Small Business Debt Collection

In a perfect world, your customers will pay their balances on time and you won't have to take additional steps to collect. But in reality, debt collection is just part of doing business. The following is a brief overview of topics and terms related to small business debt collection.

Bankruptcy of a Customer

Debtors who file for bankruptcy receive an "automatic stay," which means they don't have to pay any debts until the terms of repayment are worked out in federal court. Additionally, you may not correspond with bankrupt customers with regard to their debts.

Collecting a Debt

The key to success is to take a balanced approached, making sure your company gets paid for goods or services while also providing enough flexibility for your customers. In other words, you don't want to go straight to a collection agency as soon as a balance is overdue. Check consumer credit laws that affect debt collection methods, as well as the Truth-in-Lending Act (which limits the amount of interest that can be charged on overdue balances).

Check FindLaw's sample Debt Collection Letters for some ideas on how to correspond with debtors.

Collecting Money Judgments

Even if a monetary judgment is awarded in your favor in court, there is no guarantee that you will actually get paid. The first step should be contacting the defendant to work out a payment plan. Failing that, you may have to garnish his or her wages or seek help from a law enforcement officer.

Collection Agencies

If you choose to hire a collection agency, make sure you do your research. Look for an agency that is licensed and bonded. Also, make sure the agency is in compliance with the Fair Debt Collection Practices Act and look for any grievances that may have been filed against it.

Credit Agreements and Policies

The best way to successfully collect debts while staying within the law is to prepare a policy and procedure manual for your organization, as well as a credit application form.

Interest on Overdue Payments

Check to see whether or not your state has usury laws that limit the amount of interest you may charge on overdue balances. The debt may be forfeited entirely, and a penalty assessed, if you charge more interest than is allowed by statute. Also, you should refer to the Truth-in-Lending Act regulations, which require that interest on overdue payments be written clearly on any correspondence or invoice.

Mechanics' Liens

Contractors who do improvement work on real estate (primarily homes and commercial buildings) but are not paid may file for a lien against the property. If the debt remains unpaid, the contractor who has filed a lien may foreclose the property and use the proceeds from the sale to pay for the debt.