When an invoice becomes past due, the goal of credit and collections professionals is to liquidate the claim most expeditiously or, secondarily, to learn the reason for nonpayment. But the methods one uses to do so can have dramatically different results.
In AFM’s September 2018 newsletter column, I shared some advice on how to complete recovery efforts when dealing with two of the most common reasons for nonpayment: customer disputes and promise-breaking customers. But what are the best actions to take when a customer is financially distressed or out of business? Read on.
When a customer with past-due invoices claims it does not have the means to pay monies owed, immediately determine their proposal to satisfy their balance. You may not receive a concrete settlement offer, or you may not have the authority to accept what’s proposed, or you may decide that it is not in your company’s best interests to accept the customer’s plan.
Regardless, attempt to obtain a complete understanding of the customer’s financial picture. Signs of distress may include decreased revenue or reduced personnel, payroll difficulties, numerous uniform commercial code (UCC) creditors, cautionary liens filed by UCC creditors, federal or state tax liens, legal proceedings, collection balances or other substantial liabilities.
Much of this information can be learned during your call with the customer. To extract as much information as possible, ask open-ended questions. Before ending the conversation, ask for a recent tax return, balance sheet, profit-and-loss statement, and/or bank statements to help you evaluate their financial status and your next steps to maximize recovery.
In addition, you can learn about the customer’s financial status by reviewing state and federal court records, credit reports and financial statements.
If the customer is experiencing severe financial hardship, it is most economical to quickly settle by securing an immediate lump-sum payment, even if the amount is less than the full amount owed.
Another option is to enter into a payment-plan agreement. However, you need to protect yourself. For example, if the customer is incorporated and goes out of business, there will no longer be a party from whom to collect.
Any payment-plan agreement should include a personal guaranty, promissory note and/or agreed judgment upon default. You also should try to procure post-dated checks or credit card information to automate the payment process. If unable to settle, close the account as uncollectible.
OUT OF BUSINESS
A different approach is necessary when you learn a customer is out of business. However, the type of approach depends on whether or not the customer’s owners are personally liable for the customer’s liabilities.
If incorporated, the customer is a separate legal entity and its owners are not responsible for the customer’s debts. As soon as you discover a customer is out of business, pinpoint the dissolution date and confirm that the unpaid obligations arose beforehand. Also, confirm the customer properly distributed all remaining assets by paying their creditors, according to creditor class, before paying shareholders.
Once a customer completes dissolution, it should file a Notice of Dissolution with the Secretary of State, declaring that they properly disbursed all remaining assets. If the customer is still in the process of dissolving their company, attempt to extract documentation that will show evidence of proper asset distribution.
Lastly, locate the customer’s owners and their contact information. Sometimes, owners will pay even if they have no legal obligation to do so.
A separate series of actions is needed if you determine that the out-of-business customer’s owners are personally liable. This occurs when the customer:
* Is not incorporated – for example, when it is a sole proprietorship or general partnership;
* Incurred obligations after dissolution;
* Has owners that breached their general fiduciary duty of loyalty and care by acting with gross negligence or in bad faith.
Locate the customer’s owners and their contact information. If you do not make significant progress in voluntarily resolving the unpaid balance, consider escalating your recovery efforts to a third-party for collections or legal action when: a) the amount owed exceeds a certain threshold, so the recovery amount justifies your time and costs, or b) there are not any apparent and substantial collectability or service issues.
Regardless of whether a client is financially distressed or out of business, you’ll limit your company’s losses if you thoroughly investigate the circumstances and making swift, educated decisions.
Alex Rosen is the COO and general counsel of the collection agency American Financial Management. He can be reached at (847) 483-6220 or firstname.lastname@example.org