Collecting Delinquent Accounts Receivable
By James C. “Beau” Brincefield, Jr.
Do you ever have a problem collecting your bills?
As an attorney who does a substantial amount of collection work for clients, I have frequently been surprised that business men and women generally know so little about how to improve the collectability of their accounts. As described in this article, instituting a few simple practices and procedures can make a dramatic improvement in your collections.
Three very simple and basic things which everyone can do when he or she decides to extend credit to a client or customer are:
1. Obtain some basic information about the debtor and his/her company.
2. Obtain the debtor’s agreement to pay interest on any account not paid within 30 days.
3. Obtain the debtor’s agreement to pay costs of collection, such as court costs and attorney fees, if you have to take legal action to enforce collection of a delinquent account.
All three of these suggestions can be implemented easily in a simple, one page form which will not only satisfy all of the above objectives, but will also satisfy the requirements of a written contract which will extend the statute of limitations on the debt from three years to five.
1. Getting basic information about the debtor. With the computer databases that are now available to investigators and law firms, it is almost impossible for a debtor to disappear if you have some basic information about him, such as his date of birth and social security number. Unfortunately, I frequently find that my collection clients fail to obtain even this much basic information about a client or customer before they extend hundreds or even thousands of dollars of credit. And remember, unless you are getting fully paid in advance for your goods or services, you are extending credit. Even if it’s C.O.D., you are still extending credit until you get paid.
A properly drafted credit application/contract form need not be offensive or intrusive to a potential client or customer and it can provide a wealth of information which can dramatically improve your ability to locate debtors and collect delinquent accounts. Simply having a person’s name and address frequently is not enough because, by the time the account goes bad, the person has changed his address or changed his employment or both. If you have other basic data, (such as his date of birth and social security number), you can track him down wherever he goes.
2. Agreement to pay interest on delinquent accounts. Under the laws of most states, you cannot collect interest on delinquent accounts unless the debtor has agreed to pay it. Although courts will almost always award judgment interest, and although you can always ask for judgment interest from the date of the original bill, courts will typically award interest only from the date of entry of the judgment. In other words, even if you get judgment for the full amount of your bill, you have given the deadbeat an interest free loan for a year or two or, maybe, even longer. Equally as bad, the judgment rate of interest that you are likely to get (even if you get interest both before and after judgment) is typically a lot lower than the commercial rate that would otherwise apply.
3. Costs of collection. Perhaps the hardest blow to take is the cost of collecting delinquent accounts. Most of my first time collection clients are shocked and dismayed to find out that they are usually unable to collect more than half or two-thirds of what the debtor owes them, even when they get a judgment against him! The reason for this is that, absent an agreement by the debtor to pay collection costs, the court will usually not award the creditor attorney fees, which generally run between 25% to 50% of the amount recovered. (There are a few exceptions to this rule, such as where there are statutory provisions awarding legal fees to successful plaintiffs, but these provisions rarely, if ever, apply to collection matters.)
If you use a written credit application/contract form, you can avoid this problem with one sentence.
It is relatively easy and inexpensive to develop and use a simple credit application/ contract form but it can dramatically improve the collectability of your delinquent accounts receivable.