If you allow your customers to carry a balance, you have to assume that some of them will evolve into a delinquent account. There are two simple things you can do to maximize your ability to collect the money you are owed when this happens. One: collect the right information up front. Two: have a clear agreement with specific terms signed by the customer.
Your best opportunity to obtain information essential for collection is at the beginning of the relationship. It is at this point that a customer is willing to provide information that can help you later, if the customer fails to pay. There is an enrollment process for nearly every type of product or service rendered on an open account. Doctors’ offices, vet clinics, apartment rentals, health club memberships, home service calls – every extension of credit comes with some sort of an application or information gathering process. At a minimum, your forms should request the customer’s name, mailing and physical addresses, phone number, Social Security or EIN number. Your forms should also request the customer’s marital status, as appropriate. Since Arizona is a community property state, if married, both spouses are likely responsible for the debt. Employment information for both the customer and spouse is valuable for determining the customer’s ability to pay and serves as a good tool to evaluate collectability later. If a customer is not employed, is retired, or is a tribal member living and working on a reservation, collection efforts are much more difficult and you should consider collecting payment at the time of service or carefully consider the decision to extend credit. This is because Social Security income, retirement accounts and Native Americans on the reservation are exempt by state and federal collection laws.
The same information is needed for businesses such as corporations or LLCs. You should also collect information about the primary business owners. Because a business is less likely to have the same moral obligation to make a debt good, and legally exempts its owners from liability for company debts, lending institutions will rarely extend credit to businesses without a personal guarantee, so why should you? In this type of scenario, a guarantee from the primary owners and their spouses is not only common, but will go a long way to assuring that you are paid the money you are owed.
After the pertinent information is collected, it is important to have a clear written agreement (i.e. contract). The agreement should provide what goods or services will be provided in exchange for specified prices or rates. Every agreement should contain some provision about payment of collection costs and attorney fees if the account goes unpaid. A vast majority of collection lawsuits proceed by default – meaning the debtor never responds to the lawsuit. In those cases, a court will ONLY add attorney fees to the debt if there is a written signed agreement. Without this language, you will ultimately be responsible for payment of your own attorney’s fees.
Another important thing to have in your agreement is a provision for interest on unpaid amounts. It is important to remind the customer that you are not a lending institution and that payment is expected. An interest provision should be high enough that the customer wants to pay off your debt before others (i.e., credit cards) but not so high that a court finds it unconscionable. A suggested range is 18 to 36 percent per annum. If your agreement does not contain language regarding interest, the law provides for interest at the rate of 10 percent until judgment, after which the rate is reduced to prime plus one percent.
Always make sure that your agreement is signed by the customer. Not only does the customer’s signature demonstrate an agreement to pay but it also signifies the customer’s acknowledgement of the consequences if they do not. The customer should always sign the agreement, work order or invoice before any services are rendered or products sold. Providing an agreement after the fact deprives the customer of the opportunity to decline your goods or services and could be deemed an invalid agreement limiting your ability to collect (although not without the right to take other legal action).
If you have decided to turn your delinquent accounts over for collection, there are significant distinctions between “collection agencies” and attorneys. Collection agencies often proceed by making phone calls and if that is unsuccessful, they hire an attorney. Phone calls simply do not carry the same level of seriousness as a claim from an attorney. Only a licensed attorney can file a lawsuit. For that reason, law firms often receive a higher priority for obtaining payment. So in the end, if an attorney works for the same cost as a collection agency (i.e. a contingency basis), it is more logical to start where you get the highest chance for success. FBN
Tevis Reich is the owner of a boutique law firm, Law Office of Tevis Reich. He is admitted to practice in Arizona and Florida, in both state and federal courts. Reich is a Flagstaff native and an NAU alumnus. He can be reached at 928-213-1800 or via email at Tevis @TReichLaw.com