Doing your homework early helps when customer problems arise.
Litigation can be costly in terms of time and legal expenses. What credit professionals do before proceeding to court can help minimize that time and expense, while increasing the likelihood of a successful outcome.
Find out as much as possible about the customer at the time of extending credit--when the prospective customer wants to work with you to consider other options prior to litigation. "When you think of how cooperative the customer is when it wants to get credit, it's 180 degrees when they go into default," said Nicholas Krawec, Esq., a partner with Pittsburgh-based Bernstein-Burkley, P.C.
Laying the Groundwork
The process of getting paid starts when you first meet the prospective customer, Krawec said. "What you do from Day 1 helps your attorney." It commences with documentation via a credit application or agreement, and it continues with every transaction and interaction with the customer. "I love it when I have credit agreements," he said, adding it makes his job easier.
Document the terms and conditions in the application or agreement, he said. Include clauses that provide for attorney fees and provisions for interest, service and collection charges for delinquencies. "You're not going to get them if they're not in the agreement," Krawec said. Also, make sure you have the company's legal name. "You'd be surprised how many [creditors] don't have this correct," he noted. Add a jurisdiction or forum selection clause, which provides for courts in the creditor's locale having jurisdiction over disputes between the parties arising out of the credit agreement--especially if the debtor is out of state. Even for large states such as Pennsylvania, you can make payments due at the creditor's place of business, which can provide a basis for jurisdiction of the courts in the creditor's location, Krawec added.
If possible, include a confession of judgment clause, which states the debtor agrees to let the creditor enter a judgment against it if it defaults. These clauses can be highly controversial because the debtor is contracting away its right to legitimate defenses as well as its right to notice and a hearing before the entry of judgment; some states don't allow their use, he noted. A typical confession of judgment reads:
The undersigned irrevocably empowers any attorney to appear for the undersigned, in any court of record and confess a judgment without process in favor of the creditor and against the undersigned for such amount as may then be due and owing, and to issue an immediate execution upon such judgment."
"Including terms and conditions on the invoices also helps immensely," Krawec said. "If the invoice only has basic information, then you're pretty much stuck with what is provided as a matter of law."
Krawec also suggests obtaining security interests such as a lien on assets or personal property and personal or corporate guaranties, if warranted. He, however, recommends not using alternative dispute resolution clauses, which refers to settling disputes outside of the courts. Alternative dispute forums can be very expensive.
Get information about the assets of the person, real estate and other property. "The protections you'll need depend on the level of the creditworthiness of the potential debtor," Krawec said. "If you see some problems, dig deeper. Do you need a personal guaranty?" Performing due diligence will help you determine if you do, he noted.
Determine if this is a temporary problem for your customer, offered attorney Luke Murley, Esq. of Saul Ewing LLP, based in Wilmington, DE. "Maybe the debtor is having a [temporary] rough time." Place a phone call to the business, Murley suggests. "How is the phone being answered? Is it even being answered? If the name is different name, it could indicate the business has been bought or reincorporated. A deeper look could reveal if the successor is liable for the debt." In addition, find out if other creditors or lenders have sued or gotten judgments, or have security interests.
Payment Plans and Other Considerations
Before determining which way to proceed, consider your relationship with the customer in question and steps you could take before turning to the courts. Sometimes setting up a payment plan will work, according to an NACM Credit Learning Center teleconference, Collections-Recovery, Litigation and the Courts. The idea is that something is better than nothing. Getting some of the money gets your customer invested in the transaction and starts them on the road to paying you.
A payment schedule should have substance, however. For example, a customer that offers to pay half up front and the rest in two weeks sends a different message than a customer that suggests a payment of a much smaller amount initially followed by a balloon payment.
In general, payment plans should be reasonably prompt and often. The more frequent they are, the faster you'll know if there's a default. For that reason, weekly payments are better than monthly payments. You should have it wrapped up in a relatively short period of time especially if the customer has other outstanding invoices or is ordering new product. It's probably not in your company's best interest to turn down a viable offer, the teleconference states.
According to Murley, the "silver bullet" to minimize credit risk and, at the same time, mitigate risk for a bankruptcy preference is to get troubled customers off credit and move them to cash in advance or cash on demand. "The letters 'COD' are usually the first thing out of my mouth when advising a client with a troubled customer, but it's not always possible from a business perspective," he added. In addition, Murley offers this tip: If you have a delinquent customer that has been slow to respond or that has provided fuzzy answers, and suddenly you're being asked exactly how much it owes you--that's a red flag. "On the surface, it may seem like a good thing," he said. "But a delinquent customer that all of the sudden is interested in its current balance with you should tell you to look deeper. To me, as a bankruptcy attorney, that could be a signal that your customer has hired restructuring professionals, and that your customer has tasked the accounts payable folks with getting a handle on what's owed to its creditors."
Sudden changes in behavior, however, don't always mean a bankruptcy filing is forthcoming, Murley added, but it's important for the credit professional to make note of them. "Credit businesspeople are on the front lines, and they're usually in the best position to flag problem customers early. As credit professionals, it's a hard position to be in, but I don't see it as their job to figure out the legalities. If they recognize a red flag and sound the alarm to the right people, such as a senior executive or an in-house lawyer, the credit professionals have done their job, in my book."
When, and if, it comes time to go to court, creditors with the best documentation and terms and conditions combined with diligence and expediency are the most successful, Murley said. "Companies have to be vigilant about receivables. Once you go past 90-days due, the collection success rate drops substantially."
Legal options for a creditor will vary depending on the facts and circumstances of each situation, including how the creditor positioned itself prior to the delinquency. Keep in mind that remedies are not mutually exclusive. For example, if you have a personal guarantee and a security interest, you have the option of seeking concurrent relief on both. If no protective measures exist, then a lawsuit for breach of contract becomes the obvious choice.
Turning the issue over to the legal system doesn't mean you're no longer involved in the process, however. "As a lawyer advising my client on its receivable, the most important resource for me is the credit businesspeople," Murley said. "Whether we are suing the customer to collect the debt, or whether we are asserting our claims in bankruptcy court, having access to the people involved in the credit relationship helps me deliver efficient and effective results."
There should be no surprises. Find out if there's any disputes. It's important if there's a dispute being voiced that the creditor shouldn't ignore or slap it aside. They should dig in and find out the details.
In general, you want to do the bare minimum that's required to achieve the results that you desire. You need to decide what the most cost effective and most effective method is. You want to get results at lowest possible cost.
Diana Mota, NACM associate editor, can be reached at email@example.com.
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|Date:||May 1, 2016|
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