If you are like most business owners, you probably have several clients who owe outstanding balances. Before you turn to costly lawsuits, there are some measures you can legally undertake yourself. It is important, however, to be aware of restrictions on techniques you may employ to collect debts. If you use illegal methods to go after a debtor, you may end up on the wrong side of the law. Business owners should also be aware that different standards are applied to a creditor collecting a debt owed to itself and to collecting agencies that attempt to recover debts owed to their clients.
The first step most companies will take to recover a debt is to get in touch with the debtor and demand payment. This can be done through telephone calls, mailed delinquency notices and emails. When these methods are ineffective, rather than wasting further time and company resources on pursuing a debt, many businesses turn to collection agencies.
Collection agencies are in the business of recovering debts on behalf of their clients, typically taking a percentage of the recovery. These companies are regulated by laws such as the Fair Debt Collection Practices Act, which provide for appropriate contact methods and times. Collectors may not use deception to make the debtor listen or to motivate repayment.
Another way of raising the chances of recovering a debt is to demand the debtor furnish security at the time of the loan. In exchange for the loan, the debtor will agree to turn over assets if the debt is not paid. If your loan is secured, you will have priority over another creditor with unsecured loans. To make sure of your priority, you will have to take certain legal steps that typically involve filing specific documents. When a customer finances the purchase of a car or a home, the loan will be secured by the car or home itself. In the event of failure to make payments, the creditor will be able to initiate proceedings to repossess the asset in question.
Going to Court
There are also court proceedings available in the case of particularly reluctant debtors. If a creditor can show repossession would be impossible or futile if delayed, the court can act immediately to authorize replevin or attachment. While specifics vary depending on state law, most statutes allow immediate seizure of collateral in an emergency situation. Such actions are usually successful only if you are able to show you have good reason to believe the debtor is about to dispose of the property or damage it.
If nothing else has helped by now, it may be time to start a lawsuit. Most companies prefer to avoid this method of collection, since it can be long, time-consuming and costly. However, if the debt is sufficiently large, a court case can be the method of resolution when everything else has failed. If you have obtained a judgment from the court, the court will enforce it by sending the sheriff to recover a sufficient part of the debtor’s assets to cover the debt. Another option is to place a lien on property directly related to the debt. In some circumstances, you will be able to foreclose on the lien and recover your debt from the sale of the asset. In any case, a lien will provide an incentive to the debtor to repay the debt, since even if there is no foreclosure, the debtor will not be able to sell or otherwise benefit from property under a lien.
There are many methods available for business owners to collect outstanding debt, ranging from making a phone call to a full-fledged court case. In most cases, the better choice is to start off with the simplest methods and only escalate when necessary. If it is possible a phone call will resolve the problem, it is a waste of company resources to start by going to court.
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