, as older debts are usually less likely to be successfully pursued. Many companies choose to hire debt collection agencies on a retainer basis, paying the collector a fixed monthly fee for his or her services. This can help to reduce costs and keep you from wasting time hiring collectors case-by-case.

If debt collections by yourself or a debt collection agency are unsuccessful, you may want to consider turning the debt over to an attorney. An attorney can file suit in court to collect the debt owed and pursue enforcement of a judge’s decision in the matter by mechanisms such as liens against property or wage garnishment. Attorneys will charge a fee for their services, however this amount can often be passed on to the debtor.

When turning over a debt to a debt collector or attorney, be sure to provide all the information you can about the debt, including documentation of efforts to reach the debtor for collection. Also be mindful of the statute of limitations in your state regarding debt collection, and avoid waiting too late to pursue action.

In some cases, particularly in cases where little money is owed, or the debtor is completely unable to pay, it may be worthwhile to either settle the unpaid bill for a lower amount or write it off. Hounding indigent persons for small debts may generate bad publicity for  your business that the amount owed does not justify.

Collecting unpaid debts is a big concern to small business, as having large sums of money unpaid can severely impact your business’ ability to pay its bills and turn a profit. However, overaggressive debt collection can put you afoul of the law and create a negative public image for your company. By being professional and being reasonable in your debt collection practices, you can stay on the right side of the law and also collect the money that’s rightfully yours.

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