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Legal Options to Collect Your Debts—Part I

Unfortunately, completing the job as agreed is not always enough to get paid. Sometimes the person owing money thinks he cannot afford the debt, and sometimes he avoids payment in the hope that the debt will be forgotten. Either way, the law provides a number of ways for creditors (the person or entity to whom the debt is owed) to collect money against debtors (the person or entity who owes the debt).

Whether you are the creditor or the debtor, it is important to know how to protect yourself. This topic will cover two articles—this article addresses issues to keep in mind before problems begin, and the next article will address the specific collection methods.

Protect your ability to collect a debt before problems begin.

Ideally, you would never have to worry about collections because debtors would always pay their bills on time, but that is not how the real world works. No client, partner, or vendor is immune from becoming a debtor. Therefore, it is prudent and cost effective to conduct business as if you will have to justify a demand for payment and collect against everyone with whom you do business.

First off, put all agreements in writing. This basic recommendation is often a legal requirement and probably common practice for almost everyone. Nonetheless, resist the temptation to make a “handshake agreement” because they are notoriously difficult to prove later. Likewise, put all additions, modifications, and change orders in writing as well. These changes need to be in writing for the same reasons that the original agreement does but are more likely to be left as verbal agreements in practice. This additional effort at the early stages will save you considerable time and money later.

In your written contract, include provisions allowing you to recoup collection costs if the debtor defaults. Collecting payments through the legal system costs money—there is no way around it. What you can control is who will be responsible for that payment should the need arise. Sometimes, the very threat of having to pay for your attorney fees and costs will cause a debtor to comply before legal action is required.

Get a personal guaranty whenever possible. As you likely know, legal entities often provide significant advantages to the person operating those entities by restricting who is responsible for any debt. By obtaining a personal guaranty, the individual person or people operating the entity will also be responsible for the debt. However, for the same reasons that you want to obtain a personal guaranty, the potential debtor does not want to provide one. Whether it makes business sense to obtain a personal guaranty as a strict requirement will be a judgment call in every situation.

Once you begin working with another, pay attention to potential assets. If you are forced to collect, you will have to know where the debtor keeps its assets so that you can collect them. Maintain records of checks because the same account that provides voluntary payments now could be a source of involuntary payment later. If the potential debtor is employed elsewhere or is owed money by a third party, record that information too. Vehicles and equipment used in the business may also be a source of collection. Even off-hand comments can reveal real estate or other property that is not immediately apparent. You do not have to turn every conversation into an interrogation, but deliberate listening now can reap rewards later.

You’re not getting paid–now what?

Once someone falls behind in payments, there is no one-size-fits-all response. Whenever possible, contact the other party and try to understand why payments have stopped. Sometimes, payments have stopped because the debtor has faced unexpected expenses or a temporary cash-flow problem. If this is the case, it may be prudent to provide the debtor some time to catch up. This does not mean you forgive the debt, but it may help maintain a professional relationship that could provide business for years to come. We have all hit temporary hard times, and your debtor may be no different. While maintaining business relationships is important, you do not want to be too lax. If the debtor does not provide you with a sufficient explanation for the late payments, avoids your calls, or provides inconsistent statements, it is important to act. Oftentimes, you are not the only one trying to collect against the debtor and there may be limited money to split among creditors.

If the debtor is not responding to your communications, it may be time to get an attorney involved. It is not unusual for the debtor who is too busy to respond to the creditor’s communications is quick to respond to an attorney’s demand letter. When this is the case, the attorney may help to work out a payment schedule or an outright payoff. On the other hand, if the debtor remains evasive or uncooperative, collection may require further resort to legal options. A closer look at the collection methods allowed by law will be addressed in the next article.

© 2015 Rinke Noonan