Chapter 7

When Your Late-Paying Customer Turns into Your Debtor

In This Chapter

Creating a sense of urgency for payments

Using frequent payment reminders effectively

Establishing a good paper trail

In a perfect world, your customers pay their bills on time and you have terrific cash flow with which to pay your company’s bills. In the real world, inevitably some of your customers don’t live up to their obligations. At some point, despite your polite reminders, modest pressures, and even incentives for payment, your late-paying customer becomes your debtor. When that happens, your approach to collections must also change. You have to take things to the next level. You need to motivate your debtor to bring its account current or pay it off entirely.

Time is money: The longer the debtor is delinquent, the less you have an opportunity to recover money on that account. To put it in financial terms, after six months, a delinquent bill is only about 50 percent recoverable. After 12 months, the bill is less than 10 percent recoverable. Picture a chart with an arrow dropping at a 45-degree angle. That’s pretty much what it looks like when you graph the collectability of your accounts over a one-year timeline.

As your accounts become 30, 60, and 90 days past due, you, as a collection professional, need to give them your special attention. You don’t want to be the creditor who’s hoping for a payout when the odds of recovery drop below 10 percent.

In this chapter, you discover how to create a sense of urgency to help encourage your debtor to pay.

Creating an Atmosphere of Urgency

Imagine yourself forgetting to pay a couple of bills before you take a long vacation. One bill is from your doctor, and the other is from your credit card company. When you come home, you’ll probably find two or three reminders — in your mailbox or e-mail and on your voice mail — from your credit card company. Each reminder is more stern than the last, transitioning from polite to insistent. In contrast, your doctor probably hasn’t contacted you at all, or perhaps has sent you another statement. By the time your doctor warns you that your account may go to collections, you may have already heard from your credit card company’s law firm.

Credit card companies figured out a long time ago that urgency works. If you’re like most people in this situation, you’ll respond predictably: You’ll pay your credit card bill before you pay your doctor.

Debtors who have more debt than money (most of them) have to set priorities. You are competing with other creditors, and you need to make payment of your bill the debtor’s priority.

When you follow up with your newly delinquent customers, you want to grab their attention. Common techniques for creating urgency include

Interest and penalties: Consistent with your credit agreement and state laws, add interest, late fees, or both. Give your debtor the unambiguous message that the consequence of dragging out payment is that he’ll end up having to pay more money.

Attention-getting words and “big red letters”: It’s corny, but it works. Send notices more often with notations like “urgent” and “past due” on them in red ink. (If you’re dealing with consumer debtors, keep any red ink that suggests the communication is for debt collection inside the envelope. You can mark the envelope “urgent,” but save words like “past due” for the printed invoice that you put inside.)

Frequent reminders: Use a series of collection letters. Later in this chapter you’ll find pointers for sending demand letters, along with samples.

Multiple modes of contact: Use different forms of communication to keep your reminders in front of your debtor: e-mail, overnight delivery, telegram, hand delivery, fax, text messages, and even social networking Web sites — whatever works.

Making a phone call: If collection letters and similar contacts don’t result in payment, sometimes a phone call will bring in the money.

When you fax a demand for payment to a commercial debtor, there’s a good chance it will be seen by the debtor’s employees. When an office gossip hands over your fax, it’s potentially embarrassing for the owner. That’s a good thing: Embarrassment (and avoiding embarrassment) can be a real motivator to pay up. But at the same time, to avoid legal entanglements, your communications should be directed at the debtor and its agents and employees, not third parties. See the discussion of the FDCPA and related laws in Chapter 6.

If you’re continuing to work with your customer, consider cutting off further services or deliveries until payment is made. If you’re lucky, you’re a critical supplier to your debtor, and it’ll need to pay you to avoid increased costs or disruptions, or perhaps even to stay in business.

Communicating Effective Reminders to Pay

Effective communication with debtors is hard work. It involves both the art of persuasion and a creative imagination. Think about it: Who really wants to pay a debt? Obstinate debtors are a tough audience, yet your job is to persuade them to pay up. So how do you draw your debtor’s attention to your past-due bill and create the desired sense of urgency?

Your demand letter should convey in the clearest possible way that the bill must be paid. The initial demand letter should come across as a friendly reminder so you maintain customer goodwill, and at the same time help you get paid. Remember to make it easy for your debtor to reach you. Include the name and phone number or e-mail address of a contact person at your company so any questions or comments can be easily raised by the debtor and quickly addressed by your company.

Demand letters should be personal; that is, they should be directed to a specific person and personally signed. Whenever possible, identify a person in the debtor’s company who has the authority to pay you, and send your letter directly to that person; sending letters to the wrong people doesn’t get you anywhere. If your demand letter looks like a form letter or isn’t directed to a real person, it will be treated like a form letter (thrown in the garbage). “To whom it may concern”? If your debtor doesn’t want to pay, nobody’s concerned (except you).

Writing effective collection letters

The more you can customize your collection process, the more effective it becomes. Just as a journalist covers who, what, when, where, and why, you want to cover all the bases: Be specific with dates, invoices, balances due, interest amounts, and due dates. Make sure your debtors know how much they owe and when they need to pay it. Debtors are quick to grasp at the flimsiest straws. If you give them the opportunity, eventually you’ll hear a debtor claim that he didn’t pay you because he didn’t know how much to send or when or where to send it.

You can send your letter by any means that you believe will be effective, including regular mail, fax, e-mail, or express mail. Overnight mail can sometimes help create a sense of urgency.

When you’re drafting your demand letter, keep in mind the following general concepts. They work.

Keep it short. No more than one page.

Use simple words, short sentences, and frequent paragraphs. Your letter should be easy to read with no room for misinterpretation or misunderstanding. Be firm, convey urgency, and use action words.

Customize the letter. Even if your letter is computer-generated, identify a specific recipient and reflect the specific invoices, dates, and amounts that are past due.

Demand payment by a specific date. Don’t give the debtor any wiggle room.

The initial demand letter template shown in Figure 7-1 is included on the CD that accompanies this book (Form 7-1). Tailor it to meet your needs.

Special concerns for consumer debtors

If your demand letters are going to consumer debtors (where the goods or services provided are personal or household in nature) and you want to comply with the Fair Debt Collection Practices Act (FDCPA), you need to include specific warning language in your communication. (See Chapter 6 for more information about the FDCPA.) Include the warning language at the end of the letter, ideally on the front of the page, and in the same font you use for the rest of the letter.

Use the language provided in Form 7-2 on the CD in your first communication to the debtor (or, if your first contact was by phone, within five days of the initial phone call). Use the language provided in Form 7-3 in all subsequent communications, whether they’re in writing, over the phone, or in person.

Never try to hide the warning language by putting it on the back of the page by itself or by presenting it in a smaller font. Also, don’t change this language: Use the word-for-word language of the FDCPA. It was written by the federal government and must be used as is to be effective (and to keep you out of hot water). Also, don’t create confusion in your initial demand letter by specifying an exact date the payment is due. Under the initial FDCPA language, the debtor has 30 days after receiving the letter to request validation (the formal verification of the debt by the collector).

Still not paid? Escalating your approach

If your debtor is unresponsive or uncooperative, or doesn’t follow through on its promises, your demand notices should become increasingly stern. Your earlier positive language (“We assume you have forgotten to pay . . .”) becomes more negative (“Your credit privileges are being suspended,” “Interest is being charged,” “We will use stronger collection measures,” and so on).

Your credit policy should dictate that collection letters be sent in ten-day increments and, as a general rule, demand payment within ten days. If after ten days you still don’t have payment and you haven’t entered into a repayment agreement with your debtor, you send the next collection letter. Some customers won’t respond until they’ve received several notices.

If the first demand fails, follow closely with a second demand letter, like the one that appears in Figure 7-2. This letter is included on the CD that accompanies this book (Form 7-4).

An effective demand letter concludes with the magical letters cc (standing for “carbon copy”). For each collection letter, cc the president of the debtor’s company. In your final notice make sure you also copy your own collection agency or legal counsel, even if it’s just a generic reference such as “collection agency/legal counsel.” Let the recipient know exactly who is watching and waiting.

After your first two collection letters have failed, your next letter in the series is even stronger and may describe action you intend to take, such as terminating the customer’s account, adding additional charges, or perhaps even placing the matter in collections. Such a letter will be similar to the final demand letter shown in Figure 7-3. This letter is also included on the CD as a template (Form 7-5).

Your final demand letter should be delivered in the most personal way possible. You can have it hand delivered by a courier (including the copy sent to the company president) or delivered by a reputable overnight service company, in addition to your usual transmission by fax, e-mail, or other method you’ve found to be the most effective way to communicate with the debtor. Your manner of delivery helps your final notice speak louder than the words it contains and leaves no question about the situation’s seriousness.

Customizing your notification approach

Debtors, particularly those who owe money to a lot of creditors, can smell a form letter a mile away. They quickly discover that most form letters can be ignored. If your debtor senses that you’re sending a series of form letters, there’s a good chance he’ll ignore your letters and not even consider sending a check until he gets your “final notice.” If that’s also a form letter, it may not be taken seriously either.

If at first you don’t succeed, mix up your collection efforts. Use mail, fax, e-mail, telegram, overnight service, telephone calls, personal visits, courier, and get-in-his-face-type communications. Make sure your debtor can’t possibly ignore you. Use everything you know about your debtor to anticipate what may work and then try it.

Don’t forget the power of a phone call

Don’t hesitate to pick up the phone the minute a debt becomes delinquent. It’s never too soon to make that call. For a past-due bill, person-to-person contact is far and away the most effective way to get your message across (“Pay me now”) while clearing up any misunderstandings (“We thought our terms were net 30, not net 10”).

As with collection letters, your initial calls are polite reminders, conveying the benefit of the doubt. At the first contact, you can assume that your customer simply forgot to pay the bill. (You’ll know what’s really going on by the time you get off the phone.) Chapter 8 provides a thorough guide to making collection phone calls.

Documenting the File: Having Good Notes When You Need Them

Document everything. Just as you keep records of your customers’ credit applications, purchases, payments, and everything else that’s described in Chapter 4, you must also track your collection efforts. Before the account is delinquent, your records help you avoid confusion and get paid. After the account is delinquent, you’re preparing for litigation, which you hope doesn’t happen.

The short version is, “Keep everything.” The longer version? Make sure you keep

Your customer’s entire credit file: Credit applications, invoices, purchase orders, debit and credit memos, and a ledger summarizing all transactions (a ledger comes in handy when your customer wants to nitpick the account or suddenly develops amnesia when reminded that there’s a balance due).

Notes of phone calls made or received, along with dates and responses: If the debtor admits owing the amount due, be sure to include that in your note. Admissions are extremely important if you end up having to go to court.

Notes made by employees of your company: Include notes regarding meetings, promises, disputes — anything relating to the account.

Copies of all follow-up statements: Your copies should be exactly as they were sent to the debtor, including any markings of “urgent,” “reminder,” “past due,” and so on, so you can demonstrate your persistent efforts to collect the debt without resorting to litigation.

Copies of all demand letters and follow-up correspondence: Keep records of all correspondence, no matter how it was sent. Keep copies of letters, e-mails, faxes, telegrams, or any other written exchanges.

A rule to live by: He who has the most paper wins.

The paper trail: How good records help you both in and out of court

I once had a teacher who told me that he graded research papers by throwing them down the stairway. The heaviest papers, the ones with the most pages, got all the way to the bottom of the stairs, and they got an A. Research papers consisting of one or two pages just floated to the top steps, and they received a lower grade. I’m pretty sure this teacher was pulling my leg, but after that I made sure that all of my research papers were hefty.

In the collections trade, the same concept applies. If you end up in court and you have only a few pages to document a debt, you risk having your case presumed to be as lightweight as your file. You want enough documentation so the debtor and, if necessary, a judge can see exactly what occurred.

If you need to go to court, your case may not reach trial for a year. By that time, even things you swear you’ll never forget may have faded from memory. Odds are that, once in court, your debtor will concoct stories about why the money isn’t owed or that it was already paid, and it’s your job to refute them. Your records are essential to recalling the account history, including every dollar invoiced, every credit memo, debit memo, adjustment, payment, negotiation — you get the idea.

Anticipating reactions: Playing devil’s advocate

Put yourself in the place of your debtor. You have minimal cash flow and can’t afford to pay off your creditors. You’re going to use any weakness in the billing system, any miscommunication, any defect in the services or products, any excuse at all to justify nonpayment.

Your goal as the creditor is to know your debtor’s arguments. Take a look through the credit file. Does your documentation have any holes? Any communications that may have caused a misunderstanding? Anything you were supposed to follow up on that slipped through the cracks? You can rest assured that in court your debtor will identify and raise any problems with the account. Document any problem you find, face up to it, and be prepared to explain everything your company did to resolve it.

Pursuing written admission of the debt

Does going to court seem like a big mystery to you? Let us wipe out some of that mystery. Judges and jurors are people, and just like the rest of us, they respond to good stories. If you go to court and tell a compelling story, odds are excellent that you’ll win. (If you want to know more about court proceedings, flip to Part IV.)

What’s the most compelling story you can tell in a collection case? That’s easy: “The debtor admitted that he owes the money.” After the jury understands that a debtor admitted to the debt, it’s really hard to lose. And of course, you produce in court any written admission of the debt. After that happens, no matter what the debtor says during the trial, the judge or jury will keep coming back to the admission.

Therefore, follow this simple rule: Try everything you can to get the debtor to admit the balance owed. Make a note of any oral admission the debtor makes to owing the debt (for business debts, include the person’s name and title). Keep a copy of any written admission. Chapter 9 provides detailed information on how to lead your customer into an admission.

Prior or partial payments can also constitute admission of the debt; see Chapter 9 for more on admissions.