NASE Blogs

I'M HAVING TROUBLE COLLECTING A BUSINESS DEBT. WHAT CAN I DO?

Friday, March 25, 2011

Collecting a business debt while, at the same time, doing your best to keep the customer can be difficult. Sometimes you lose good customers and it seems there's little you can do about it. Ultimately you need to be paid.  Collection alternatives include mediation and/or arbitration, either of which suggest that you might not receive all of what you are owed.  You might prefer more direct action  before trying those options.  Consider trying one or more of the following:

 

1)  Offer to accept payments.  You have to negotiate this option and, of course, try to get a fairly large first payment.

 

2)  Offer to accept some discounted amount conditioned on receiving payment within some specified period, say 10 days, two weeks or a month, after which you withdraw the offer.  Sometimes it’s a good idea to put this kind of offer in writing.  Only you know what your profit would have been and how much room you have to negotiate, and only you know how badly you need to get some of the money they owe you.  Those factors will determine how much you might be willing to reduce the bill. 

 

3) Write them a hard-nosed collection letter.   There a many kinds of collection letters and there is no standard form to use.  The most effective ones seem to be those that threaten either to turn them over to the IRS for failure to report the unpaid debt as income or those that turn them over to an attorney, or both.  (See samples below).

 

4) Turn them over to a collection agency.  Such agencies are usually pretty effective but the downside is that they will usually want a fairly substantial percentage of the amount they collect as their fee.  Note: As a business owner YOU are not subject to the Fair Debt Collection Practices Act (“FDCPA”) when collecting your own debt, but any third party, including a collection agency, will be subject to the federal debt collection regulations. In some instances this gives you some advantages such as the ability to call the debtor after business hours.

 

5)  Actually turn the debt over to an attorney and pay him/her to collect it for you.  There are attorneys who specialize in debt collection and they’re usually pretty tough and good at what they do. Their fees are usually based on a percentage of what they can collect but some work hourly.  Remember that attorney fees are, to some degree, negotiable. When you threaten to use an attorney and file suit you can also add the threat of additional expenses such as reasonable attorney’s fees, courts costs, cost of service of process etc.  Fear of having to pay all of those additional costs will sometimes motivate a debtor to pay you.

 

 

SAMPLE COLLECTION LETTERS:

****************************************************

 

Date of letter

 

Address of client

 

 

            Re:  Your current debt to (name of your business)

 

Dear _________________:

 

Your current balance now due and payable is $__________ and this entire amount is more than ___ days past due. As you know, our normal terms require payment within 30 days after the original invoice is sent to you.  As you also know we have made numerous requests for payment.

 

This is our final request for payment-in-full.   You have ____ days from the date of this letter in which to pay.   If we do not receive payment by that date we will write off your debt off and it will become income to you for IRS purposes.   For that reason we are enclosing an IRS form W-9.   If you do not remit payment-in-full you must fill out this form and return it to us.  You will notice in the W-9 instructions under PENALTIES that you are required to provide us with this information and your failure to do so could result in both civil and criminal penalties. 

 

Next we will submit a form 1099-C - Cancellation of Debt Notice - to the IRS.  We can file the 1099-C without the information from your W-9 but doing so will increase the possibility that you will be subject to an IRS audit and resulting penalties and interest both for failure to submit the W-9 and for any unpaid taxes.  In the alternative we will turn this matter over to our attorney and in addition to payment-in-full we will seek attorney’s fees, court costs and fees and all other costs associated with collection procedures.

 

It is also possible that your credit report will be affected negatively.  It would be in everyone’s best interest if you would submit payment-in-full within ____ days.

 

Yours truly,

 

 

    signature

Printed name, owner/president/whatever

 

P.S.  Should you prefer to fill out the W-9 on an interactive form which you can then print and submit to us you can find that form at:  http://www.irs.gov/pub/irs-pdf/fw9.pdf

 

(Note to business owner:  If you plan to use this letter don’t be confused by the P.S.  It’s an actual Post Script to the collection letter and not an alternative for you.  Just delete these italics sentences, fill in the other information and you’re ready to print this letter, should you choose to use it.)

 

 

***********************************************

 

Date of letter

 

Address of client

 

 

             Re:  Your current debt to (name of your business)

 

 

Dear _________________:

 

Your current balance now due and payable is $__________ and this entire amount is more than ___ days past due. As you know, our normal terms require payment within 30 days after the original invoice is sent to you.  As you also know we have made numerous requests for payment.

 

This is our final request for payment-in-full.   You have 30 days from the date of this letter in which to pay.   If we do not receive payment by that date we will turn your debt over to our attorney who will begin immediate collection proceedings.  If forced to file suit against you our attorney will also seek reasonable attorney’s fees, interest, other costs of collection, and court costs and fees.  In addition, it is possible that your credit report will be affected negatively.  Ultimately, if we do not receive payment-in-full we will submit Form 1099-C to the IRS converting this debt to income for you and subjecting you to the possibility of an IRS audit, penalties and interest.  

 

It would be in everyone’s best interest if you would submit payment-in-full within ___ days. 

 

Yours truly,

 

 

   signature

Printed name, owner/president/whatever

Comment

  1. RadEditor - HTML WYSIWYG Editor. MS Word-like content editing experience thanks to a rich set of formatting tools, dropdowns, dialogs, system modules and built-in spell-check.
    RadEditor's components - toolbar, content area, modes and modules
       
    Toolbar's wrapper 
     
    Content area wrapper
    RadEditor's bottom area: Design, Html and Preview modes, Statistics module and resize handle.
    It contains RadEditor's Modes/views (HTML, Design and Preview), Statistics and Resizer
    Editor Mode buttonsStatistics moduleEditor resizer
      
    RadEditor's Modules - special tools used to provide extra information such as Tag Inspector, Real Time HTML Viewer, Tag Properties and other.