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Collecting Business Debt FAQs

1. What can I do to put myself in the best possible position for successful collection of my receivables?
The single most effective thing that a creditor can do to optimize collection of its receivables (short of never selling on credit) is to “paper the file.” Insist upon the completion of credit applications or written contracts at the outset of the business relationship. Seek financial statements, personal guaranties and security interests right from the start; once the account starts to sour it is unlikely that the debtor will provide this information. Also, keep in touch with your customers and make a note of what projects they are working on or where they are employed. Information is the best ammunition.

2. I do not want to sue the debtor because we still do business, but the account is very large and I am concerned; is there anything I can do?
Where there is an ongoing relationship between creditor and debtor, there are options available that often cease to exist once an account has been sent to an attorney for collection. It is in this instance that you could propose at least one of the following:

(a) that the debtor grant you some security interest in its assets;

(b) that the old balance be reduced to a promissory note with an agreed upon payment schedule;

(c) that any future business be conducted on a “COD plus” basis; or

(d) that the debtor execute a joint check agreement or assignment of some kind so that the debtor’s debtors become liable to the creditor as well.

The rationale for options (a) and (c) should be obvious. Execution of a promissory note for the old balance not only establishes an acknowledged amount of the debt and sets up payment terms that the parties can live with but often allows the creditor to take the debt off its books as an open account, which can be handled differently for tax purposes. The final option is most effective in cases where the goods or services provided to the debtor were for the use or benefit of a third party, as in the case of a creditor-supplier selling goods to a subcontractor for use in connection with its contract with a general contractor. In that case, a joint check agreement executed by the subcontractor and the general contractor results in primary liability from the general contractor to the creditor, thereby giving the creditor substantially greater assurance of being paid.

3. How long will it take to collect debt once it goes into collection?
Never fall into the trap of estimating a quick fix. Although we are always hopeful that collection will be quick, this is most often not the case. It depends on where the case is filed and what remedies you seek in addition to the cooperation (or lack thereof) of the debtor. Cases filed in district courts, theoretically at least, are supposed to be brought to trial approximately one year from the date of filing. Cases in Superior Court generally will not be resolved for at least two years if they have to be brought to trial. Most often matters do not have to be tried, however.

4. Who has to pay the attorney fees?
The sad answer is that the creditor does, with a few exceptions. For certain actions brought pursuant to statutes that provide for the award of attorney fees, such as G.L. c. 93A, you will have to make a motion to have attorney fees assessed by the court. In the event that you have a credit application, promissory note or other writing signed by the debtor, the court should also assess attorney fees. Again, this is only done if properly requested in the pleadings.

5. Is there anything I can do to be compensated for the time and expense I incur as a result of debtors giving me bad checks?
Yes. Not only can you bring criminal charges against the signer of the check if the check was given in a contemporaneous exchange for goods (an over-the-counter transaction or COD payment, as opposed to a payment on account) after two days’ notice by designated form, sent to the debtor certified mail return receipt requested, but there is also a civil remedy. Under General Laws c. 93, § 40A, upon delivery of certain prescribed notices to the debtor, certified mail, return receipt requested, if payment in full of the amount of the check plus any costs incurred by the creditor is not made within 30 days, an additional $100 to $500 per check and attorney fees are to be awarded to the creditor. Be aware, however, that these remedies are only available if they are specifically pled in your complaint.

6. Once I have a judgment, the debtor has to pay me, right?
Well, that is a gross simplification. Yes, the debtor now has a legally enforceable obligation to pay the debt, but that does not necessarily mean that it will do so. If the debtor does not have the money to pay the debt, you may have to go on a payment plan and accept payments over time. The debtor may simply refuse to pay the debt, in which case you must be creative in locating and liquidating its assets to satisfy your judgment. The world could be paved over with uncollected and uncollectible judgments obtained by creditors over the years. Still, an experienced and knowledgeable collections attorney will be able to five advice on the most effective and efficient means to collect the judgment, if any. Postjudgment collection is a category unto itself.

7. Can I collect interest from the debtors?
In Massachusetts, interest is set by the statute at 12 percent per annum for both prejudgment and postjudgment debts. In the absence of a writing to the contrary, that rate will apply. Often creditors will reflect a higher rate of interest on invoices, statements or credit applications; and so long as it is requested in the pleadings, it will usually be awarded. The court will generally assess interest from the date of demand, so long as it is disclosed, until the date of judgment and include that total on the execution. As a matter of law, interest then continues to accrue on a postjudgment basis. If the date of demand is not noted in the pleadings, interest will be assessed from the date of filing the complaint.

8. The debtor has filed bankruptcy; is there anything I can do?
Yes. First, if any deliveries of goods were made within 10 days prior to the bankruptcy filing, you are entitled to reclaim those goods if immediate demand is made and the goods are still identifiable. Unfortunately, because of the short time limits on that remedy, it is rarely effective. Depending on the debtor’s status, which chapter bankruptcy was filed and the amount of your claim, you can and should review the bankruptcy schedules, file a proof of claim and possibly participate in a creditor’s committee. At the very least, if your claim is substantial, you should attend the Section 341 meeting (usually the date is on the first notice you will receive) to get an overview of the debtor’s assets and liabilities and see what the debtor anticipates as a result of the bankruptcy. As a practical matter, it is sadly true that when a debtor files bankruptcy, there is little available for creditors, particularly those that are unsecured; thus, creditors too often receive the notice, file a proof of claim and basically close their file. Frankly, that is just what the debtors hope the creditors will do. At least by attending (or having your attorney attend) the Section 341 meeting, you will get some notion of whether there might be assets to pay a dividend to you. If so, you do yourself a disservice by not paying attention to the proceedings, because if the debtor does not believe the creditors are watching, those assets tend to disappear.

9. I have a promissory note (or a personal guaranty or a judgment) from the debtor-so I am secured, aren’t I?
No, you most certainly are not. While such documents aid in collections-in the case of a promissory note, the defenses that the debtor can raise are very limited (did the debtor sign it or not? did the debtor pay it or not?); in the case of a personal guaranty, the assets of the guarantor are available for satisfaction of the debt in addition to the assets of the primary debtor; and in the case of a judgment, it is just one more paper that says that the money is owed-none of those documents constitute security as that word is understood by attorneys. Security, for purposes of debt collection and, most importantly, insolvency proceedings, is an affirmatively granted, publicly recorded equity interest in certain specified property of the debtor. It is most often effectuated through the mortgage, a security agreement or UCC financing statements and must be properly executed and recorded to be legally binding. While it is not necessary that you be assisted by an attorney to obtain and perfect a security interest, it is advisable at least at first, that you do so. Failure to complete and record the required documentation in accordance with the law will negate any security interest you may believe yourself to hold.

10. How do I decide when to refer an account to collections?
This is a business decision that each creditor must make for himself or herself on a case-by-case basis. In general, from the attorney’s prospective, the younger the claim, the quicker and easier the collection. The client, however, would just as soon forgo payment of attorney fees unless and until he or she feels that he or she has “worked the claim” to death. Probably, the answer is somewhere in-between. Some claims, because of their nature, have to be referred promptly because the remedies sought have short statutes of limitations (e.g., notices of contract, bond claims). Others are very time sensitive, such as actions to reach and apply where you seek a security interest in money due the debtor is transferring assets, paid imminently, or when you have notice that the debtor is transferring assets, thereby divesting itself of the ability to pay your debt. The average collection is probably referred after 120 days and before five years (in Massachusetts, the contract statute of limitations is six years). Of course, as the claim gets older, the debtors move, witnesses’ memories dim, documents are destroyed and everything about the claim gets more difficult, so it is advisable not to sit on claims too long if you want to maximize your likelihood of success. As a general rule, those creditors who have contracts providing for the debtor’s liability for attorney fees turn over claims more quickly as they have less to lose in the bargain. Remember, a judgment is good for 20 years in Massachusetts. Thus, even if the debtor is currently not in a position to pay its obligation, it is better to reduce it to a judgment promptly and check the debtor’s status periodically thereafter than to simply let it go.