Chapter 20
Ten Common Pitfalls in Credit and Collections
In This Chapter
Taking a pragmatic approach to collections
Keeping out of legal hot water
Getting help when you need it
Dealing with the obnoxious debtor
You may not be able to avoid delinquencies, but you can avoid lapses and lost opportunities that stand in the way of effective collections. The suggestions we provide in this chapter can help you maximize the return on your collection efforts and avoid wrong turns or mistakes that waste time and opportunities.
Not Taking Preparation Seriously
What do you do when you’re getting ready for an important meeting? Whether you’re an employee meeting with the boss or the boss meeting with an important customer, you prepare. You collect available records, information, and data relevant to the meeting, and then you review it and organize it.
Do you spend that kind of time and energy when you prepare for a meeting, phone call, or court case with a debtor? If not, ask yourself why not. Consider what will happen if you don’t collect the money; think about the potential impact on your cash flow. Your collections efforts are important. Although overpreparing is almost impossible to do, underpreparing can be disastrous to both you and your company.
Not Sharpening Your Collections Skills
Practice makes perfect. Your ability to communicate, negotiate, and react meaningfully with a late-paying or nonpaying customer is a skill that you must regularly hone if you want to stay sharp and effective. When a customer’s payments fall into past-due status, both your credit policies and your instincts have to come together to lead to successful collection.
Chapters 9 and 10 can help you anticipate debtor stall tactics, deal with them as they arise, get commitments for payment, and get the account back on track. You should immediately place in writing and confirm with the debtor the results of any negotiation (the deal you strike with the debtor).
A crafty credit executive is always prepared to discuss payment issues with a recalcitrant, excuse-making debtor. In the collections business you need to think on your feet and grab all opportunities to get paid because you can’t count on second chances.
Not Recognizing Potential Problems
As you gain experience with collections, you’ll spot signs of trouble on the horizon or red flags on your extensions of credit, which we describe in Chapter 5. The credit and collections professionals you work with are also good at spotting trends, monitoring paying habits, and taking quick action when danger appears.
After you recognize the red flags for collections in general, for your industry, and even for particular customers, you can’t ignore them. Don’t let business or personal history or relationships cloud your vision. If you don’t see the signs early enough, you may find yourself literally at the end of the line — behind other creditors who spotted the problems early and who were the first to pursue collection. You know about the early bird and the worm; it’s the same story in the collection business.
Failing to Act Timely to Place the Account for Collection
If you have good collection policies, which we describe in Chapter 2, your policies include time frames in which to take certain actions, such as
Following up with demand letters requiring payment when an account balance becomes delinquent.
Following up with collection phone calls when demand letters don’t produce payment, which we discuss in Chapter 8.
Immediately following up with the debtor when the debtor doesn’t keep promises to make payment.
After you’ve taken the actions defined by your collection policy and your debtor still hasn’t paid, you shift into collections mode. Delay in initiating collection action, including bringing in collections professionals as appropriate, can be the death knell for collecting on the account. If your debtor still has (or may have) some ability to pay but continues to stall payment, you need to move quickly.
Refusing to Be Practical with Delinquent Customers
When you’re trying to collect a delinquent account, you strive to strike a difficult balance: being flexible, yet remaining firm. Resolving an account with an obstinate debtor may be easier to do when you’re willing to concede some minor points early on in the game. Chapter 9 offers tips on how small concessions can get you past objections — sometimes major ones — from your debtor. Remaining practical offers some real advantages:
You can preserve goodwill and possibly retain the business of an angry customer by resolving the source of his anger.
You can get full or partial payment before a customer’s financial condition deteriorates, possibly even to the point of going out of business.
You can avoid litigation and all the associated costs and delays, and you may be able to wrap up the matter quickly.
Negotiation isn’t about winning every argument. A good negotiator knows which points are flexible and which points are inflexible; when to concede a point and when to stay firm. Negotiation is an exercise in being practical and, at times, even swallowing your pride. Your ideal outcome is a win-win situation in which both your company and your nonpaying customer feel like they’ve benefited from the settlement negotiations. And you may not have to give up very much to get to that point.
Avoiding Obnoxious and Insulting Debtors
When an account becomes delinquent, getting excited about calling the debtors, particularly if they’re long-valued customers, is pretty hard to do. When you do call your debtors, you may find that they’ve transformed from Dr. Jekyll into Mr. Hyde. When did they become so obnoxious and insulting? Was it something you said or did? More likely, their personality changes are simply the result of having encountered financial difficulties. Whatever your past relationship was, now they perceive you as just another creditor.
Your first instinct may be to avoid obnoxious debtors. But if you do so, you may as well delete their balances from your account receivable ledger. Unless you press for payment and continue to confront them on the phone, you won’t see their (or should we say, your) money. Some debtors are proud of their ability to scare off creditors with their bad phone manners and offensive personalities. You must make it clear that you’re not going anywhere and that you’ll keep calling them until they pay you.
Be calm. Be organized. Speak about the account. Request payment by a specific date, and avoid engaging a debtor in an exchange of insults. If the call still goes badly . . . well, at least you tried. You know what to do next: Evaluate the file for outside collections or for a possible lawsuit.
Not Following Guidelines Set by the Fair Debt Collection Practices Act
The Fair Debt Collection Practices Act (FDCPA) is a federal law that applies in all 50 states. In a nutshell, the FDCPA is meant to deter debt collectors from using unfair, deceptive, or abusive practices when collecting debts, and to impose penalties when debt collectors violate defined standards. The law is limited in its application in that
The FDCPA applies only to consumer collections (collection of debts incurred for personal, household, or family purposes), not commercial collections.
The FDCPA applies only to third-party collectors, not individuals or businesses collecting their own debts.
You can read about the finer details of the FDCPA — when it applies and what it requires of you — in Chapter 6.
I urge you to follow the guidelines set by the FDCPA in all your collections, even when the act doesn’t apply. Why? Because these guidelines provide a framework for responsible debt collecting. None of the requirements are unreasonable, and if you follow them all, you’ll always come across as a professional. You’ll also avoid an accidental violation (for example, when you believe you’re collecting a commercial debt but you’re actually contacting an individual).
Furthermore, following the FDCPA can keep you from accidentally breaching state consumer laws, some of which apply similar restrictions on in-house collections and even on your dealings with businesses that owe you money. Following the FDCPA in all cases minimizes your chances of violating broader state laws.
Failing to Obey the Automatic Stay in Bankruptcy
Although finding out that your debtor has filed for bankruptcy protection is upsetting, you must honor bankruptcy law. Bankruptcy proceedings supersede all other collection activities, even if you’ve already filed a lawsuit.
No matter what form of bankruptcy the debtor files, the immediate result is an automatic stay on collections activity. While the stay remains in effect, all evictions, repossessions, lawsuits, collection demands, and other collection activities must come to a stop. Often, if further litigation is to occur, it must take place within the bankruptcy court or by leave of that court.
Violations of the automatic stay may result in serious penalties. You can find a detailed discussion of bankruptcy and the automatic stay in Chapter 6.
Failing to Get Security for Debts Whenever Possible
When your debtor doesn’t pay you for your products or services, your natural instinct is to take back whatever you sold to that person. If you can’t do so, you want to pursue any security you hold for the debt, such as liens, bonds, or personal guaranties. A lien on property is an effective tool you can use to enforce collection, and it acts as leverage when you attempt to negotiate payment with the debtor. Also, liens on property may survive bankruptcy; that is, you may be able to recover that item or the proceeds from its sale even though the debtor files for bankruptcy protection.
Do you take precautions whenever possible? Getting security for a debt proactively anticipates that the customer may eventually default in payments and helps you head off losses. Chapter 3 describes how to obtain a personal guaranty and how to file and enforce a lien.
Failing to Write Off a Dead-End Account
Not every debtor is collectible. Not every debtor is worth the investment of time and money (court costs, investigative fees, and attorney fees). Not every debtor is worth chasing to the ends of the earth. Sometimes you just have to recognize that it’s time to write off the account. Signs that you’ve reached this point include the following:
Out-of-business corporate debtor
Small delinquency
Bankruptcy
If you’ve turned a delinquent account over to a collections professional, which we discuss in Chapter 13, your professional will make recommendations throughout the collections process, including when closing out the account is your best option. If your professional has thoroughly investigated and found your debtor to be totally uncollectible despite all reasonable efforts, odds are that it’s time to write off the account.