Credit Policies & Increased Collection

It is important for business to have an efficient system by which to collect on outstanding accounts. As with most lawsuits, collection matters can be made more successful and less time‑consuming when proactive measures are taken before a conflict arises. This article will outline some of the proactive measures that can be instituted by your company to streamline the collection process. We will also discuss what services our firm can provide to initiate new collections procedures, or procedures to improve your existing collections process.

In most collection matters, we are dealing with unsecured debt. Usually, by the time the debt is referred to an attorney, it is at least 120 days old. In most true collection cases, which are undisputed debts, owed by the debtor to the creditor; non‑payment is a result of financial problems of the debtor. Since non‑payment is a result of financial problems of the debtor, our claim is usually not the only one against the debtor and there is a substantial risk that a bankruptcy would hinder our claim. As you know, a collection matter that ends up in bankruptcy is lucky to get a dime on the dollar. In most cases, when a debtor reaches the point where re multiple collection actions have been filed against him, he does not have sufficient assets to pay all of the creditors.

Fortunately, there are steps a business can take to minimize this risk. Below is a review of a few good ways to protect your ability to collect what is owed to you.

PERSONAL GUARANTY

One common credit protection procedure is to obtain a personal guarantee on all corporate debt. Corporate Status shields a corporation's shareholders and employees from being personally liable for the debts of the corporation. In most instances, as a supplier of goods, you are contracting with a corporation and not with the individuals running the corporation.  Often, in unpaid invoice situations, these corporations are under‑funded and do not have the assets necessary to fully satisfy their creditors. A personal guarantee makes the shareholders of the corporation personally liable on the debt.  Thus, a personal guarantee protects you by providing an additional Debtor from which to collect.

A shareholder who is personally liable for a debt will put a greater emphasis on payment of that debt than if completely shielded from liability.  Additionally, if the corporation defaults on the account if you have a personal guarantee you can look to the shareholders as additional parties responsible for satisfying the debt.

LIEN RIGHTS

If your company supplies building products or services, depending on the particular situation, you may the have the right to place a lien on that property.  However, the right to pursue a lien is subject to certain time restrictions (120 days to file the lien from the last furnishing of goods or services and 180 days to perfect that filing) that must be met in order for the lien to be enforceable.

Obtaining a lien assists in the collection process by allowing you to foreclose on a particular piece of property on which the lien attaches. Additionally, a lien may also bring provide an additional source of funds from parties willing to pay the debt or assist in its payment in order to restore the marketability of the real property.

SECURITY INTEREST

Another device that may be used, or even incorporated into a credit application or credit agreement, is a security interest. A security interest acts like a mortgage on a particular piece of personal property, and gives the creditor the right to repossess this property in order to satisfy any debts owed. It is possible for a creditor to obtain a security interest in the product that they sell or a general security interest in all of the assets of the debtor’s business or corporation. There are additional benefits to a security interest in that if it is properly perfected, a security interest will give you priority over all other creditors on the covered property or any proceeds resulting from their sale. Priority is of particular importance if the debtor declares bankruptcy, as priority could be the difference between receiving full payment on your debt or only pennies on the dollar.

BENEFITS OF NEW CREDIT POLICIES

Implementing efficient collections procedures will significantly reduce your time and expense in the collection of accounts.  It will also serve to make collections more successful.  In certain circumstances, it will even allow you to extend more credit or to extend credit to those that you normally would not.  Perhaps a potential customer can give you a security interest in a great deal of property, or you can get a personal guarantee from a credit‑worthy individual in exchange for a line of credit.  With a new credit policy you could feel more relaxed in extending credit to new customers.

We recommend that you get all of your current and future customers to sign security agreements and possibly personal guarantees.  While you might think that your customers would refuse to sign these documents, we find that most will agree to these terms if in return, they get more goods or services on credit.  

Security interests and the other above outlined mechanisms make your debts more collectible, however it is still important that your customers have assets available to secure the debt.  If there are no assets available and the customer is not credit‑worthy, these documents would not assist in making their debt collectable.  Therefore, we still recommend doing a thorough background and asset check on all perspective customers before making large extensions on credit.

If you have any questions regarding your current credit policies and how they can be improved, feel free to contact Chiarello & Wagner at 336‑283‑0331.