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What can
I do to put myself in the best possible
position for successful collection of my
receivables?
The single
most effective thing that a creditor can
do to optimize collections of its
receivables (short of never selling on
credit) is to “paper the file.” Insist on
the completion of credit applications or
written contracts at the outlet of the
business relationship. Seek financial
statements, personal guaranties and
security interest right from the start;
once the account starts to sour, it is
unlikely that the debtor will provide this
information. Also, keep in touch with
your customers and note of what projects
they are working on or where they are
employed. Information is the best
ammunition.
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I do not
want to sue the debtor because we still do
business, but the account is very large
and I am concerned; it there anything I
can do? 
Where there
is an ongoing relationship between
creditor and debtor, there are options
available that often cease to exist once
an account has been sent to an attorney
for collection. It is in this instance
that you could propose at least one of the
following: (a) that the debtor grant you
some security interest in its assets; (b)
that the old balance be reduced to a
promissory note with an agreed on payment
schedule; (c) that any future business s
be conducted on a “COD plus” basis; or (d)
that the debtor execute a joint check
agreement or assignment of some kind so
that the debtor’s debtors become liable to
the creditor as well. The rationale for
options (a) and (c) should be obvious.
Execution of a promissory note for the old
balance not only establishes an
acknowledged amount of the debt and sets
up payment terms that the parties can live
with but also often allows the creditor to
take the debt off its books as an open
account, which allows it to be handled
differently for tax purposes. The final
option is most effective in cases where
the good or services provided to the
debtor were for the use of benefit of a
third party, as in the case of a
creditor-supplier selling goods to a
subcontractor for the use in connection
with its contract with general
contractor. In that case, a joint check
agreement executed by the subcontractor
and the general contractor results in
primary liability from the general
contractor to the creditor, thereby giving
the creditor substantially greater
assurance of being paid.
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I have a
promissory note (or a personal guaranty or
a judgment) from the debtor – so I am
secured, aren’t I?
No, you most
certainly are not. While such documents
aid in collections- in the case of a
promissory note, the defenses that the
debtor can raise are very limited (did the
debtor sign it or not? Did the debtor pay
it or not?); in the case of a personal
guaranty, the assets of the guarantor are
available for satisfaction of the debt in
addition to the assets of the primary
debtor; and in the case of a judgment, it
is just one more paper that says the money
is owed- none of these documents legally
constitute security. Security, for
purposes of debt collections an, most
importantly, insolvency proceedings, it an
affirmatively granted, publicly recorded
equity interest in certain specified
property of the debtor. It is most often
effectuated through a mortgage, a security
agreement or Uniform Commercial code (UCC)
financing statements and must be properly
executed and recorded to be legally
binding. While it is not necessary that
you be assisted first, that you do so.
Failure to complete and record the
required documentation in accordance with
the law will negate any security interest
you may believe yourself to hold.
Security may also be obtained by court
order.
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How do I
decide when to refer an account to
collections?
This is a
business decision that each creditor must
make for himself or herself on a case –by
case basis. In general, from the
attorney’s perspective, the younger the
claim, the quicker and easier the
collection. The client, however, would
just as soon forgo payment of attorney
fees unless and until he or she feels that
he or she has “worked the claim” to
death. Probably, the answer is somewhere
in between. Some claims, because of their
nature, have to be referred promptly
because the remedies sought have short
status of limitations (e.g. notices of
contract, bond claims). Others are very
time sensitive, such as actions to reach
and apply where you seek a security
interest in money due the debtor by a
third party that is to be paid imminently,
or when you have notice that the debtor is
transferring assets, thereby divesting
itself of the ability to pay your debt.
The average collection is probably
referred after 120 days and before five
years (in Massachusetts, the contract
stature of limitations is six years). Of
course, as the claim gets older, the
debtors move, witnesses’ memories dim,
documents are destroyed and everything
about the claim gets more difficult, so it
is advisable not to sit on claims too long
if you want to maximize your likelihood of
success. As a general rule, those
creditors who have contracts providing for
the debtor’s liability for attorney fees
turn over claims more quickly as they have
less to lose in the bargain. Remember, a
judgment is good for 20 years in
Massachusetts. Thus even if the debtor is
currently not in a position to pay its
obligation, it is better to reduce it to a
judgment promptly and check the debtor’s
status periodically thereafter than to
simply let it go.
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How long
will it take to collect the debt once it
goes into collections?
Never fall
into the trap of estimating a quick fix.
Explain to the client that while you are
always hopeful that collection will be
quick, this is most often not the case.
It depends on t where that case is filed
and what remedies you seen in addition to
the cooperation (or lack thereof) of the
debtor. Cases filed in district courts,
theoretically at least are suppose to be
brought to trial approximately one year
from the date of filing. Cases in
Superior Court generally will not be
matters do not have to be tried, however.
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Who has
to pay the attorney fees?
The answer
is that the creditor does, with a few
specific exceptions, unless stated in
contract by debtor.
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Is there
anything I can do to be compensated for
the time and expense I incur as a result
of debtors give me bad checks?
Yes. Not
only can you bring criminal charges
against the signer of the check if the
check was given in a contemporaneous
exchange for good (an over-the-counter
transactions or COD payment, as opposed to
a payment on account) after two days’
notice by designated form, sent to the
debtor certified mail return receipt
requested, but there is also a civil
remedy. Under General Laws c.93 %40A, on
delivery of certain prescribed notices to
the debtor, certified mail, return receipt
requested, if payment in full of the
amount of the check plus any costs
incurred by the creditor is not make with
30 days,, and additional $100 to $500 per
check and attorney fees are to be awarded
to the creditor. Be aware, however, that
these remedies are only available if they
are specifically pled in your complaint.
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Once I
have a judgment, the debtor has to pay me,
right?
Well, that
is a gross simplification. Yes, the
debtor now has a legally enforceable
obligation to pay the debt, but that does
not necessarily mean that it will do so.
If the debtor does not have the money to
pay the debt, you may have to go on a
payment plan and accept payments over
time. The debtor may simply refuse to pay
the debt, in which case you must be
creative in locating and liquidating its
assets to satisfy your judgment. The
world could be paved over the uncollected
and uncollectible judgments obtained by
creditors over the years. Still an
experienced and knowledgeable collections
attorney will be able to give advice on
the most effective and efficient means to
collect the judgment, if any. Post
judgment collect is a category unto
itself.
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Can I
collect interest from the debtors?
In
Massachusetts, interest is set by the
statute at 12 percent per annum for both
prejudgment and post-judgment debts. In
the absence of writing to the contrary,
that rate will apply. Often creditors
will reflect a higher rate of interest on
invoices, statements or credit
applications; and so long as it is
requested in the pleadings, it will
usually be awarded. The court will
generally assess interest from the date of
demand, so long as it is disclosed, until
the date of judgment and include that
total on the execution. As a matter of
law, interest then continues to accrue on
a post-judgment basis. If the date of
demand is not noted in the pleadings,
interest will be assessed fro the date of
filing of the complaint.
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The debtor has filed bankruptcy; is there
anything I can do?
Yes. First,
if any deliveries of goods were made
within 20 days prior to the bankruptcy
filing, you are entitled to reclaim those
goods if immediate demand is made and the
goods are still identifiable.
Unfortunately, because of the short time
limits on that remedy, it is rarely
effective. Depending on the debtor’s
status, which chapter bankruptcy was filed
and the amount of your claim, you can and
should review the bankruptcy scheduled,
file a proof of claim and possibly
participate in a creditor’s committee. At
the very least, if your claim is
substantial, your attorney should attend
the Section 341 meeting (usually the date
is on the first notice you will receive)
to get an overview of the debtor’s assets
and liabilities and see what the debtor
anticipates as a result of the
bankruptcy. As a practical matter, it is
sadly true that when a debtor files
bankruptcy, there is generally little
available for creditors, particularly
those that are unsecured; thus creditors
too often receive the notice, file a proof
of claim and basically close their file.
Frankly, that is just what the debtors
hope the creditors will do. At least by
attending (or having your attorney attend)
the Section 341 meeting, you will get some
notion of whether there might be assets to
pay a dividend to you. If so, you do
yourself a disservice by not paying
attention to the proceedings, because if
the debtor does not believe the creditors
are watching, those assets tend to
disappear.
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