Collections 101: Getting What You Are Owed

Let’s face it, the pandemic has not been kind to most of us. Companies are stretched, employees are frazzled, and a general unease has permeated both our personal and work spaces.

Dealing with Pandemic Debtors

Patience is essential. But that that doesn’t mean to wait for them to call. You should take the initiative. You want them to understand that you are in the same boat that they are in. You incur debt to service them, and you want them to understand how you are connected.

The Four Types of Creditor

People not paying their bills is not a new problem. But the pandemic might be pushing a new kind of client into the collections funnel, said Cliff Ennico, an attorney, author and columnist who speaks frequently on small business topics.

In a recent presentation he gave with the National Federation of Independent Businesses (NFIB), he said, “A lot of good people are having trouble paying their debts these days.”

Ennico’s talk on “Collections 101: Getting What You are Owed” was the second part in the Small Business Reset and Recovery Series.

“Because of the pandemic and the related government shutdowns, there are a lot of good hard-working people who owe money.” And now, with lots of government programs expiring that were created to help people navigate through the pandemic, lots of folks will be renegotiating their debt. “Your goal is to be as cooperative as possible and get these clients back on track.”

Ennico says you should have three goals when it comes to problem clients. 1. Keep them at an absolute minimum. While this is not always doable in a pandemic, it’s a good general approach. 2. Keep small “receivables” from becoming bigger ones. If you jump on things quickly, it’s much easier to manage them and come to a resolution. Don’t wait until a client is three invoices behind. You need to be talking with them as soon as they are past due.

3. Treat problem clients ruth-

lessly. If you are a nice person, it’s going to be hard to have some of the conversations that you may need to have with some of your debtors to get them to pay attention. If you don’t get their attention, then it’s going to take a lot longer to get a resolution.

When a business or person finds themselves in a hole, one of the things they do as they triage, is divide their creditors into four different categories. It’s good for you to know about these different “buckets”, because you want to be in the bucket that gets paid! 1. People who are “essential to the operation of the business” (almost always get paid) 2. People who make such a nuisance of themselves that debtors pay them just to get them off their backs (most get paid). 3. “Friends and Family” (sometimes get paid) 4. Everyone else (they have to wait) Your goal, Ennrico said, is to be in category number one or number two. If it’s a smaller debt and you make a nuisance of yourself, they might want to pay you just so they don’t have to hear from you anymore. Sometimes the squeaky wheel does get the grease. How to Avoid Bad Debts in the First Place An ounce of prevention is worth a pound of cure. 1. Get money up front. The client should “pay early, pay often”. You should be pleasant and helpful, but that doesn’t mean you are their friend. You don’t want to be put in the “friend” bucket when it comes to getting paid. You don’t want to be that far down in the pecking order. Most people would rather pay a small amount every month, than a huge bill once a year. If you get a client into a regular payment system, you’ll recognize payment issues before the amounts get larger. Big receivables almost always start as small ones that got out of control.

Being “Ruthless”

Ennico says business owners must be “ruthless” with problem clients. But he also says ruthless doesn’t mean what you think it means! If you’re curious about his interpretation of the word, and why business owners should adopt the trait, he suggests you find his video on YouTube entitled “Three Personality Traits Every Entrepreneur Needs to Have.”

2. Get an airtight contract that leaves the client with

no “wiggle room”. Be crystal clear on when payment is due. Don’t use fuzzy language in your contract that may be interpreted in different ways. Additionally, it is very difficult to have an attorney write a collection letter if your contract is vague. You must have it signed by the client. Make sure to include a statement that interest will be accrued on overdue payments.

3. Stop working or hold back product the MINUTE bills become overdue (as al-

lowed by law). If you find yourself in a hole, stop digging. You may not get out of the hole, but at least you can better manage the loss. 4. Don’t do business with crazy people! Your gut is a lot smarter than your brain sometimes. Do some background checks and ask around if a new client sets off any alarm bells.

Steps to Collecting Debt

Step 1: Make a Demand for Payment. You cannot legally enforce a debt unless you first make a “formal demand” for payment. Have your attorney draft and send this via certified mail – it has more impact (most attorneys will do this for a 1-hour fee). Make sure to include a phrase such as: “Interest shall accrue from the date of this letter at 12% per annum or the highest rate allowed by law if less.” Additionally, it should say something to the effect of: “if I do not hear from you within a certain amount of time (10-15 days is standard), I will have no choice but to retain legal counsel and pursue my legal remedies against you.” Ennico says that while you can draft these letters yourself (templates can be found online), the letters have more impact if they come from an attorney. “When a debtor sees that you’ve lawyered up, they tend to take it more seriously. Your first battle with any debtor is to get their attention.”

Step 2: Try to Negotiate a Solution. There are only two ways to work out debt. “Compromise” – offer to forgive part of the debt if the client pays the rest quickly. “Extension” – offer to a payment schedule (many small claims courts will rule against you if you haven’t at least offered this). You can combine these two tools as well. If the client agrees to a compromise or extension, GET IT IN WRITING! Stop working/deny service until the problem is resolved to your satisfaction (as the law allows).

Step 3: Mediate/Arbitrate If You Can. Mediation is a “brokered agreement”. Arbitration: a “mini-court case”. There are some wonderful online mediation and arbitration services, such as www.adr.org. This only works if both parties agree to mandatory mediation/arbitration. This should be included in the initial contract, as well. Mediation and arbitration can cost as much as litigation, especially for smaller claims.

Step 4: Sue in Small Claims Court. You always sue where the client is located, not where you are located. You do this because courts are required to enforce judgments from other states, but not “default” judgments. It also sends a strong signal to the client that you mean business.

If your budget does not allow for you to hire an attorney, Ennico says there are lots of great forms available online for either free or a small fee. For instance, on www.uslegalforms.com/ smallclaims you can search for “[your state] small claims” and pull down current applicable forms. You fill those forms out and send them with the filing fee to small claims court.

Ennico also suggests that to get ready for your court date, you watch lots of TV. “Whatever you might think about Judge Judy, it’s a great way to prepare for what you’ll be doing. … What you are watching is actually small claims court.” Small claims judges will almost always side with the party that is more prepared. Prepare, prepare, prepare!

During your day in court, make sure to be on time, show respect for the process, keep it simple and stay away from lawyers (and lawyer speak). Talk plainly and simply.

Enforcing Your Small Claims Judgment

The moment the court issues a judgment, walk over to the court clerk’s office for an “execution” to be issued against the party’s wages, property, or bank account. The bad news is that you will have to do the “legwork” to enforce your judgment.

There is a new controversial market where you MIGHT be able to sell your judgment online (for example, see http://judgmentmarketplace.com). There are some ethical questions about selling your judgment, but it’s something you might want to explore.

Using a Collection Agency Knowing When to “Cut Your Losses”

Managing your emotions is the key to successful debt collection. A lot of small debts aren’t worth the effort – remember that “time is money”. Additionally, you can write worthless debts off on your taxes, as long as you’ve made a reasonable effort to collect them.

Cliff Ennico is best known as the former host of Money Hunt, the pioneering 1990s PBS television series for entrepreneurs that is widely considered a precursor to “SharkTank” and similar shows, Cliff is a nationally syndicated newspaper and Web columnist, YouTube video host, and professional speaker on just about anything to do with entrepreneurship and running your own business. A former Wall Street lawyer and business consultant, Cliff is the author of 16 books on entrepreneurship and small business success. He graduated magna cum laude from Dartmouth College in 1975, majoring in history and philosophy, and got his law degree from Vanderbilt University School of Law in 1980. During the 1980s, Cliff worked for a succession of law firms in New York City, where he specialized in corporate finance, venture capital and securities law. After a stint during the early 1990s as in-house counsel for General Electric Capital Corp., he launched his own legal and business development consulting practice in Fairfield, Connecticut in 1996. For more information: www.succeedinginyourbusiness.com.

There are pros and cons to utilizing a collection agency. In the pros column: They are unemotional, and know the rules a lot better than you do. Also, they are usually more (ahem) aggressive than you might want to be. In the con column: They cost money, and the minute the client says they “dispute” the debt, the collection agency ceases their efforts and tells you that you need an attorney.

Things You CAN’T Do

The Fair Debt Collection Practices Act (FDCPA) protects consumers and says you: can’t call before 7 am or after 10 pm; can’t say you are a government employee; can’t say you are a lawyer (unless you are); can’t threaten client with jail or criminal penalty if he only owes you money; and you can’t misrepresent or embellish the facts. Basically, you cannot harass the debtor.

If the Debtor Files Bankruptcy

The minute you get notice that a client has filed for bankruptcy they are issued an “Automatic stay”, which means all debt collection activities must stop! You will need to file a claim in bankruptcy court.

If the debtor reorganizes, you will be asked to restructure the debt. If debtor liquidates, you will receive X cents on the dollar.