COLLECTIONS
DO YOUR HOMEWORK BEFORE FILING YOUR COLLECTION SUIT TO MAXIMIZE RESULTS AND MINIMIZE COSTS
Today's economic conditions have created a multitude of reasons for filing collection lawsuits. In many cases, however, even if these lawsuits produce a favorable judgment, they may produce little or no return for the creditor because of costs and/or delay. To avoid frustration, when your business accounts are past due and you are considering a collection suit, do your homework before you call your attorney. Your preparation can go a long way towards maximizing your results, reducing and budgeting attorneys' fees, and increasing the return to your business.
1. You Don't Get Something Unless You Ask for It.
As a business owner, credit manager or controller, the first inquiry to make of your customer's sales representative should be: "Did you ask them to pay our bill?"
You are likely to learn two things from this common sense inquiry. First, nobody likes to ask a client to pay their bill; neither front-line sales people nor the boss ever likes to ask about unpaid bills. Still, customers who purchase goods and services expect to pay for what they get, and before any attorneys' fees are incurred, it just makes good sense to ask for payment.
Next, if the customer has purposely not paid their bill, your inquiry may produce another important result, by giving you the best information about why the account has become past due. This is important, because if the problem can be resolved without litigation (or the threat of litigation) you may have just saved a customer, their referrals, and additional time and expense in trying to collect the outstanding amount.
You should enter into a settlement agreement, if you do reach an acceptable agreement with the customer at this stage and if you are going to put the matter to rest once and for all. However, a formalized settlement agreement is not always necessary. Agree with the customer on the time for payment and other arrangements (who will do what, when and so on), then call your lawyer to prepare a settlement agreement to memorialize your understanding. A helpful hint for clients: Put your understanding of the agreement into a letter form, with all the terms stated in plain but detailed language, when you send it to your attorney for review. Your version may be able to be used with only minor modifications, saving attorney time and expense to you. Additionally, the informal letter style of agreement will usually be more readily accepted by the customer/debtor because it is less intimidating and avoids excessive use of legalese.
2. "Pay up or Die"
Business people often use their head when making a sale, but forget to use their head in emotional circumstances. If the customer does not answer your calls, or if the check has been "in the mail" one too many times, it's time for a final notice and demand for payment. No form letter can cover every situation. However, in drafting your final demand you should keep in mind several things for the future.
A. Even if you never expect to see this customer again, resist the desire to use "colorful" language. Someone, like another client, or perhaps, a judge, may read the letter in the future or hear of the letter, so being assertive is okay, but being indiscreet is not.
B. Be clear about what you want. Your letter should be as easy to follow as possible. Including an explanation of the account (breaking down interest and other charges that have been posted is often helpful, so that the customer/debtor can compare your claim to their own records). When you expect to receive a check, and who should be contacted if the customer has any questions are also important elements of your final demand for payment.
C. Don't forget the Fair Debt Collection Practices Act. If you are collecting a consumer debt, special rules may apply to the manner and means of collecting your obligation from the consumer customer. CONSULT YOUR COUNSEL BEFORE SENDING YOUR DEMAND.
3. "Just the Facts, Ma'am" Prepare to Discuss Your Case with Your Lawyer.
Pull together all information on the customer and their account that you have in your hand or that you can lay your hands on from any source. Prepare you lawyer an explanation of the circumstances, including the possible claim that your customer may be thinking of bringing against you. This is no time to tell your attorney half of the story.
In these situations, you can treat your lawyer as a hired gun, or as a counselor who can help you decide whether a collection suit is worthwhile or will backfire. It only takes a few extra moments to make a good decision, where misinformation may lead to an uninformed, bad decision. The only way that the lawyer can be a counselor is with information from you or guesswork, and you don't want the attorney having to guess!
The following will be helpful:
A. Locate the customer for the lawyer. Do not make your attorney have to locate the customer unless it is necessary because you cannot do it on your own. Give your lawyer the customer's business name(s), address(es), the name of any affiliated companies operated by the customer, and any information that you have about how to reach the customer or people who may have helpful information. Are there any guarantors or others who may be jointly obligated for the debt? Let your lawyer have all the information you have with regard to those persons as well.
B. If you can, locate the debtor's assets. Tell your lawyer everything you know, or you can discover, about the customer's assets, including their house, bank accounts, business assets, etc. The Illinois Secretary of State will generally provide you with the name and location of businesses operated by a corporation under other assumed names. You can get this information by calling 217-782-7808. Your lawyer can then follow-up to determine whether or not other businesses are open, operating, and have available assets. Likewise, you or your lawyer can check with the county in which the customer's business is located and with the Secretary of State, to see if other creditors have security interest or liens on all or part of the customer/debtor's assets.
C. Locate any others who may have had similar problems with the debtor. Can you find out anything from others in the business community about the debtors willingness to pay or settle claims? Avoid spreading false information which may lead to counter-claims for defamation, but collect whatever information you can concerning the customer and their ability to pay other businesses, as well. If you have Dunn & Bradstreet available to you, use it and provide your lawyer with backup information that you obtain.
D. Consider ordering a credit report, whether from Dunn & Bradstreet or from one of the other services available. This will help to locate other attachable assets with which to satisfy a judgment, or perhaps to let you know that the company may be unable to pay its other debts and may be a candidate for bankruptcy.
4. Work With Your Attorney to Decide Whether to File The Collection Suit.
Nobody hires a painter to paint their house without an estimate, and your approach to using an attorney to pursue a collection matter should not be any different.
Some attorneys will pursue collection cases on a contingent-fee engagement. In these cases, the attorney will usually charge legal fees based upon the amount of the settlement or judgment s/he can obtain, and then only up to a specified percentage of the total. Other attorneys will handle collection matters on a flat fee basis or hourly fee against a contingency. In either case, you should expect to pay all costs for the suit, regardless of the recovery.
Spending $2,500.00 in court costs and legal fees to pursue a judgment worth $7,500.00, without a high probability of recovery is simply bad business. Contracting with an attorney for a one-third contingency on a $100,000.00 claim with almost certain recovery may also be bad business if the case is simple and will require minimum attorney time. Ask questions and negotiate, but be aware that you will have stronger negotiating power if you have done all of your homework first, rather than approaching the attorney without being prepared.
The bottom line is, if you do your homework in advance, collect information and be wise about filing collection suits, you may be able to avoid filing the suit in the first place or if you have to file the lawsuit, you will probably have the upper hand on collection matters. Even if you have to use the courts, your advance preparation will help you work with your attorney to decide the best way to proceed with your lawsuit.
If you would like more information about preparing for or filing collection lawsuits, please call Marc Sherman or any of the attorneys at Marc D. Sherman & Associates, P.C. You can also e-mail us to request assistance at info@mshermanlawoffice.com
We can help resolve collection issues and establish reasonable fee structures to meet your needs.
This article is intended to highlight areas of interest for our clients and others. It is not intended to be legal advice and it is not a substitute for advice and consultation with your lawyer.