By: Attorney, Charles McElwee
Sooner or later, everybody in business encounters a problem in collecting debts. There are some tried and true ways to give yourself the best chance of collecting the money you have earned.
Start thinking about collection before you lend. Use a comprehensive Credit application. Cover such basics as the full identification of the debtor, their financial resources, references, current Liabilities, and obligations to others.
Establish firm criteria for credit accounts, and then stick to your rules. Determine what credit limits you will impose on each account. Consider the volume of business you got from the prospective credit customer in the past on a cash basis. Think about the volume of business you may expect from each account, and the terms that may be available to similar customers from your competitors.
Always have a written credit agreement. Get the signatures of all responsible parties, and if you are dealing with a corporation or limited liability company, make sure to clearly state your expectation that the individual owners will be personally responsible for paying the debt.
Spell out the terms of the agreement in detail, including any discount for early payment and any penalty for late payment. Be sure to specify the rate of interest you will charge on accounts that are not paid on time. If your agreement doesn’t say anything about interest, you will likely have trouble collecting interest.
If you have specific questions about this subject, feel free to call Davis Miles using your LegalShield benefits. One of our attorneys will be happy to speak with you. The number is 800-435-3290 (located on the back of your membership card).
Also be sure to specify that your debtor will pay attorney fees and court costs you incur if you have to take any action to collect a past due account.
The most favored creditors in almost all situations are those who have collateral. Consider whether your debtor may be able to give you a lien against any kind of property to secure payment of the debt.
Having a clear written agreement is a good start. Establishing a routine systematic billing program is the next crucial step. Remember, if you don’t bill on time, you can’t expect to get paid on time.
After you send out the bills, develop a routine for keeping track of who is paying and who is not. Categorize accounts by how long they are past due. Categories of 30, 60 and 90 days are common in many businesses, but you may use any categories that suit you.
Maintain frequent phone contact with your customers who are late paying their bills. They say the squeaky wheel gets the grease, and it’s true. Be polite. Your goal is to keep yourself in the forefront of your customer’s mind and develop a desire on their part to pay you first. Making an enemy of your customer by being rude or abusive because they have not paid is not likely to put much money in your pocket.
Keep notes of your discussions with your customers so you can politely and accurately remind them what they have promised to do.
Develop a series of standard letters to send to those who have not paid on time. Start with a simple reminder and use a progression of emphasis with each letter becoming more insistent. You might have the last letter come from your attorney. Using your LegalShield benefits, you can call Davis Miles to have one of our attorneys perpare a legally appropriate letter and send it to your customer.
Stop extending credit at some early point. It does no good to keep giving credit to a customer who is already not paying what is due.
When you are fortunate enough to encounter the situation where someone is willing to make an effort to pay what they owe, let them do it. Of course, that doesn’t mean you should agree to take whatever they can afford to pay whenever they can. Get them to be specific.
When you have reached a clear understanding of how much will be paid, and when it will be paid, get it in writing. A simple promissory note is ideal for this purpose. Your LegalShield benefits allow free review of a promissory note which you can find online or at a stationery store. The attorneys at Davis Miles can answer questions for free over the phone as you fill out the form, or you can prepare it and then have them review it and give you guidance (also at no charge). If you want an attorney to prepare a Promissory note for you, you can be referred under the 25% discount benefit, and you can meet with an attorney to pay for preparation of a Promissory note. Costs might range from $100 to $500 depending on the complexity of your situation.
You might even want to consider offering a discount if your debtor will pay off the entire balance right away. After all, some money now is better than more money that may or may not be paid later, and definitely better than no money.
Don’t be afraid to suggest that your debtor borrow money somewhere else to use to pay you. After all, you are not in the business of lending money. Let them borrow from someone who is.
You may find that collection agencies can be of assistance. They may help you reduce the amount of time you spend trying to collect unpaid bills, giving you more time to spend on your customers who are paying you like they should. Of course, there is a cost for using collection agencies. Not all agencies use the same method of charging for their services.
Before selecting a collection agency, it is a good idea to survey the market to learn what rates are available from different agencies. Some may offer contingent fees, meaning they do not charge you until they collect money for you. Learn about any requirements each agency may have for acceptance of accounts.
If more gentler forms of persuasion do not prevail, many claims can be resolved in the County Magistrate Court (Metropolitan Court in Bernalillo County). These courts have jurisdiction over claims up to the amount of $10,000.
Simple forms are available from the court clerk’s office, together with instructions. You are not required to be represented by a lawyer, unless you are a relatively large corporation. Court costs are lower and cases proceed quicker than in the State District Courts.
For claims greater than $10,000, the State District Courts are available. We strongly recommend you have an attorney assist you with any case in the District Court.
When hiring an attorney, be sure to get a written fee agreement, so you will know just how your attorney’s fees will be calculated. Different kinds of fee arrangements are commonly offered by attorneys. They include the hourly fee, under which you pay for the time it takes to do the work, the flat fee, under which you pay a fixed amount, regardless of the time taken or the outcome reached, and the contingency fee, under which you pay a portion of the money actually collected.
In Bernalillo County, your case in the District Court may not be decided by a judge. If the amount at stake is less than $25,000, the case will be sent to an arbitrator for a decision. The arbitrator may be any attorney in Bernalillo County who has practiced law for at least five years.
Finally, if all else fails, you must bring yourself to consider the wisdom of writing the account off as a bad debt. There comes a time in the life of every uncollected account when it becomes apparent that further collection effort will either not produce any result or will not produce enough of a result to justify the further effort. Then it’s time to let go and concentrate on the matters that are more likely to put money in your pocket.
If you have specific questions about this subject, feel free to call Davis Miles using your LegalShield benefits. One of our attorneys will be happy to speak with you. The numbers are located on the back of your membership card: 505-246-0231 (Albuquerque) or 800-435-3290 (statewide).