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At our commercial collection agency we always prefer having a personal guaranty. Years ago, a new client started sending us claims along with their very simple, one page credit application. At the bottom of the page, immediately above the signature block, it reads exactly as follows:
NOTWITHSTANDINGTHISACCOUNTISESTABLISHEDINTHENAMEOF A BUSINESS, I PERSONALLY GUARANTEEPAYMENTOFTHEACCOUNT (MUSTBEANOFFICEROROTHERAUTHORIZEDTOSIGNON BEHALFOFTHECOMPANY)
The signature block reads: Signature, Title, Printed Name and Date, and is the only signature location on the page for the entire credit application and personal guaranty.
When we first saw this guaranty, we were not confident that it would have much legal value. We have always been advised that the signature for the personal guaranty should be in addition to a signature committing to the other terms and conditions on a credit application or other agreement. Also, when someone signs with their title, that typically is interpreted as them signing on behalf of the organization and not themselves personally.
While we collect the vast majority of our accounts without going to court, unfortunately, we have had to sue a number of times for this client. And each time the judge has ruled the personal guaranty as described above was valid.
We all know that personal guarantees are not a panacea — they do not guaranty that you will get paid. If the guarantor is not creditworthy then the guaranty may be worthless. But there are a number of advantages whenever our collection agency gets an account that has a personal guaranty:
● personally guaranteed invoices have a higher priority in the guarantor's mind than those that are not guaranteed;
● this higher priority typically leads to greater access to the guarantor to discuss resolution and then get payments;
● the threat of litigation is more potent as the guarantor understands it will affect their personal credit as well, leading to higher collection success without litigation;
● even if both the company and the guarantor are broke, the guarantor has more incentive to share information that confirms the financial distress they are claiming, thus allowing us to make more informed recommendations to clients on how to proceed.
The personal guaranty described above is far from perfect. We are not saying that courts would always rule that it is enforceable. Nor are we saying that it guarantees you will get paid. But we are saying that this simple guaranty has helped our client minimize the number of accounts they send to collections and it has been instrumental in our success on a number of their claims.
If a business is organized as a corporation, limited liability company (LLC), or other type of separate legal entity, the owner is not liable for the debts of the business unless other conditions exist. For small businesses, the primary reason the owner took the time and expense to set up the separate legal entity was to prevent being personally liable for business debts.
Historically, when an individual started a business, such as a cobbler, blacksmith, or street vendor, the business and the person were one and the same. These businesses are known as proprietorships, and in these cases, the owner is personally liable for all of the business's obligations.
As we all know, it takes money to start, grow and run a business. The concept of corporations came out of the need to raise larger amounts of capital to fund larger businesses, which meant the need for multiple investors. Since most investors were not actually involved in running the business, they wanted to limit their liability to the amount they invested. When you buy a share of stock in Apple or IBM, the most you can lose is what you paid for the stock, regardless of how much money the corporation might owe to vendors and lenders. The corporation is a stand-alone entity completely separate from the owners, managers, and employees, and therefore the owner is not liable for the business debt absent other circumstances. ,
There is some chance you can pierce the corporate veil to create personal liability as we explained in an earlier article. Given that this can be an expensive and difficult process with uncertain results, it is not a great alternative in most cases.
An individual is liable for a corporation's or LLC's debt if they provide a personal guaranty to the lender or vender. This needs to be a written document specifically stating the individual is guaranteeing the obligation and then signed by the guarantor as an individual and not as an owner or officer of the company. A personal guaranty can easily be included in a credit application. An email or letter where the individual 'promises' you will get paid is not a valid personal guaranty and does not create personal liability.
As a commercial collection agency specializing in large claims, we always prefer to have a personal guaranty. It gives us more leverage to make our client’s invoices a higher priority regardless of the company’s financial situation.
|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.
Recently we published a pamphlet about free internet resources which can be used to verify credit applications and prevent fraudulent purchases. These same resources can be helpful when trying to locate a debtor and collect the monies owed. Skip-tracing is the detective work that is done to locate and contact debtors. There are some excellent skip-tracing subscription services available, and these services are becoming more and more powerful. Our business to business collection agency can be especially challenged when looking for small business debtors. It is not uncommon for us to be unable to locate a valid phone number to reach a live person or even to know who to contact. Fortunately, there is one free internet resource which often yields the exact information we are looking for.
Prior to picking up the phone to make a debt collection call, our collectors go online and visit the debtor’s website. The goal of the collector is to learn about the company and about the people who run the company. Unfortunately, many small business websites tell us very little beyond the basics. The fact that the debtor has a website is good news because that means that the debtor had to register the domain with ICANN (Internet Corporation for Assigned Names and Numbers) which keeps track of website domain names for the internet. Just like the county recorder keeping track of who owns each piece of real estate in the county, ICANN keeps track of what company owns each domain on the internet, and ICANN makes this domain registration data available to the public.
A Whois search is the easiest way to obtain domain registration information. Free Whois searches are available from most companies who sell domain names such as GoDaddy and Network Solutions via links located at the bottom of their web pages. Click on the link to get to the Whois search page. Once there, enter the website address of the debtor in the appropriate field. This will bring up the page showing the information that was submitted by the debtor to ICANN. This information usually includes the company name, the company address, the administrative contact, the administrative contact’s direct telephone number and email, other submitted contact names, telephone numbers and emails, and the names of the servers that host the site.
Of key importance is that ICANN information is truthful except in the cases of outright fraud because it records ownership. Website domains are valuable company assets. Therefore, most small business owners will want to register their domains in their names, and the information will usually be valid and up to date with the business owner or a key employee name listed.
If the contact information listed in the Whois search is not valid, this is a red flag. It may indicate that the business owner no longer sees value in the business because it is no longer in operation. Another possibility is that the business hired a registration company to register their domain, and the information listed belongs to the registration company. In this case, the registration company only has to reveal the company’s contact information if a court order is issued; however, it never hurts to ask.
When a company has changed ownership, a Whois search can provide valuable information. Due to the value of a company’s website, it is highly likely that the new owner would go through the strict process of transferring domain ownership to his or her name. When this transfer takes place, the Whois search will usually reveal the official name of the new business entity as well as the name of the new owner of the business. The search may also yield the date of the transfer which can be helpful in determining who owes the debt, the new or the original owner of the business.
Using a Whois search to locate and contact a debtor is one of several free internet resources available. Visit our website to access more ideas to help in your debt collection efforts including infographics, videos, ebooks, articles, and more.
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