12 Fatal Mistakes

12 Fatal Mistakes Businesses

Make When Extending Credit and

Collecting Debts.

By Alexander L. Ullenberg, Esq.

MISTAKE #1. Ignoring problem accounts or, worse yet, procrastinating. Your customers are not paying you for a reason. It could be they are not satisfied with the product or service you provided or that they are getting into financial difficulties. However, the longer you delay in resolving the problem or obtaining payment, the harder it will be for you to ultimately collect the money owed.

SUGGESTION. Deal with delinquent accounts promptly and systematically. The odds that you will collect the money owed to you decrease dramatically the longer the account goes without payment. In addition, there's no need to belabor the point - if your debtor is not responding to your first few letters, the odds they will respond to further letters or phone calls is not good. You need outside help. Create your own internal collection procedures or follow our 3-step collection system. Remember: speed and persistence are the keys to successful collections.

MISTAKE #2. Failing to find out why your customers are not paying. Sometimes your customers are not paying you for a reason. If that reason is because they were dissatisfied with your services or products, it makes good business sense to find this out ahead of time and try to resolve it in the hopes of possibly keeping the customer or at least preventing them from becoming the tell-everyone-I-know-how-bad-you-are liability. And if they have a good defense (or a counterclaim against you for warranty defects or malpractice) its better to find this out before you sue them.

SUGGESTION. Contact your delinquent customers right away. Find out why they aren't paying - better to do that now than after a lawsuit is filed. It's the first part of our 3-step collection system.

MISTAKE #3. Not getting enough information from your customer before extending credit. Information is terribly important when you ultimately have to collect amounts owed you. Get the obvious information right away like your debtors' full name (and any aliases or maiden names), current address and phone number. In addition, get their old address or the name and address of their nearest relative - it make it easier if you have to track down their new address after they move without leaving a forwarding address. Also get their social security number or date of birth - it'll make it easier to determine whether the "John Smith" you located is really the John Smith that owes you money.

SUGGESTION. Get as much information as you can before extending credit. Use a written application or a credit record. Ask your salespeople, receptionists, secretaries, tellers, salesclerks, and other employees who have direct contact with your customers to record all the information they hear relating to your customer before and after you extend credit. Often times, I have found this information the most valuable when trying to find debtors and ultimately convincing them to pay.

MISTAKE #4. Trying to do everything yourself in the hopes of saving collection fees and costs. You owe it to yourself to at least try and send out a few letters or make a few phone calls to get your customer to pay. It's a cost efficient way to get payment in some cases and the cheapest way to find out why your customer is not paying. Correcting dissatisfaction at this state can mean the difference between keeping that person as a repeat customer or turning them into a tell-everyone-I-know-how-bad-you-are liability. However, if after a few inquiries, your debtor just flat out refuses to pay for no good reason, it makes good business sense to seek outside assistance to collect the debt. First, the laws regulating the extension of credit and collection of debt are one of the most heavily regulated areas of the law. Technical violations can cost you dearly. Second, referring your delinquent accounts to outside sources makes good business sense. Your time and efforts are better spent serving your existing and paying customers, rather than chasing the old ones who haven't paid. Third, by turning your delinquent accounts over to someone else lets them be the "bad guy" and gives you the opportunity to preserve a relationship with your customer who may once against become a good prospect in the future.

SUGGESTION. Institute a system in your business, where you contact non-payers 30 days after they are late by letter inquiring into why they haven't paid and asking them to call you if they were dissatisfied with the services or to make arrangements if they can't pay in full. Follow through with a phone call if you haven't heard from then in two weeks after that letter. And if you want, give them one follow up letter saying that unless they contact you, you will turn the account over shortly to your attorney when you routinely forward accounts to him for collection unless they contact you. But do not delay -- turn over the non-paying accounts over regularly to your attorney for collection.

MISTAKE #5. Relying too heavily on outside collection agencies to "solve" your problems. Collection agencies may be successful in helping you collect more of your delinquent account receivables, but the wrong agency may harm you more than help you. First, overly aggressive agencies can increase the frequently with which your customers complain to you and can create the dreaded tell-everyone-I-know-how-bad-you-are former customers. Second, since collection agencies make their money based upon high volume, your accounts are grouped together with many other accounts owed by the same debtor and payments may be applied to other accounts before yours which increases the likelihood that your account is the one remaining when the debtor files bankruptcy. Third, in Wisconsin, collection agencies cannot sue for you. (Wis. Ethics. Op. E-61-1). To get around this rule, agencies often develop limited relationships with collections attorneys who will accept referrals from the agency and file the suits for the creditors directly. However, these attorneys often limit what services they will provide and are retained only after the agency determines it cannot collect on the account by itself. Delays in using judicial remedies like garnishment and levies often means the difference between getting paid and waiting in line. Lastly, since collection agencies rely upon volume in order to make a profit based upon their thin margins, they often will keep accounts in their portfolios long after they should've been referred out to an attorney in the futile attempt to "earn" their commission. These delays cost you money.

SUGGESTION. In the past, I have worked with my client's collection agencies and I continue to do so for some clients, but I prefer to work with my creditor-clients directly. Moving quickly is very important to make sure that you maximize the odds that you will collect the amounts due to you. Allowing a collection agency to take a "stab" at the account often wastes the best time to get payment which is usually the 90-120 day period after your debtor hasn't paid.

MISTAKE #6. Not establishing a relationship with your own collections attorney to assist you in collecting delinquent accounts. Even collection agencies realize that there primary weapon - persistent telephone calls to your debtor - is not enough to get most debtors to pay. They use collections attorneys extensively - why shouldn't you?

SUGGESTION. Working with your own collections attorney is an integral part of any successful collection system. Collections attorney are bound by the ethical rules to represent your interests and their professionalism lends credibility to your efforts to collect your debts. It's no surprise that debtors who often do not respond to letters from you and your collection agency, respond quickly when contacted by an attorney. An attorney makes the treat of litigation real - and often times that's the only way some debtors will pay. Second, collections attorneys, unlike agencies, can write persuasive on-point letters to your debtors anticipating their defenses and convincing them to pay. For example, for medical bills, debtors often claim that their insurance company or ex-spouse should've paid it and therefore they don't. We have standard letters developed to counter these arguments and show the debtor that these are not valid defenses. Collection agencies cannot provide these letters (as they constitute legal advice) and therefore their letters are often ineffective in obtaining payment from these debtors. Third, and perhaps more importantly, collections attorneys can anticipate problems with an account before they develop. Attorneys are trained to recognize your liability, and often times can see problems before they develop into large litigation headaches or exposure. And this is especially important in the are of consumer debts - where penalties and damages under the Wisconsin Consumer Act can easily exceed thousands of dollars. Lastly, your collection attorney can quickly marshal the full force of the law from garnishments to levies to receiverships against your recalcitrant debtors. Collection agencies often have to find attorneys to assist you with this - and as we all know delays mean the difference between getting paid and waiting in line.

MISTAKE #7. Writing off every account that doesn't pay. Unless you like not getting paid or working for free after the fact, this just does not make good business sense. In addition, if you write off large amounts of debt you are forced to raise prices for your paying clients which may in turn drive them out of your business. The vicious cycle can destroy you.

SUGGESTION: Implement a regular and simple internal collection procedure based upon a system of two letters plus a follow up phone call. Regularly refer your delinquent accounts to outside sources when payment is not achieved through this system.

MISTAKE #8. Charging interest and not complying the requirements of the credit laws. No area of the law is more technical than that pertaining to charging interest. There are complex rules governing what terms you must include in your contracts when you charge interest, how you charge interest, and when a customer is in default for not paying.

SUGGESTION. Before you even think about charging interest on an account, make sure you consult with an experienced collections attorney.

MISTAKE #9. Using legal words and terminology in your correspondence and conversations with delinquent debtors. Don't try to act like an attorney - unless you want to be held responsible for being one. Don't use legal terms like "accord & satisfaction" or "default" unless you know what the terms mean and that they apply. Your idea of "default" may not be the same as the law's - and if you're wrong the penalties are swift and extensive.

SUGGESTION. Stick to what you know best - what's right and just. Use plain English to communicate with your delinquent customers. If you need to pull out the "legal guns" - let your collections attorney handle that (that's why he or she went to law school.)

MISTAKE #10. Threatening to turn over the account to an attorney or sue the debtor and not following through. Don't threaten to do something - i.e. repossess a debtor's car, foreclose on their home, or sue them - unless you really intend to do so (and have done it in the past). Not only does it destroy your credibility and leverage with your debtor, but it opens you up to extraordinary liability in most contexts especially in relation to consumer debts under the Wisconsin Consumer Act.

SUGGESTION. Establish a relationship with your collection attorney before dealing with problem accounts and then you won't have to make idle threats.

MISTAKE #11. Harassing the person who won't pay you by calling them late at night, early in the morning, or repeatedly in the same day.

SUGGESTION. It's a good rule of thumb not to call after 8:00 p.m. or before 8:00 a.m.; or call more than three times in any one 24-hour period. You do not have to be obnoxious in order to collect a debt. Besides nothing destroys your business reputation more than such behavior.

MISTAKE #12. Threatening to call the District Attorney's Office when a debtor gives you a bad check or threatening to tell the debtor's employer, spouse, or parent about how much money they owe you. In most states, including Wisconsin, it s a crime to threaten criminal proceedings - not to mention just bad business practice. [Wis. Stats. §943.30.] It may also be a violation of the Wisconsin Consumer Act subjecting you to hefty liability. Telling third parties who really have no legitimate need to know is equally egregious; and the penalties for doing so are severe.

SUGGESTION. Treat your debtors professionally and with dignity. Even good people fall on temporary cash-flow problems here and there. You could be in the same shoes someday too - treat people the way you would want to be treated. But, remember, treating someone with dignity does not mean you need to become a push-over. Insist on some payment arrangements (even its only $25 a month for a few months) and stay in touch. If you're concerned that the bad check is a possible crime - don't threaten to call the District Attorney just do it. Better yet, ask your collections attorney to file suit against the debtor under Wis. Stats. §943.245 which allows you to collect up to 3x the value of the bad check plus your reasonable attorneys' fees (up to a maximum of $500).

I hope you don't make these costly mistakes - or other mistakes I didn't list here.

You have a right to receive the money your customers promised to pay. - and you don't have to be the biggest player with the biggest budget to collect that money and decrease your write-offs. All you need is a simple collection system that responds quickly and persistently to your customers / clients / patients who aren't paying. That's precisely what our 3-step system is designed to do.

However, debt collection is not easy and it's a "mine field" riddled with technical and arcane rules where even "honest" mistakes can cost you thousands of dollars and hours of your time. Take along a partner.

Over the past few years, I've worked with numerous creditors in a variety of industries from medical to construction to retail - and the successful businesses in those industries all use a variation of this 3-step system.

I'd love the opportunity to speak with you more about helping you implement this system for your business.