Debt Collection - Overview
Debt Collection Basics
Owning a business means handling many varied tasks: hiring and training employees, ordering supplies, balancing the books, and often, collecting on customer debt. While this may not be a pleasant task, it is most necessary to the financial health of your small business. Follow along as FindLaw helps introduce you to some basic information and tips on collecting debts from your business's customers.
Credit Agreements and Policy
Keys to collecting debt legally and successfully include preparing a policy and procedure manual and a credit application form. A credit agreement is a legally binding contract. It lists out the conditions of the extension of credit or loan and includes repayment terms and other important information.
Attempting to Collect a Debt
A measured approach to debt collection is better in the long run than immediately going to a collection agency or court. Consumer credit laws affect preliminary debt collection methods, while the Truth-in-Lending Act regulates the amount of interest that can be charged on overdue payments. In addition, it may help to look at Sample Debt Collection Letters before composing your own.
Your Customers Bankruptcy
The debtor has the benefit of an "automatic stay" immediately upon filing a bankruptcy petition. That stops you from taking any further action to try to collect the debt unless or until the bankruptcy court decides to the contrary.
Interest on Overdue Payments
Interest charged on late payments may be subject to state usury laws limiting the amount of interest that can be charged. If the maximum amount of interest is exceeded, the debt may be forfeited and a penalty assessed. In addition, interest on overdue payments must be written clearly and conspicuously in order to avoid violation of the Truth-in-Lending Act.
Before hiring a collection agency to pursue your debtors, make sure that the agency is licensed and bonded. Your state's collection agency administrator can provide information on licensing requirements. In addition, make sure the agency operates under the Fair Debt Collection Practices Act, and check with your state's consumer protection agency or regional Federal Trade Commission (FTC) office to see if there have been any grievances filed against the agency.
Collecting Money Judgments
If a money judgment is awarded to you in court, further action may still be needed to receive payment. Such action may include contacting the defendant, or in worse cases, providing information about the defendant to a law enforcement officer so that they can assist you in collecting the debt.
Contractors who are hired to improve real estate, but then are not paid for work completed, may file for a lien against the property. Should the debt remain unpaid, the contractor has the right to collect it by a foreclosure sale of the property.
Next Steps in Business Debt Collection
As your business grows, so does the amount of financial risk you take on. If you need help collecting on a customer debt, consult with a business and commercial law attorney in your area now.
For more information, see our Business Finances section.