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DEBT COLLECTION IN
HARD TIMES
Introduction-Why Even
Sue?
“Can’t squeeze blood
from a turnip” was a favorite saying of my mother. In the commercial
context, it is worded slightly differently: “What’s the point of suing
them? They have no money.” And it seems an obvious truth.
And is quite often
dead wrong.
Indeed, strong
arguments can be advanced that in difficult economic times, one must not
only perfect the skills of collecting on overdue accounts, but must
become more, not less, aggressive to protect whatever chances there may
be for eventual successful collection. Some thought will indicate why
this is true.
1. While many
debtors are in trouble, so are many creditors and there may be less
competition still viable to collect the debts owed to you by your
debtor. Creditors are as likely to disappear as debtors and you may find
yourself as one of the few creditors still chasing the resources of the
debtor.
2. The average
business or person owing you money is not the usual “dead beat” one
finds in all business but usually a good business coming on hard times,
often through no fault of their own. These debtors are precisely the
type of people you should seek to have a judgment against since they
will, ultimately, likely again prosper and pay off the judgment.
Remember, a judgment can last decades, earning interest at ten percent
annually. We have collected on judgments twenty four years after
entered.
3. Many creditors
”give up” and do not bother to promptly and effectively seek judgment.
Since judgments are often repaid based on date of entry, it is first
come first served and if one is one of the few creditors to obtain the
assets either because of recovery of the economy or bankruptcy of the
debtor, that judgment may be worth gold. Collection is often a race for
scarce resources. To delay your commencement may give the race to
someone else.
4. Many debtors,
once successful, will not only be prosperous again but wish to maintain
as good a relationship with vendors and suppliers as possible and will
agree to entry of judgment via stipulation, a relatively inexpensive and
efficient method that will allow you to preserve your rights without
expending significant sums.
5. Use it or lose
it. The statute of limitations on collecting sums due you expires in
anywhere from one to four years and if you do not at least commence suit
to collect the debt, you may find yourself barred for all time from
collection, even if the debtor again prospers.
6. Many taxing
authorities require “reasonable efforts” to collect debts before
allowing a write off as a bad debt.
7. Accounts
Receivable are an asset and lending institutions will give them some
value if collection efforts are commenced. One’s own financing may be
improved by efforts to collect.
8. Deterrence can
work. If your other debtors see you are aggressive in seeking recovery,
they may elect to have your company be one of the few companies they
keep current. The squeaky wheel gets the grease, as my mother would have
said.
9. When a company is
having trouble paying its vendors, it often cannot afford the expensive
legal cost of defending against your suit. Instead of a prolonged fight
costing you a great deal of money, the other side, realizing they cannot
afford their own legal defense, may agree on a quick and fair
settlement. In a way, their lawyer and his or her cost may be your best
friend. See our article “Buying
Justice” on that topic.
10. A clear cost
benefit analysis of each step of the litigation can allow one to abandon
those collections that appear useless and proceed to judgment and
collection on those that have a chance of success. See our articles
Cost Benefit
Criteria in American Litigation as well as
Debt Collection-The Tools Available on
Enforcement of a Judgment for a full description of the
powerful methods of collection available. One can seize and sell a home,
attach accounts, or seize vehicles if one uses the tools correctly…and
often merely the threat of those actions will result in a payment
program worth considering.
11. Collection
Agencies are useful for small overdue accounts but, based on pure
volume, are not capable in most instances of the type of rigorous and
aggressive legal maneuvering that can achieve effective collection. If
one wants to test the waters to determine if a debt can be collected,
one will have to hire one’s own legal counsel…and the criteria for
determining the tactics are outlined in this article.
Steps in Determining
Whether and How to Sue.
1. Cost Benefit is
the Name of the Game.
Vengeance or anger
is not why you sue. You sue to accomplish the goals stated above, namely
to generate an economic return. Work with your legal counsel to get
accurate estimates of costs of each step of the case so that you can, as
the case progresses, determine if the risk to rewards assessment
justifies further legal action. Do not hesitate to drop the case if the
debtor’s situation radically deteriorates or if your own economics do
not justify further expense. See our article
American Litigation.
2.
Use All Your Tools. By use of continued access to your products
(for cash) you may be able to encourage a debtor to make payments to
you. After all, the debtor may not have any other sources of goods. But
that can be coupled with a stipulated judgment which you can enforce if
certain payment criteria are not met. Explore such settlements before
filing suit and during the legal action, but be prepared to keep the
pressure on or the debtor may change his or her mind.
3.
Check Out the Other Creditors. This has two purposes. First, if
they are far ahead of you, there may be no point in pursuing your own
claim. Second, they may have thought of a method you have not considered
and you may want to join them on their path.
4.
Create Your Overall Strategic Plan with Legal Counsel. Lawyers
know how to sue and good lawyers have many litigation tools.
However, those litigation tools have to be matched with your own
criteria for success and budget and the other means of collection that
you may be considering. It is vital to make sure you control and
interact with your legal counsel or your cost benefit analysis may
become a nullity.
5. If You Are Going
to Move…Move Now.
In collections,
speed is often the name of the game. Dithering only allows other
creditors to move more quickly than you and grab scarce resources.
Decide quickly and implement your plan quickly.
6. Consider Taxes.
Taxes
owed by the debtor usually have priority in payment over your debt. If sales tax, income tax, payroll
tax or state taxes owed by the debtor exceed significantly the debtor's assets and are overdue, you
may want to simply give up the chase.
.
7.
Create Decision Points. Do not just sue. With your legal
counsel, make sure you schedule in advance certain points in the
litigation to reassess the case with a new cost benefit analysis. For
example, once the answer to the complaint if filed but before discovery
commences is a good time to analyze the defenses available and the
amount of legal effort that seems worthwhile.
8.
Be Open to Settlement and Think of Inventive Means to Settle. As
annoying as the costs of the case may be to you, it is far more annoying
and destructive to the debtor. Unless emotion overcomes thinking, the
debtor will be open to any methods to stop the bleeding. Providing
security, even pink slips to vehicles, can alter the cost benefit of the
case and allow you to consider the benefits of a negotiated settlement.
Talk with your legal counsel about security and methods to avoid the
danger of bankruptcy court voiding your settlement.
9.
Be Patient. A typical court case takes months or even years.
Pressure increases constantly and at some point a debtor faces trial which
is the most expensive process in the legal action. Often debtors will
wait to the eve of trial before settling. In your own planning, assume
the case requires full trial and that way you will not find yourself
impatient for the results.
Conclusion:
It was about five
years ago that an Abstract of Judgment we had recorded in 1987 resulted
in a telephone call from a title company. The judgment debtor was trying
to sell his building and had been told by the title company that in
order to close title, he would have to pay off our client who had long
retired. The judgment had tripled in the amount due because of the
accrued legal interest and the debtor was outraged…our client would get
the bulk of the proceeds from the sale. Our client, on his cell phone
from his fishing boat on Lake Meade, laughed and told us to “hang
tough.” We either get paid or we would use our judgment to foreclose on
the building.
Our client had
waited all this time while the debtor rebuilt the equity, knowing that
sooner or later he would have to be paid off. And he was, about sixty
days later.
Laughing, that
client once said something to me that perhaps best summarizes what debt
collection is all about.
Collecting what is
owed you spotlights the character of business people: some turn up
their sleeves; some turn up their noses and some don’t turn up at all.
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