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Collections

Collecting from a commercial debtor may sometimes be a confusing and daunting undertaking.  Businesses may feel comfortable knowing that their accounts receivable are significant.  But the longer an invoice goes unpaid, the less likely a commercial creditor is to see any repayment at all.  The value of your accounts receivable declines over time, and a business is likely to only collect 20 to 60 percent of receivables when they are past 90 days old, with that number dropping dramatically over time.  Many businesses are unsure of what steps to take after mailing an invoice or two, and following up with a phone call.  Using a traditional consumer debt collection agency is not a good option for commercial creditors, as their aggressive approach may damage the relationship between a company and its clients or customers.  Navigating through a complex web of state and federal laws governing collections may seem intimidating.  There are many options for commercial creditors who want to ensure a favorable return on accounts receivable and maintain goodwill among its debtors.  Legal counsel is invaluable in accomplishing this goal.



 

 

 

FAQS

Q. How is commercial collections different from consumer collections? 

A. Consumer debt is debt owed by individuals, families, and households.  Commercial debt (also called corporate debt) is debt owed by businesses and corporations.  Consumer collections are governed by federal legislation (the Fair Debt Collection Practices Act.)  The FDCPA does not apply to commercial collections, which are governed mainly by state statutes and regulations.  Commercial collections often involves more unsecured transactions and higher balances than consumer collections and requires industry-specific knowledge.  Consumer debt is often sold to a debt collection agency, where creditors make pennies on the dollar of the outstanding debt.  Commercial collections can be handled by an attorney, who either charges a flat fee or a contingent percentage of the amount collected.  Commercial creditors often have a strong interest in preserving a business relationship with a debtor.  Attorneys are superior to debt collection agencies in this respect.

Q. Can I take commercial dept to small claims court?

A. You can, depending on the amount of the debt you are trying to collect.  The limit to the amount you can pursue in small claims court varies from state to state.  That dollar limit can range anywhere from $2500 to $25,000, depending on your state.  The advantage of small claims court is that the process is easier to navigate than formal litigation, and you do not need to hire an attorney.  The disadvantages include the amount of time spent on the process (when an attorney could be working on the file, leaving you to run your business), the potential damage to your business relationship with the debtor (they will probably be unhappy with the amount of time they have to spend showing up in small claims court), and the difficulty in collecting on a judgment, even if the judgment is in your favor.

Q. What are my alternatives to litigation?

A. Hiring a commercial collections attorney does not mean a complex, drawn out lawsuit from day one.  When you refer commercial debt to an attorney, the attorney will work the file by making contact with the debtor by phone and letter and attempting to settle the debt.  Often a commercial debtor who is ignoring your invoices will take action to repay the debt when they learn that an attorney is involved.  Alternative Dispute Resolution (ADR) can also be used in place of litigation when negotiations between the parties have failed.  ADR can involve either mediation (parties communicate their positions to a neutral third party who tries to help them reach an agreement) or arbitration (parties present evidence to an arbitrator or panel of arbitrators, who issues a binding decision.)  Depending on state law, an attorney can seek a confession of judgment.  This involves seeking a judgment against the debtor in court, but is used when no legal action has been filed.

 

Q. How can I enforce a judgement that has been entered by the court?

A. An attorney can first conduct a debtor’s examination and subpoena financial documents.  This can be conducted in court or at the attorney’s office.  A debtor’s examination allows the attorney to determine the debtor’s assets and how the attorney might go about collecting from the debtor.  Debtor’s examinations vary according to state law.  When you have been awarded a money judgment you can enter a judgment lien.  In some states, a judgment lien is automatically entered when a creditor wins a judgment against a debtor.  This allows you to collect against any real property (both currently owned and, in some cases, purchased in the future) for a number of years, depending on state law.  A sheriff’s levy is an order by the court allowing the creditor to direct the county sheriff to seize a particular asset of the debtor and place it up for sale to satisfy the debt.  The court may order garnishment to collect the debt.  A garnishment order authorizes a third party, such as an employer, bank, or anyone who owes money to the debtor, to take funds from the amount owed to the debtor and remit it directly to the creditor. 

Q. What if a debtor closes his corporation or LLC to avoid paying a debt?

A. If a company is defunct, a creditor cannot collect, so it is important to contact an attorney immediately to start the collection process before the company is out of business and its assets are gone.  If you can show that the corporation or LLC was essentially a “shell” to protect its owners from liability, or that the owner committed fraud in obtaining credit, you may be able to go after the owners’ personal assets.  This is referred to as “piercing the corporate veil.” 

             

 

Q. What happens if a debtor files bankruptcy?

A. Federal laws govern how a company may file for bankruptcy.  If a company files Chapter 7, they cease all operations and go completely out of business.  The bankruptcy court appoints a trustee, who is responsible for selling all of the company’s assets and paying off its debts.  Secured creditors get paid first.  If a company files for Chapter 11 bankruptcy, the company reorganizes to pay off its debts and continue to operate.  The company and a committee devise a plan for the company to pay off its debt, and creditors and stockholders vote on whether to approve the plan.  The bankruptcy court has final say over whether the plan is implemented. It is important to note that once a debtor files for bankruptcy all collection efforts must stop. 

 

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