Handling Bad Debt

One of the most difficult aspects of running a business is managing cash flow. And, one of the most tiresome aspects of managing your cash flow is handling past due account receivables. No matter your business, most owners or managers will face the prospect of the customer who is reluctant to pay.

First, all business owners have to take a close look at their documents which create the account receivables. In some situations, oral debts can be difficult to collect. Whenever possible, you should have some written evidence indicating that money is due and owing from the transaction. In some instances, such as retail sales involving deferred purchase prices, Illinois law spells out what can, and cannot, be contained in the contract. What might such a document be? A written invoice, signed by a customer will often be sufficient. Or, a more formal contract may be warranted depending on the circumstances. Sometimes, one hundred words or less might be sufficient to properly paper the transaction.

There is a second, and often more important, reason for having written evidence of the debt. Eventually, all business owners are going to have to resort to the courts to collect on an account. In Illinois, the prevailing party in a lawsuit is not entitled to attorneys’ fees unless provided for by statute or in a written contract. In most situations, the typical business owner will not be able to rely on a statute to get attorneys fees. The savvy business owner or operator, however, uses a written document, signed by the customer, in which the customer agrees to pay reasonable attorneys’ fees and costs in the event litigation is needed to collect a debt. Absent such a provision, it is often not economically practical for a business to collect on a debt.

Now that you have the debt or account papered correctly, what can you do to collect on it? If you are the typical business owner, you first write some letters or make phone calls. Of course, those letters and phone calls contain no unconscionable language. And, if you are in retail sales, for example, your communications strictly follow the applicable statutes. (For example, the Motor Vehicle Retail Installment Act and the Retail Sales Installment Act.) Nationwide, and particularly in Illinois, there is a growing emphasis on protecting consumers. When in doubt, consult an attorney, as the repercussions for violating any of the numerous statutes on this topic are severe, especially when consumers (essentially non-business purchasers) are involved.

For the truly recalcitrant customers, those letters and phone calls will do little other than result in a string of broken promises to make good on the obligation. At this point, many business owners will write off the debt. However, collecting on those debts is not as difficult as it may seem.

First, you can hire a collection agency. Collection agencies will try to collect on your debts for a percentage of what is recovered. In general, they cannot file suit for you. This often works best with a high volume of smaller claims. But, let’s suppose a collection agency is not the right fit for you, or that it has no more success than did your own efforts at getting your long delayed payment. What then?

At this point, your choice is whether or not to institute a lawsuit. In Sangamon County, the court system is particularly well designed to handle these types of claims. And, because you have a written document entitling you to attorneys’ fees, that is not a factor in your decision. More often than not, the recalcitrant debtor will either pay up when faced with a lawsuit or will simply allow judgment to be entered in your favor. If you are paid, then you can go on and focus on growing your business. But what do you do with a judgment in the event your debtor does not immediately make good on it?

First, don’t be too worried. Judgments carry interest after the date they are entered. Judgments can also be recorded with the County Recorder. Although it may take several years, your debtor may eventually need to sell some real property he or she owns, and will then have to deal with you.

For those with less patience, there are a whole host of post judgment remedies available. Citations to Discover Assets allow for an examination of your debtor, under oath, as to the financial wherewithal to pay the judgments. And, if you find non-exempt assets of your debtor available to satisfy your judgment, non-wage garnishments provide a means to get at those assets. In the case of the individual debtor who is employed, wage garnishments afford another tool to recover on a judgment. These are not the exclusive methods of collecting on a judgment. The point is, the judgment is more than a piece of paper to hang on your wall along with those checks returned “NSF.”

Of course, there are the “professional debtors.” These debtors work the system and take advantage of every opportunity delay and hindrance. Professional debtors often count on their creditors giving up. Don’t. Be persistent and patient.

The last resort for many debtors is bankruptcy. A discussion of how to approach this situation is beyond the scope of this article. However, whatever you do, timely file a proof of claim with the Bankruptcy Court when advised to do so.

In these days of increasingly tight profit margins, often one or two customers who refuse to pay can send you from black to red. Preventive measures will go a long way toward improving your chances of successfully, and economically, recovering those amounts. And, if necessary, obtaining those judgments is not as tough as it would seem. Armed with such a judgment, your chances of eventually getting paid aren’t all that bad.

by Thomas C. Pavlik, Jr.

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Handling Bad Debt

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