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|Louis S. Freedma
It’s almost impossible to imagine a world without credit. Major purchases like a home, car, college education, and vacations would be difficult even for the wealthy and virtually impossible for everyone else. So many things that make our life comfortable can be attributed to our ability to obtain credit. Consumer spending makes up over 70 percent of the U.S. economy and is driven by the availability of credit.
The availability of affordable credit is based on an important
concept: credit is a promise to repay. In a perfect world, the credit
“ecosystem” would only consist of creditors and consumers who repay
their obligations. Perfect balance. However, when credit is not
repaid, due to unforeseen hardships or other reasons, it results in
higher credit costs for everyone, including those who paid their bills.
This is an imbalance that is corrected, in part, by bringing attorneys
into the ecosystem.
After sending a non-paying customer’s account to a collection agency for assistance in collecting on past-due invoices, the collector reports they haven’t been able to recover your money. Does the reason for non-payment matter?
At this point, you must decide how to proceed in the collection effort. You have several options here, including:
· Writing off the debt
· Creating a payment plan on the account
· Entering into litigation against the customer
· Closing the claim and/or writing off the debt
· Postponing collection efforts while monitoring the situation
· Gathering more information to resolve a dispute
· Pay to run a skip-trace on the debtor
· Using a different collection agency in hopes they will be able to collect the balance
Choosing which course of action to take at this point should be considered in the same way as any other business decision. Clearly, collecting and analyzing information allows you to make better decisions about what to sell, how to sell it and who to market it to. Applying the same process of data collection and analysis will allow your business to improve the profitability of its unpaid invoice collection efforts. Naturally, the larger the amount owed, the greater impact this decision will have on your business’s bottom line.
Many collectors feel taking an extremely firm position in their collection process produces the fastest results, regardless of the debtor’s situation. This means that when the collector makes contact with the debtor, they simply demand immediate payment in full and then commence collection litigation if the debtor doesn’t pay. The idea behind this approach is that the debtor will realize the matter is being taken seriously and feel pressured into paying off the debt. Sometimes, this method achieves its goal and results in payment if the debtor has the assets to cover the debt. However, oftentimes taking this heavy-handed approach results in the debtor retreating and cutting off communication, which seriously impedes the chances of successful collection. Furthermore, if a debtor truly doesn’t have the money to pay off the debt, taking them to court may not end up being worth the time and resources.
If the debtor is pressured into reducing or refusing communication with the collection agency, this can seriously reduce the chances of successfully collecting the balance due. Limited access to information from the debtor often results in an agency making less-than optimal decisions. Spending money on litigation with a company that is about to shutter or file bankruptcy is a waste of both time and resources; even if a judgment is obtained against a debtor, it usually takes between six months and two years to collect on it. More often than not, cooperation between debtor and collector result in faster payment at a much lower cost.
The challenge of successful debt collection lies in finding a balance between aggressively pursuing payment in a way that doesn’t negatively affect your ability to gather important information from the debtor. Experience in collections, as well as good general business knowledge, prove very helpful in this balancing act. Understanding the true situation behind a debtor’s non-payment has become even more crucial in today’s still-challenging business climate, as many small and mid-size companies continue to struggle.
Before extending credit to potential customers, companies need to validate the information provided on the credit applications. When fraudsters turn in their credit applications, they are hoping that creditors will not carefully check the information, thereby allowing fraudulent purchases. One important step in any credit application verification is to confirm the physical address of the customer is legitimate and a commercial building. This can be accomplished very quickly by any internet user using Google Maps.
Using your web browser, go to Google Maps. You will see an address field near the top of
the page. Enter the customer’s business
address in this field. Using the
satellite view zoom in to quickly determine the type of building at the
address. If it is available, use the
street view for an even closer look.
Continue to investigate if:
· the address is clearly a residence, not a commercial building;
· the signage in front of or on the building does not show the customer’s name;
· The building does not look like it would be appropriate for the type of business the customer has.
One important step is to determine if the address is a mailbox service, executive suites building, or a UPS store. In our experience, these types of buildings are frequently used by fraudsters.
There are several ways to determine if a commercial building is a mailbox service such as a UPS store. When you search an address on Google Maps, it will typically list the names of the businesses located at that address. Keep researching if:
· more than one business is listed at the address;
· the businesses at the address list suite numbers, which may actually be P.O. box numbers;
· The name of one of the businesses listed is recognizable as a mail service, package, copy or print business.
Once in a while, your Google Map search will yield no result. If this happens, copy and paste the address into your regular search engine for a quick search. Recently, when we ran a Google Maps search the address did not show a UPS store at the address. However, when we ran a search engine search, the result was a UPS store address and phone number which turned out to be fraudulent.
It is always risky to ship product to a P.O. Box because you will have no way to verify if your customer actually took possession of the merchandise. The only proof you will have is that the executive suite or mailbox service received the product. In this situation, if the customer ends up not paying for the merchandise, any collection effort will be unsuccessful.
If you determine that the customer’s address is a mailbox service, request the physical address and verify it. If the address is inside a mall, confirm that the physical location is a true store and not a kiosk in common space. Validate any home addresses listed using Google Maps and search engine searches. In a case where the business does not have a permanent commercial location or if the customer provides a personal guarantee, it is critical to request and verify the home address.
Confirming a customer’s business address is one of several steps to preventing fraud. For other tips on fraud prevention, visit The Kaplan Group’s website for free downloadable resources.
Just winning a lawsuit against a non-paying business customer does not guarantee that the debt will actually be collected. In fact, depending on the circumstances of the debtor, there is a significant chance that no money will be collected, and the creditor's loss will be even higher as they will also be out the costs of the lawsuit in addition to the original debt owed. For this reason, it is important for any creditor to determine the realistic chances of collecting on a judgment before any lawsuit is pursued.
Below is a list of questions that need to be answered when determining the likelihood of collection:
· Will the customer still be operating by the time the judgment collection process begins? (Remember, the legal system can be extremely slow and time consuming).
· Will the customer’s cash flow or assets provide the monies needed to satisfy collection of the judgment?
· Does the customer have secured creditors which may potentially block the collection of the judgment?
· Does the customer have any previous judgments or liens attached to the business which may increase the difficulty of collection or indicate that others have not been able to figure out how to collect judgments?
· Is there personal liability for the company's obligation, creating a secondary source of repayment?
· Does the person with personal liability possess income or assets which could be used to satisfy the judgment?
· Does the owner of the business have personal assets that could be put into the company even if the company is not personally liable for the outstanding debt?
· Can the owner of the business and/or the guarantor be found so that pursuit of the judgment collection can occur?
The more of these questions that can be answered, the more accurate the estimate of judgment collectability will be. It is harder to justify the cost of a lawsuit if you aren’t reasonably confident that the judgment can be collected.
We have several free resources on our website, including two short videos explaining commercial collection litigation and the judgment collection process as well as downloadable infographic that guides you through the process of determining if a judgment is likely to be collectable.
What does ROI (Return on Investment) have to do with choosing to sue a business customer who has stopped paying for product received? Everything! There are costs involved in filing suit against a customer. In addition, the legal process is typically very slow, and the chances of collecting the debt owed goes down the older the debt becomes. For these reasons, it behooves a company to look at the ROI of a law suit before any legal action is taken.
To estimate a lawsuit’s ROI, the company must look at four things:
· the original debt amount;
· the lawyer’s contingency fee;
· the chances of successfully collecting the debt;
· and the company’s out of pocket court costs.
The total amount that could potentially be collected is the dollar amount of what is owed by the customer. From this total amount, the contingency fees of the lawyer must be deducted. If the litigation contingency fee is 35%, the Net Potential Recovery would be the original amount plus interest and recoverable costs less the contingency fee. Next we estimate the likelihood of collecting from the customer. Factors such as if the business is likely to continue operating, the quality and value of the customer’s asset base, other liens or judgments, must be looked at to arrive at this percentage estimate. Apply this percentage to the Net Potential Recovery amount to calculate the Expected Value of Recovery. The difference between the Expected Value of Recovery and the company’s out of pocket costs to litigate is the estimated return on investment..
If the ROI is large enough to make filing suit against the customer worthwhile, then the company should move forward with a lawsuit. If, however, the ROI is not significant, then it is probably better to not invest time and money in litigation. The Kaplan Group is a commercial collection agency specializing in large claims. More information including an infographic depicting the decision process behind filing a lawsuit and sample ROI calculations can be found on our website.
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