Commercial debt collection refers to debts that one business owes to another. Often, this is a debt for a good or service that the purchaser never pays to the supplier. Business owners in Los Angeles are often focused on receiving prompt payment to avoid having to follow a debtor. And what is more, in many cases, the longer a debtor fails to pay, the less likely it is the business can collect on the debt. Business owners must often make difficult choices about how to collect on commercial debts as there is no perfect, low-cost method to collect on overdue commercial debts. While numerous attorneys practice consumer debt collection, very few lawyers in Los Angeles offer commercial debt collection services.
Many businesses give debtors a certain amount of time to pay for goods or services. This may be anywhere from 90 to 120 days but can sometimes be a shorter timeframe. Once that time lapses, the creditor has a few options: (1) sue the business for unpaid debts; (2) assign the debt to another party to collect it; or (3) sell the debt to a commercial debt collector. Some creditors are also open to settlement because they determine it is better to receive partial payment than nothing at all.
A collector’s first approach is usually to call the business owner or department head in charge of bill payment. The collector is trying to determine who is the person with the authority to pay or settle the outstanding debt. The collector then makes regular calls to figure out a payment plan the debtor and creditor can agree to. While it may seem that selling loans to a commercial debt collector means avoiding legal action, this is not necessarily true. In some cases, a collector might escalate a case to litigation; the collector usually has a firm or several firms to recommend for this process.
Suing Over Unpaid Debt
First, a business would typically initiate a suit for unpaid debt by bringing claims for breach of contract, negligence, unfair business practices, and potentially other claims. Lawsuits can be effective in high-stakes situations, where the amount owed is significant. Different legal tools can be used to attach or protect a debtor’s remaining assets, such as personal and real property. An experienced commercial collections attorney will know how to best guide you. The court can order a sale of the property so the creditor can be paid.
While a lawsuit can often be effective in forcing the debtor to pay, the business owner should be prepared to spend time and money to resolve the unpaid debt. The business owner will need to share business records with the debtor, and possibly with the court, to prove the debt is owed and has not been paid. Courts offer some protections for those records, but putting the protections in place can require additional legal costs and attorney time.
Assigning Unpaid Debt
Second, some business owners choose to assign their right to collect to another party. This may be done as part of a business deal, including a property transaction. Suppose a business owns an adjacent building and rents it out to various small business tenants. Perhaps one or more tenants is several months’ behind on the rent. The business owner might sell this property, which is now “encumbered” by the owed rent. As part of the sale, the buyer could receive an assignment of the debts owed by the tenants. The buyer can collect on the debt and would retain the benefits of the collection. Of course, by purchasing this encumbered property, the buyer also risks not being able to collect on the debt.
Selling Unpaid Debt to Collector
Third, some business owners who have smaller loans choose to sell their loans to a commercial debt collector. The collector pays the business a small percentage of the loan’s value, based on what the collector thinks he or she can recover. In many instances, this amount may be 10 percent of the value of the loan—or less. The benefit to the business owner is that he or she realizes some small return on the loan—which may be more than the debt collector will receive.
Some states regulate commercial debt collection agencies. The state of California does not put regulatory requirements on commercial debt collectors, so anyone over age 18 can be in the business of collecting commercial debt. Many people recommend choosing only collectors that are members of the Commercial Collection Agency Association. To join the CCCA, members must have been in business for five years. They must carry bonds to protect creditors and must engage in a large percentage of commercial bond collection. Unlike consumer debt collectors, commercial collectors are not subject to the Fair Debt Collection Practices Act (“FDCPA”). The FDCPA makes debt collection techniques such as harassment, abuse and other intimidating or deceiving tactics illegal. Further, members of the CCCA must agree to follow certain ethical guidelines and keep creditors’ money in a separate client trust account.
To discuss the best approach for your business, contact the attorneys at Law Offices of Ron Slates today.