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From the Desk of Attorney Don Leviton: Proven Strategies for Improving Collectibility Part 3 | Brown & Joseph

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From the Desk of Attorney Don Leviton: Proven Strategies for Improving Collectibility Part 3

July 12, 2013

“From the Desk of Don Leviton, Esq.” is a featured monthly article from Brown & Joseph’s General Counsel, Don Leviton.

Last month we discussed a few proven celeb gossip strategies for improving collectability of your past due accounts.  In this article we will discuss some additional cost effective steps you can take that will improve the chances of recovering past due accounts.

Use a comprehensive credit application to gather all the information you can on your customer and clearly identify your customer. Before you extend credit, be sure you know who - or what - you're dealing with. Is the customer an individual, a proprietorship, a partnership, or a corporation? It's important to clearly establish who's liable for the obligation. Include credit terms that make provisions for attorney's fees, late charges, and interest at the highest allowable rate by law. Without such provisions in writing, you may not be able to recover them in the event of litigation. Establish in specific terms when payment is due. For example, net (30) thirty days or COD. Leave no questions as to when payment is due. Force the debtor to defend any lawsuits on your home court.  With this provision, your collection cases will be heard by a local judge or jury, in the locale where your company does business, saving you travel time and money. Include a personal guarantee. Many new and unknown companies without proven credit records will attempt to avoid personal liability by establishing a corporate account. This is OK, but it's critical that you also get a personal guarantee.

Use forbearance agreements and security agreements when appropriate. Many times a security agreement can be used to create a lien on the equipment or merchandise sold to protect you in the event of a default. Additionally, if an account has become delinquent, a forbearance agreement can be utilized to re-establish the debt as well as a liquidation schedule for payment of that debt in lieu of suit. This clearly delineated liquidation schedule will avoid problems later, especially regarding the quality or fitness of the merchandise which was sold; leaving the only issue in dispute to whether or not the debtor lives up to the terms of the forbearance agreement.

Keep correspondence. Many clients fail to appreciate a letter's value either from themselves to the customer or from the customer to the client. Many letters which are received from customers can be incriminating regarding admitting the liability in question. Additionally, I recommend that clients follow up any phone conversation or oral agreement with a letter of confirmation. Also, if you receive a letter from the customer which you do not agree with, it is important to respond in writing, setting forth your reasons for disputing or disagreeing with those contentions.

Act Promptly. Of all of the rules or strategies we have discussed, perhaps the most important is acting promptly once an account is clearly in default. The best predictor for determining whether or not an account will be collected is the age of an account. Statistically, 90 days after the account is past due, you have less than a 75 percent chance of collecting it. That percentage rapidly decreases with each passing month and at the end of one year, you have roughly a 25 percent chance of recovery. It is critical that accounts be properly monitored during the first three months of aging and a prompt decision must be made to refer an account for collection once a predetermined deadline has expired. Invariably, most clients tend to provide the debtor with one last opportunity in the hopes that tomorrow, or next week, or next month, payment will be made. Don't fall victim to this technique used by all sophisticated debtors. Act promptly.

By following simple and basic collection strategies, most clients can maintain an effective control of their accounts receivable and give themselves an advantage if the account does need to be placed for collection. Planning for problems before they arise, in most instances, will prevent small problems from becoming larger ones. Additionally, when a clear understanding as to the debtor/creditor relationship is established, much of the emotion is removed and therefore, the matter can be dealt with solely on a business basis. Once it is clear that an account is not going to comply within a reasonable time frame for payment, do not procrastinate, take action.

Contact us for any questions about your receivable problems.

Information in this article is provided as a matter of information and education only. It is not intended to provide legal advice or counsel. Do not take action in specific cases without full knowledge of the facts, and competent legal advice from your attorney.