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The Fair Credit Reporting Act

State and Federal Fair Credit Reporting Acts impose mandatory disclosure requirements on those who use credit reports.

Consumer Report

A consumer report may contain information regarding a customer’s credit history (how credit was used and whether credit payments were made on time), character, personal characteristics, mode of living, or reputation. It is used to determine eligibility for credit, insurance, or employment.

Obsolete Information

If a credit bureau reports adverse information from public records, it must make sure that the information is both up-to-date and complete. A credit bureau may not report the following information: bankruptcies more than 14 years old, unpaid judgments, paid tax liens, accounts placed for collection, records of conviction, information regarding drug or alcohol addiction and mental institution confinement, or any other information more than seven years old.

These time limitations do not apply to credit transactions of at least $50,000, underwriting of life insurance of at least $50,000, or employment involving an annual salary of at least $25,000. There are also other exceptions to these time limitations.

Consumers’ Rights if Rejected

If a consumer is rejected for credit, insurance, or employment based on a credit report, he or she must be given the name and address of the credit bureau so that any misinformation in the file can be corrected.

The consumer has the right of access to the files of the bureau even if adverse action isn’t taken. You, as the consumer, have the right to know the nature, substance, and source of the information in the file except for medical information. You also have the right to know who received your credit report for employment purposes during the previous two years and for other purposes during the previous six months

The consumer reporting agency must promptly advise consumers of the agency’s obligation to (1) disclose its files either in person, by mail, or by telephone; and (2) provide a decoded written version of files or a written copy of files with an explanation of any code used if a consumer so requests. All consumers must be specifically advised that if they have been denied credit in the past 30 days, they are entitled to receive a written copy of their complete file on request at no charge whatsoever

Inaccuracies

Credit bureaus are required to reinvestigate disputed items of information and correct those found to be inaccurate. Unverified or inaccurate information must be deleted from the report. If a dispute is not resolved, the existence of the dispute must be noted in the file as well as a statement of the consumer’s version of the dispute.

If any disputed item is reinvestigated and found to be in error or can no longer be verified, the bureau must promptly mail the consumer a corrected written copy of the file at no charge.

Enforcement of the Law

It is a crime to obtain information from a credit bureau under false pretenses. A bureau may be liable for providing information to someone unauthorized to receive it. Consumers may sue a credit bureau for failure to comply with the Fair Credit Reporting Act.

Suppliers and users of information and credit bureaus can be sued for libel, slander, or invasion of privacy if the information is false, is furnished with malice or willful intent to injure the consumer, or if there is negligent noncompliance with the act.

Women and Credit

Both men and women are protected from credit discrimination based on sex or marital status. You may not be denied credit just because you are a woman or just because you are married, single, widowed, divorced, or separated. State laws and the federal Equal Credit Opportunity Act provide the following protection from discrimination in credit lending.

Sex, Marital Status, and Child-bearing Plans.

Creditors may not ask your sex on an application form except for loans to buy or build a home. You do not have to use Miss, Mrs., or Ms. with your name on a credit application, but in certain cases a creditor may ask whether you are married, unmarried, or separated. "Unmarried" covers single, divorced, and widowed persons.

Creditors may not ask about birth control practices or whether a woman plans to have children, and they may not assume anything about a woman’s intentions to have a child.

Income and Alimony.

Creditors must consider all of your income, even income from part- time employment. You do not have to disclose child support or alimony and maintenance payments as income. But if you do, creditors must consider them as income.

Telephones.

Creditors may not consider whether you have a telephone listed in your name because this discriminates against married women. But creditors may ask if there is a telephone in your home.

Your Own Accounts.

You have a right to your own credit account based on your own records and earnings. Your own credit means a separate account or loan in your own name, not a joint account with your husband or a duplicate card for his account. Creditors may not refuse to open an account solely because of your sex or marital status. You may choose to use your first name and maiden name (Mary Jones), your first name and husband’s last name (Mary Smith), or a combined last name (Mary Jones-Smith).

If you are creditworthy, a creditor may not require your spouse to cosign your account except when property rights are involved. Creditors may not ask for information about your spouse or former spouse when you apply for your own credit based on your own income unless that income is alimony, child support, or separate maintenance payments from your spouse. This last rule does not apply if your spouse is going to use your account or is responsible for paying your debts.

Change in Marital Status.

Creditors may not require you to reapply for credit because you marry, become widowed, or are divorced, nor may they close your account or change the terms of your account on these grounds: some indication that your creditworthiness has changed is required. For example, creditors may ask you to reapply if you relied on your spouse’s income to get credit and subsequently seek additional credit based solely on your own earnings. Setting up your own account protects you by giving you your own history of debt management to rely on if circumstances change as a result of widowhood or divorce.

A creditor may consider whether income is steady and reliable, so be prepared to show that you can count on a steady income, particularly if the source of income is alimony payments or part-time wages.

State laws specifically prohibit discrimination on the basis of sex or marital status in an application of credit for the acquisition, construction, rehabilitation, repair, and maintenance of housing. The Federal Housing Act specifically prohibits discrimination in granting federally related home mortgage loans.

If Credit is Denied.

You must be notified within 30 days after your application has been completed whether your loan has been approved. If credit is denied, this notice must be in writing, and it must explain the specific reasons for denying credit or tell you of your rights to request an explanation. You have the same rights if your account is closed. You may have to ask the creditor for an explanation if your credit has been denied. You are entitled to your credit file from the credit bureau. If you feel that you have been discriminated against, consult an attorney.

Under state laws, if you have been discriminated against, you can go to either the state division of human rights, the superintendent of banking, or you can file a suit in state court. Under federal law, you can go either to the appropriate federal agency or to a U.S. district court.

Keep in mind that creditors are permitted to consider your willingness and ability to repay the loan by looking at your assets, income, expenses, and credit history.

Thirteen Sources of Cash for Your Business

Friends and relatives
Liquidating or borrowing from retirement funds, such as an IRA, KEOGH, or 401(k) account, although income tax is imposed on all funds that you withdraw as well as a 10 percent penalty if you are under 59½ years old
A home equity line of credit, second home mortgage, or refinancing your original home mortgage
Asking your customers to pay in advance for products or services
Asking your suppliers to give you 60 to 90 days to pay for materials
Obtaining an SBA Micro loan for up to $25,000
Using credit cards even though the interest rates may be higher than on other types of loans
Obtaining an SBA-guaranteed bank loan for $150,000 to $750,000
Seeking a private investor
Obtaining a business loan or line of credit from a bank
Factors, who typically purchase your uncollected receivables for about 96 cents on a dollar
Venture capital firms that buy a piece of your company to help it grow
Taking your company public by issuing stock in an initial public offering

How to Come Up with Collateral for a Bank Loan

Your signature alone may not be sufficient as security to obtain a bank loan. Banks require assurance that a loan will be repaid. The kind and amount of such security depends on the particular bank and borrower. If the loan you require can’t be justified by your financial statements alone, a pledge of any of the following as security may satisfy the bank:

Endorsers.

To bolster your own credit, you could get someone to sign a note as an endorser someone who is contingently liable for the note. If you fail to pay the bank, the endorser is expected to pay the note and may also be asked to pledge assets or securities.

Co-Maker.

A co-maker creates an obligation jointly with the borrower. The bank can collect directly from either the maker or the co-maker.

Guarantor.

A guarantor guarantees the payment of a note by signing a guaranty commitment. Both private and government lenders often require guarantees from officers of corporations to ensure continuity of effective management. A manufacturer, for example, may act as a guarantor for its customers.

Assignment of Leases.

The assigned lease is used in franchise situations. The bank lends money on a building and takes back a mortgage. The lease between the franchisee and the franchiser is assigned to the bank so that it automatically receives the rent payments.

Warehouse Receipts.

Banks take commodities as security by lending money on warehouse receipts delivered directly to the bank. The receipts show that the merchandise used as security has either been placed in a public warehouse or been left on your premises under the control of one of your employees who is bonded (as in field warehousing). These loans are generally made on stable or standard merchandise that can be readily marketed. The typical warehouse receipt loan is for a percentage of the estimated value of the goods used as security.

Trust Receipts and Floor Planning.

Merchandise such as automobiles, appliances, and boats usually have to be displayed in order to be sold. The only way that many retailers can afford such displays is by borrowing money secured by a note and trust receipt.

The trust receipt is used for serial-numbered merchandise. On signing, you (1) acknowledge receipt of the merchandise, (2) agree to keep the merchandise in trust for the bank, and (3) promise to pay the bank as you sell the goods.

Chattel Mortgages.

Chattel mortgages are used for equipment (such as a cash register or a delivery truck) in which you give the bank a lien on the equipment. The bank will (1) evaluate the present and future market value of the equipment being used to secure the loan; (2) look at how rapidly it will depreciate; and (3) see whether the borrower has the necessary fire, theft, property damage, and public liability insurance on the equipment.

Real Estate.

Real estate is used for long- term loans. A bank determines the location of the real estate, its physical condition, its foreclosure value, and the amount of insurance carried on the property.

Accounts receivable.

This form of collateral may be taken by a bank on a notification or a non-notification basis. Under the notification plan, purchasers of goods are informed by the bank that their account has been assigned to it, and the purchasers are told to pay the bank. Under the non-notification plan, purchasers continue to pay the sellers the sums due on their account, and the sellers pay the bank.

Savings Accounts.

Savings accounts may be assigned to a bank. The bank obtains an assignment from you and holds your passbook. If an account in another bank is assigned as collateral, the lending bank asks the bank that has your account to mark its records to show that the account is held as collateral.

Life Insurance.

Banks lend up to the cash value of an insurance policy if you assign the policy to the bank. If the policy is on the life of an executive of a small corporation, corporate resolutions must be made authorizing the assignment.

Most insurance companies are willing to use the cash value of a life insurance policy as collateral for a loan to their insured's.

Stocks and Bonds.

Marketable stocks and bonds can be used as collateral. As a protection against market declines and possible liquidation expenses, banks usually lend no more than 75 percent of the market value of high-grade stock. On U.S. or municipal bonds, they may be willing to lend 90 percent or more of the bonds’ market value.

A bank may ask the borrower for additional security or payment whenever the market value of the stocks or bonds drops below the bank’s required margin.

Equal Credit Opportunity Act

The Equal Credit Opportunity Act requires that commercial lenders

notify small business applicants in writing of any adverse action taken, and notify small business applicants of their right to a statement of the reasons for the adverse action;
act on a small business’s application within 30 days; and
retain records of small business applicants and any adverse action taken for 12 months.

Commercial lenders can inquire about a business applicant’s marital status only if the applicant resides in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) or relies on property located in a community property state to secure the debt.

To exercise their rights to a statement of reasons for adverse action, small business applicants must request the statement within 60 days of notification of an adverse action. On receipt of such a request, the lender must provide a written answer within 30 days. The Equal Credit Opportunity Act covers only small businesses that are defined as start-up businesses and borrowers with gross revenues of $1 million or less in the preceding fiscal year. Trade credit and credit incident to factoring arrangements are not covered by the law even when a small business applies for this type of credit.

Are Debtors Getting Away with Murder?

How would you like it if you went through all of the expense and trouble of going to court and getting a judgment against a customer who owed you $4,000 and you still couldn’t collect a cent?

You may very well suffer this frustrating experience because our laws favor the debtor. This favoritism is evident in three areas of the law: (1) judgments, (2) bankruptcy, and (3) landlord-tenant relations.

Judgments

The judgment that you obtain against a debtor may be worthless and un collectible if the debtor is not employed and has no property. Even if the debtor owns property or has income, in order to seize the debtor’s nonexempt property or garnish the debtor’s nonexempt wages, you must first ascertain the debtor’s place of employment and an exact description of the debtor’s property, including serial numbers. Even if the debtor is employed, federal law exempts from garnishment 75 percent of all disposable earnings per workweek or an amount equal to 30 times the federal minimum hourly wage, whichever is greater. If the debtor files for bankruptcy, you cannot garnish the debtor’s wages, seize the debtor’s property, or sue the debtor; and even worse, the debt may be wiped out.

Bankruptcy

The bankruptcy law is invitingly named a "fresh start" law. A debtor can erase most debts and judgments and still keep most of his or her property, even a mortgaged home. If the debt is not secured, it is wiped out.

A person can file for bankruptcy even if he or she has a good job. An example is a surgeon who was guaranteed $10,000 per month from a hospital. During a leave of absence, he wiped out $45,000 worth of debts by filing for bankruptcy after which he returned to work at another hospital at the same salary.

Landlord-Tenant Relations

If a tenant does not vacate leased premises at the end of the lease period or after 30 days notice, the landlord cannot lock out or throw the tenant out without a court order. Even after the landlord obtains a court order and warrant of eviction, the sheriff or another court-appointed officer is required to give the tenant 72 hours notice to move out. If the tenant still has not moved out by this time, the landlord must store the tenant’s property. Although the landlord may get a judgment against the tenant for rent, damages, and court costs, the judgment is worthless if the tenant is unemployed and has no assets.

The High Cost of Favoritism

Some of the results of the favorable treatment accorded debtors are that (1) business and landlords are passing their losses on to consumers; (2) credit is being tightened; (3) it is becoming more difficult for certain groups to obtain apartments, especially the young and those on welfare; and (4) worst of all, it is destroying the work ethic: People are finding out that they are better off not working and thereby avoiding their financial obligations.

Correcting the Problem

If you are wondering what can be done to correct this problem, here are some suggestions:

Urge your federal and state legislators to pass laws making it easier to collect judgments and harder to go bankrupt.
Business owners should (1) make sure their loans and sales are secured, giving them the right to repossess the property; (2) obtain complete information about a debtor’s background, property, and places of employment (see the "Consumer Credit Application" form at the end of this chapter); (3) have contracts provide for payment of attorney fees, late charges, and interest in the event of default; and (4) have customers sign a promissory note as added security for repayment of debts (see the "Promissory Note" form at the end of this chapter).
Landlords should obtain substantial security deposits, conduct careful and thorough reference checks, and protect their rights through well-drafted leases.
Almost everyone can use small claims court for collections. (See How to Survive Legally as a Landlord, published by Victoria Square Publishing Co., Inc., Akron, NY 14001-0031, for further information regarding small claims court and landlord-tenant laws.) The court costs are less in small claims court and you don’t need an attorney, but if you hire one, his or her fee is usually less than it would be for a regular lawsuit. You can recover triple damages plus attorney fees from a defendant against whom you have at least three unpaid small claims judgments.
Don’t wait too long to start a suit against someone who owes you money. The longer you wait, the worse your chances are of collecting.

The best way to protect your rights as a creditor is to consult an attorney before it is too late. Preventive law is always the best policy.

Successful Debt Collection

Are you losing money because of any of the debt collection problems and concerns listed below?

You lack office procedures for handling credit and collections.
You lack information about debtors to help you collect debts.
You are unable to recover expensive attorney fees, late charges, and interest.
Your business is hit with too many bad checks.
You are unable to locate debtors.
You fear being sued for harassing debtors.
You have waited too long to sue.
Your debtors turn out to be judgment-proof.

Many businesses are losing thousands of dollars by not taking some very simple precautions. Collecting debts may be almost impossible if you do not take these steps:

Step #1: Prepare a policy and procedure manual.

Step #2: Use a credit application form.

Step #3: Use a credit agreement.

Step #4: Prevent bad checks.

Step #5: Learn how to skip trace.

Step #6: Know what collection practices are prohibited.

Step #7: Don’t procrastinate.

Step #8: Pursue all responsible parties.

Step #9: Find a good collection attorney.

Step #1: Prepare a Policy and Procedure Manual

Developing a credit/collection policy and procedure manual, which contains procedural guidelines and legal references, is the first step toward improving debt collection practices. The manual should be specifically tailored to the needs of your business and should include information on the following:

Credit procedures credit applications (see step #2), credit ratings, credit line evaluations, credit reporting agencies, and financial ratio analysis
Collections delinquency collection techniques, bankruptcy, deductions, and debit memos.
Credit/Collection duties and responsibilities cash flow projections, cash flow statements, gross profit reviews, letters of credit, surety bonds, promissory notes, personal guaranties, bank guaranties, adjustments, criminal prosecution for bad checks, and payment terms.

The manual should also include information on final settlement checks. If you receive a check containing the words "final settlement" or similar wording, you must return the check to the debtor within a reasonable time if you do not agree to receive it in full discharge of the indebtedness. However, there are two exceptions to this rule. If you mistakenly deposit the check, you can promptly and effectively repudiate this by having the check returned from the bank and causing adjustments in the bank accounts of both your customer and you so that you do not have any beneficial use of the debtor’s funds. If the payee strikes the "full payment" notation and substitutes its own statement that the check is "accepted in partial payment under protest and without prejudice," that is sufficient if the check is for the sale of goods but not for services rendered.

Step #2: Use a credit Application Form

It is absolutely essential that you obtain the client’s or customer’s Social Security or employer identification number, date of birth, place of employment, names of closest relatives, and bank account and motor-vehicle information. This information is very useful in collecting a judgment and identifying potential problem customers. Be cautious about customers who have frequent address changes or frequent employment changes. The "New Account Transmittal Form" at the end of this chapter includes the type of information that you will have to provide to your attorney or collection agency to make collection of a judgment possible.

Adequate credit information is necessary to reduce the risk with new customers. It is also important to update the information periodically so that you can accurately reevaluate current customers. It is important to obtain and update the following information:

The correct name, location, management, principals, ownership, and legal structure of a company
Background information concerning a company’s current and past business activities and relationships (line of business, how long in that business, any name changes, any ownership changes, any past or pending litigation)
Personal financial statements from guarantors
Name and reputation of the company’s accountant(s)
Date and state of incorporation

A number of sources from which you can get pertinent information include the following:

Specialized directories, such as the Dun and Bradstreet Reference Book and Polk’s World Bank Directory and directories published by many chambers of commerce.
Financial and trade periodicals, such as the Wall Street Journal and local newspapers
Specialized databases and online credit reference services
City, county, and state public records. You can research public records on your own or use a reputable search firm that can retrieve information from public filings at minimal cost. Public records provide essential information concerning lawsuits, bankruptcies, liens, UCC filings, and the like. But be sure to pursue any such information that you find. For instance, if a lien has been filed, you will want to find out if it has since been released. If your loan will be collateralized, check with the state and county to see whether the company’s collateral is already encumbered.
Local libraries whose business sources include encyclopedias, journals, and information on public records
Local telephone directories to help verify some of the information supplied by businesses or individuals

Step #3: Use a Credit Agreement

Attorney fees, late charges, or interest are not recoverable unless debtors agree to pay for them in writing. Your credit agreements should be signed by the customer and his or her spouse and should provide for

33.33 percent attorney fees
interest and late charges
personal guarantees by the shareholders if the customer is a small corporation (see step #8).

Step #4: Prevent Bad Checks

The use of bad checks is on the rise but they can be avoided. Your policy and procedure manual should have specific guidelines on accepting checks. There are basically seven types of checks:

A personal check is written and signed by the customer who makes it out to you or your firm.
A two-party check is issued by one person (the maker) to a second person who endorses it so that it may be cashed by a third person. This type of check is susceptible to fraud because the maker can stop payment at the bank.
A payroll check is issued to an employee for wages or salary earned. It usually contains the name of the employer, a check number, and the word payroll. The employee’s name is printed by a check-writing machine or typed. Unless you know the company officials and the employee personally, you should never accept a payroll check that is hand-printed, rubber-stamped, or typewritten even if it appears to be issued by a local business and drawn on a local bank.
Government checks are issued by the federal, state, county, and local government. Such checks cover salaries, tax refunds, pensions, welfare allotments, and veterans benefits. Be particularly cautious with government checks; often they are stolen and the endorsement forged. In some areas, theft of government checks is so great that banks refuse to cash Social Security, welfare, relief, or income tax checks unless the customer has an account with the bank. You should follow this procedure also. In short, know your endorser.
A blank check, also known as a universal check, is no longer accepted by many banks because Federal Reserve regulations prohibit standard processing without encoded characters. The universal check may be used, but it requires the bank to go through a special collection process and incur an additional cost.
Counter checks are still used by a few banks. They are issued to depositors who withdraw funds from their accounts and are not good at other banks. Some stores have their own counter checks for the convenience of their customers. A counter check is not negotiable and is so marked.
A traveler’s check is sold with a preprinted amount in round figures. The traveler signs the checks at the time of purchase and should countersign them only in the presence of the person who cashes them.

In addition, a money order can be used in place of a check. However, money orders are usually mailed. Most businesses should not accept money orders in face-to-face transactions.

Close examination of the key items of a check may tip you off to a worthless check. Before accepting a check, closely examine it for the following:

Non-local banks. Use extra care in examining a check that is drawn on a non-local bank. Ask for positive identification. List the customer’s local and out-of-town address and phone number on the back of the check.
Date. Examine the date for accuracy of day, month, and year. Do not accept the check if it’s not dated, if it’s postdated, or it’s more than 30 days old.
Location. Be sure that the check shows the name, branch, town, and state where the bank is located.
Amount. The numerical amount must agree with the written amount.
Legibility. Do not accept a check that is not written legibly. It should be written and signed in ink and must not have any erasures or written-over amounts.
Payee. When you take a personal check on your selling floor, have the customer make it payable to your business. Unless you know your customer well, it’s not wise to accept a two-party check.
Amount of purchase. Personal checks should be drawn for the exact amount of the purchase. Do not give the customer change.
Checks over your limit. Set a limit on the amount that you will accept on a check. If a customer desires to go beyond that limit, have the sales clerk refer the customer directly to you.
Low sequence numbers. Be more cautious with low sequence numbers. A higher proportion of these checks are returned. Most banks issue personalized checks beginning with the number 101.
Amount of check. Most bad-check passers issue checks in the $25 to $35 range on the assumption that the retailer will be less cautious when presented with a check for a small amount of money.
Types of merchandise purchased. Be vigilant about the types of merchandise purchased. Random sizes or selections or lack of concern about prices indicate that caution should be exercised when accepting a check.

After you have ascertained that a check is valid, determine if the person holding the check is the right person. Requiring identification can help you in this determination, but no identification is foolproof. Obtain enough identification so that the customer can be identified and located if the check turns out to be worthless. The following types of identification are useful:

Current automobile operators license
Automobile registration card. The name of the state should coincide with the bank location. Compare the signature on the registration to that on the check.
Store charges. Use store charges or other credit cards as identification for the signature or photograph. Retail merchants organizations in some areas issue lists of stolen shopping plates to which you can refer when identifying the check passer.
Government passes. These carry the name of the employing department and the employee’s serial number. Building passes should also carry a signature.
Identification cards. Those issued by the armed services, police departments, and companies should carry a photo, description, and signature. Police cards should also carry a badge number.

The following types of cards and documents are not good identification because they can be easily forged: Social Security cards, business cards, club or organization cards, bankbooks, work permits, insurance cards, learner’s permits, letters, birth certificates, library cards, initialed jewelry, unsigned credit cards, and voter’s registration cards.

You may also wish to take these precautions: Photograph customers and their identification, and verify their address and telephone number in the local telephone directory or with the information operator.

Regardless of the type of identification you require, it is essential that you compare the signature on the check with the one on the identification. You should also compare the customer with the photograph and/or the description on the identification.

To recover double or special damages for bad checks, in most states you must post a sign warning customers of the law and send two written notices to customers that their check has been dishonored. If a customer’s check is returned for insufficient funds, you can recover damages. If a customer writes a check on a closed account, you can recover up to double damages. Make photocopies of all checks for your records.

Step #5: Know How to Skip Trace

If customers stop paying, their phone has been disconnected, and you cannot find them, use these resources to locate these debtors and their assets:

City directories
Post office (for a forwarding address)
A customer’s employer
Department of motor vehicle license and registration records
“In case of emergency” name and address or closest relatives listed on a credit application
Credit reports
Law journals
Old files
The Internet
Skip-tracing services
Tax accessory
Credit bureau reports
Neighbors
Directory assistance
Dun directories

Step #6: Know What Collection Practices Are Prohibited

Although credit grantors are excluded from the provisions of the Fair Debt Collection Practices Act, the District of Columbia and the following states include creditors in their debt collection laws: Arkansas, California, Colorado, Connecticut, Florida, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New York, North Carolina, Oregon, Pennsylvania, South Carolina, Texas, Vermont, West Virginia, and Wisconsin.

You are prohibited by law from doing any of the following:

Simulating a law enforcement officer or a representative of any government agency
Knowingly collecting, attempting to collect, or asserting a right to any collection fee, attorney fee, court cost, or expense unless such charges are justly due and legally chargeable against the debtor (see step #3)
Disclosing or threatening to disclose information affecting the debtor’s reputation for creditworthiness with knowledge or reason to know that the information is false
Communicating or threatening to communicate the nature of a consumer claim to the debtor’s employer before obtaining final judgment against the debtor. (However, you may communicate with the debtor’s employer to execute a wage assignment agreement if the debtor has consented to such an agreement.)
Disclosing or threatening to disclose information concerning the existence of a debt known to be disputed by the debtor without disclosing that fact
Communicating with the debtor or any member of his or her family or household with such frequency or at such unusual hours or in such a manner as can reasonably be expected to abuse or harass
Threatening any action that you, in the usual course of your business, do not in fact take
Claiming to enforce a right with knowledge or reason to know that the right does not exist
Falsely using a communication that simulates in any manner legal or judicial process or that gives the appearance of being authorized, issued, or approved by a government agency or attorney-at-law

Step #7: Don’t Procrastinate

The longer you wait to sue, the less your chances of successfully recovering the debt. Accounts that are 90 to 120 days in arrears should be turned over for collection. Although there is a four-year statute of limitations (the time during which a suit can be started) for contracts for the sale of goods, these time periods can be renewed or stopped.

The statute of limitations starts all over again when

the debtor signs an acknowledgement of the debt, or
the debtor makes a partial payment.

The statute of limitations stops running when

the debtor is outside the state,
the debtor is using an alias,
the debtor is adjudged insane (maximum ten years),
the debtor is in the military, or
the debtor has filed a workers’ compensation claim.

Step #8:Pursue All Responsible Parties

There may be more than one individual who is responsible for the debt. Do not overlook the following possibilities:

Partners. Each partner is responsible for debts of the partnership. Check the business certificates in the county clerk’s office for the names and addresses of the individual partners.
Guarantors of payment. They are responsible if the guarantee is in writing.
Deceased debtors. File a proof of claim with the surrogate or probate court. If there is no will, those who have inherited property from the decedent are responsible for his or her debts.
Spouses. They are responsible if the creditor relied on their credit.
Parents. They are usually responsible for their children’s necessities until they reach age 21.

Step #9:Find a Good Collection Attorney

A good collection attorney can help you collect your delinquent accounts faster and with greater success. Ask the attorney if he or she provides

"same-day service" for installment loan collections, credit card delinquencies, bankruptcy motions, and foreclosures;
instant answers to your legal questions by telephone or e-mail at no charge;
educational services and publications to keep you up-to-date on the latest developments in collection and bankruptcy law;
every possible effort, including contempt proceedings, to locate debtors and their assets;
pre-legal dunning by collectors;
national coverage by electronic referrals;
instant status reports to keep you informed of the progress of your cases;
computerized skip-tracing services;
free training of your employees; and
strict compliance with the Fair Debt Collection Practices Act.

Attorneys in many instances can give you just as good service as a collection agency with fees that are no higher. Some firms contact debtors both by telephone and in writing. Valuable time is saved by turning your accounts directly over to an attorney. Payment negotiation can be accomplished while suit is in progress.

Mechanic’s Liens

If you do remodeling work for a property owner who refuses to pay your bill, you can put a lien on his or her home without first having to sue. To obtain a mechanic’s lien, a laborer or material man must improve real estate with the owner’s consent and file a notice of lien.

A mechanic’s lien diminishes the value of real estate but does not make it un-salable. It merely makes a sale more difficult by rendering the title unmarketable. A mechanic’s lien grants a builder or material man the right to have the debt paid by a foreclosure sale of the property.

Laborers/Material Suppliers

The following persons who perform labor or furnish material for the improvement of real estate are entitled to a mechanic’s lien: contractors; subcontractors; laborers; material suppliers; landscape gardeners; nurserymen; or sellers of fruit or ornamental trees, roses, shrubbery, or vines.

A material supplier is one who furnishes building materials; supplies machinery, tools, or equipment; compresses gases for welding or cutting; or supplies fuel or lubricants for machinery and motor vehicles.

Improvements

Real estate improvements include demolition, erection, alteration, or repair; work done and materials furnished for permanent improvements; drawings by an architect, engineer, or surveyor; the reasonable rental value for the use of machinery, tools, and equipment; and the value of fuel and lubricants used.

Consent

The work or materials must be with the consent of the owner or the owner’s agent, contractor, or subcontractor. Consent may be implied from the owner’s conduct.

Where a building contract is made with a husband or wife and the property belongs to either or both of them, the spouse who signs the contract is presumed to be the agent of the other. However, the other spouse may, within ten days after learning of the contract, give the contractor written notice of his or her refusal to consent to the improvement.

Notice of Lien

The lien is created by filing a notice of lien with the county clerk. The notice of lien must be properly filed in order to be legally effective.

Notice to the property owner is required so the owner can ascertain whether the material was actually furnished or the work was actually performed and its value. The amount of the lien is the value, or the agreed price, of the labor performed or materials furnished plus interest. This includes materials manufactured but not delivered.

If you are entitled to a mechanic’s lien, see an attorney so that all technical requirements are strictly followed

How to Collect a Money Judgment

Even if you win a money judgment against a customer for an unpaid bill, you may not always be able to collect the judgment. It is your responsibility to take the necessary action to collect your judgment.

If you have not received your money from the defendant within 30 days after he or she has received notice of the judgment, you should contact the defendant. If the defendant refuses to pay you or if you are unable to reach the defendant after several attempts, it will be necessary to use the services of an enforcement officer, such as a sheriff, marshal, constable, or police officer (whoever is empowered to enforce judgments of the court where you sued) to help collect your judgment.

Your chances of collecting the judgment depend on the resources of the defendant and the type of information you provide about the nature and location of the defendant’s resources or assets. The likelihood of having your judgment satisfied is remote if the defendant has no known property or income, has prior judgments, and has a very low salary or other income. If the defendant has other judgments against him or her, you may have to wait your turn to collect.

Your chances of collecting greatly increase when you can supply the enforcement officer with such specific information as the license number and description of the defendant’s car and where it is usually parked, bank account numbers, and employment information. If you can supply the name and location of the bank where the defendant has savings or checking accounts, the enforcement officer can seize money in the defendant’s accounts and use the funds to satisfy your claim.

To ascertain the location of the defendant’s bank, look at the back of a canceled check that you may have given to the defendant, or check your records to locate checks you may have received from the debtor in the past. If you are unsure where the defendant maintains an account, you may use an information subpoena to inquire of any bank whether the defendant has an account there. You must provide the enforcement officer with a notice to garnishee. After the defendant’s account has been seized, the judgment and interest that has accrued on it will be paid to you along with reimbursement for the expenses that you incurred enforcing the judgment.

If the defendant is employed, you may be able to collect your judgment from the defendant’s salary. To do so, you must use an income execution. If the defendant fails to pay the judgment after the income execution has been served, the enforcement officer will serve a copy of the income execution on the defendant’s employer, who must make deductions from the defendant’s wages.

If the employer fails to honor the income execution, it will be liable for the amount of the judgment. If the defendant changes jobs, you will need to locate the new employer and start the process all over again.

When giving the enforcement officer the employer’s name and address, you must pay a fee in advance for the income execution. You are entitled to recover this fee (in addition to your judgment plus interest) from the wages turned over by the defendant’s employer.

If the defendant owns real estate, you may be able to collect your judgment from its sale or have a lien placed against it.

A judgment can also be satisfied from the sale of personal property, such as an automobile, stocks, and bonds. However, certain property, such as clothing and basic household goods, is exempt. You must provide the enforcement officer with the model, year, and license plate number of the vehicle and a property execution. You can determine if the defendant owns an automobile by filling out a registration information request at the department of motor vehicles. The execution against a motor vehicle is not always practical, especially if there is an unpaid auto loan or if the automobile is old and not in very good condition. The expense of seizure, towing, and storing of the vehicle and of advertising and conducting an auction sale may not justify the effort.

If you are unable to locate any of the defendant’s assets, you may conduct a discovery proceeding that requires the defendant to appear before a court to answer questions about any property he or she owns. You must prepare a subpoena to take the deposition of the judgment debtor.

You may have the court order a self- employed defendant to make periodic payments out of earnings by making a motion for an installment payment order for which you will need an attorney’s assistance

Consumer's Right to Attorney Fees

Whenever a consumer contract entitles the creditor or seller to recover attorney fees and expenses from the debtor or buyer for a breach of contract, it is implied that the creditor will be obligated to pay the attorney fees and expenses of the debtor or buyer if the creditor breaches the contract or the consumer successfully defends the suit brought by the creditor or seller. This right cannot be waived by the consumer.

Bankruptcy

If your company is experiencing serious difficulty in meeting its debt obligations, contact an attorney before your business suffers disruption. An attorney can assist your company in either (1) reaching an agreement with all of your creditors to extend repayment of your debts and avoid the necessity of bankruptcy, or (2) obtaining the protection of the U.S. Bankruptcy Court’s automatic stay if all of your creditors will not agree to a voluntary repayment plan and are threatening to proceed with collection efforts such as judgments, liens, and property seizures.

An attorney can determine whether bankruptcy is appropriate for your company after reviewing your debts, assets, mortgages, sources of income, contractual obligations, leases, pending and future lawsuits by or against you, judgments, liens, and recent asset transfers.

As soon as a bankruptcy petition is filed, your business receives the protection of an automatic stay, which prevents all listed creditors from any further collection activities against it. The court sends notices to all creditors listed in the petition, ordering them to cease any collection efforts. The court also sets a date for the first meeting of creditors at which they may question you about the business’s property, debts, and other relevant facts.

The following debts are not dischargeable in bankruptcy: (1) maintenance and support ordered in a decree of dissolution of marriage; (2) certain unpaid tax debts; (3) certain student loans; and (4) fines and restitution ordered in criminal cases.

The bankruptcy court may recover fraudulent conveyances made within a year before the filing of the petition. A fraudulent conveyance is a transfer made without the receipt of equivalent value in return, or a transfer made with the intent to deceive or defraud creditors. A preference is a payment on account of debt that is made within a limited period (usually 90 days prior to filing for bankruptcy), which gives a creditor more than it would expect to receive if your property were liquidated. The bankruptcy court may recover these transferred assets.

Individuals may file for either liquidation under Chapter 7 or for a repayment plan under Chapter 13. Farmers may use a repayment plan under Chapter 12 or liquidate. Chapter 12 is more liberal than Chapter 13 in that there is an allowance for income that is seasonal in nature and a much higher total debt limitation than Chapter 13. Corporations and partnerships may use a repayment plan under Chapter 11 or liquidate.

Chapter 7 Liquidation

Most types of debts will be discharged under Chapter 7, which allows the debtor to make a "fresh start." However, some assets are likely to be liquidated, and the bankruptcy will appear on the debtor’s credit record for up to ten years. The debtor turns over all nonexempt property to a bankruptcy trustee. The trustee sells that property and uses the proceeds to pay the creditors. Property that is exempt under state or federal laws may be retained by the debtor. Exempt property includes the following:

A certain amount of equity in a personal residence (However, a bank holding a mortgage retains most of its rights under the mortgage; if payments are in arrears and a debtor cannot cure or correct the default, the mortgagor may be able to foreclose on the residence.)
A certain amount of equity in an automobile
Personal and household items within limits
Tools of your trade

After exemptions are taken into account and administration expenses are paid, unsecured creditors will receive the remaining proceeds proportionately. The portion of unsecured debts not fully paid will be discharged under an order from the bankruptcy court except for non-dischargeable debts such as

alimony and child support,
certain taxes,
certain student loans,
certain consumer credit debts incurred shortly before the bankruptcy proceeding,
debts incurred through fraud or larceny, and
liability for damages caused by willful and malicious acts.

Chapter 13 Repayment Plan

If you have stable income and debts not higher than certain limits, you may be able to use a Chapter 13 repayment plan. This may involve repaying all of your debts over a three- or five-year period.

The court also may reduce the size of the debt to be paid. The unpaid amount may be discharged except for secured debts (e.g., mortgage loans to the extent of the value of the property) and non-dischargeable debts (e.g., alimony and child support obligations and certain taxes).

Your proposed repayment plan will be presented to a bankruptcy trustee. If the plan is approved by the court, unsecured creditors must generally accept it as long as they will receive as much of the principal due to them as they would if the debtor’s property were liquidated.

After the bankruptcy court approves your repayment plan, you must make monthly payments as required by the plan. If you cannot make the scheduled payments called for by an approved Chapter 13 plan, then your bankruptcy will be converted to a Chapter 7 liquidation.

The advantages of Chapter 13 are as follows:

Debtors can keep their property while the repayment plan is in effect. Liquidation of assets may not be necessary. The owner of an unincorporated business may continue to own and operate the business under a Chapter 13 repayment plan. In a Chapter 7 liquidation, the business or its assets will be sold.
The automatic stay protects co-debtors, cosigners, or guarantors of consumer debt while the plan is in effect.
The bankruptcy court may approve the reduced payments on secured debts.
Chapter 13 allows you to discharge debts that are not dischargeable under Chapter 7, such as debts resulting from fraud, embezzlement, and larceny and debts resulting from injury caused by willful and malicious acts and certain educational loans. However, Chapter 13 will not allow a discharge for certain long-term debts where the last payment under the note is due after the Chapter 13 repayment period.
Debtors who receive a Chapter 13 discharge do not lose the right to file for Chapter 7 bankruptcy in the future.

Chapter 11 Repayment Plan

The bankruptcy code protects financially troubled corporations or partnerships by allowing them to continue in business as they satisfy their debts. The business may be allowed to reduce its debts and pay its remaining debts over three to five years and can continue operating under the control of the current owner. However, if the creditors demonstrate that there is unfit management or fraud, a trustee will be appointed to run the company.

Under Chapter 11, the business must propose a good-faith business plan that shows that projected income over the repayment period will be adequate to cover its restructured debts. The plan must also show that the creditors will receive more from the debt restructuring and extended payout than they would from the liquidation of the company. Creditors are allowed to vote on the approval of the plan.

Businesses with debts under $2 million can opt for the "streamlined" Chapter 11 process in which only one court appearance (instead of two or more) is required, creditors must file repayment plans within 100 days of filing (rather than 120 days), and the plan’s confirmation deadline is 160 days (instead of 180 days). This can result in saving attorney and trustee fees.

Bankruptcy as a Creditor

Secured creditors are usually more likely than unsecured creditors to recover at least part of their claim in bankruptcy. Creditors’ rights depend on whether their claim is secured, the nature of the security interest, and whether the debtor has filed under Chapter 7, 11, or 13.

If the debtor does not reaffirm the debt, secured creditors generally seek to recover their collateral. Creditors may ask the bankruptcy court to lift the automatic stay for cause such as where its interest in the property is not adequately protected or the debtor does not have enough equity in the property and the property is not necessary to the debtor’s reorganization.

The automatic stay does not apply to co-debtors, guarantors, or partners of the bankrupt.

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