Venture Capital and Angel Investor Resources

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Business

Debt Collection

Problems with debt collection can often be traced to some of the following problems:

1. poor oversight of office personnel in charge of debt collection.
2. insufficient information about debtors, which makes it difficult to find the debtor later.
3. insufficient procedures for pursing debtors who are tardy in making payments (frequent and regular contact is crucial).
4. insufficient knowledge about what the law allows creditors to do in pursuing deadbeat debtors.

Let us suggest that you implement the following procedures and policies to deal with delinquent or deadbeat debtors.

Collect Information: Obtain all legal and useful information about the debtor before you extend credit. On the earlier page we provided a list of things you can and should ask when considering extending credit. This information should be updated about twice a year.

Credit Agreements: Since attorney's fees, court costs and lost interest are all costs associated with collection of bad debt, you need to recover these costs whenever possible. And you can only recover them from the debtor if he or she agreed in writing to pay such costs. Your standard credit agreement should have provisions stating that the debtor will pay any and all costs associated with collection of the debt, including but not limited to attorney's fees, court costs, and a stipulated interest rate (usually not less than ten%, but higher in times of inflation). There should also be an agreement with the owners of any debtor-business that they are personally liable (link to form agreement) for the business' debts.

Skip-Trace Bad Debtors: Often, debtors move or change their phone number and/or address. To locate a customer who is no longer paying on his/her/its debt, contact the following sources of information:

1. post office (for forwarding addresses).
2. former or present employers of owners of business.
3. department of motor vehicles (again, find owners).
4. web sites offering free locator services.
5. credit reports (there may be additional addresses listed for the businesses or owners).

Illegal Collection Practices: NEVER engage in the following practices when you are trying to collect a debt or find out information about a debtor:

1. Never impersonate a police officer, other law enforcement official, court official, attorney, governmental agency, etc. or mislead others into thinking that you are any of these things (e.g., do not use any sort of letterhead, language or other communication suggesting any of the foregoing or affiliation with same).
2. Never threaten to disclose untrue information or information that may or may not be true about the debtor's creditworthiness if the debtor does not pay you.
3. Never disclose any information to credit reporting bureaus concerning a debtor's creditworthiness unless you yourself know it to be true.
4. Never inform a debtor's employer about the bad debt and the collection efforts you are engaging in, and never threaten to contact a debtor's employer with such information. The only exception to this is that if you have a judgment against the debtor and the court has authorized a wage garnishment (or the debtor has agreed to a wage assignment), you can contact an employer with such information.
5. Never call the debtor, his family or any other person known to the debtor so often or so late at night or early in the morning that it is more like harassment than debt collection.
6. Never threaten to take an action that you know you will not take.
7. Never threaten to take an action that you cannot take.

Twin Sins of Creditors Consigned to Bad-Debt Hell: Small business creditors often do two awful sins when faced with a bad debt. First, they fail to aggressively pursue it immediately. Anything that is late by over thirty days is bad debt, and you should start your phone calls and letters at that point. If the bad debt extends to ninety days past due, either institute collection proceedings or turn the debt over to a collection agency. Second, you should pursue any shareholders or owners who guaranteed the debt at the same time that you pursue the debtor. Let them know that you intend to pursue the matter fairly but aggressively, and that they will stand next to the debtor in any legal proceedings on the debt.

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