Advanced Issues in Commercial Collections
Written By: Brad Magill, Esq., Managing Lawyer of the Collection Law Group
Navigating the complexities of commercial collections requires a deep understanding of the legal and strategic challenges that can arise when pursuing delinquent accounts. This article explores three advanced issues that frequently impact creditors and collection professionals: the importance of UCC filings in securing payment, addressing commercial debtors who improperly invoke the Fair Debt Collection Practices Act (FDCPA), and effectively handling debtors who leverage credit reporting concerns in negotiations. By analyzing real-world case studies from The Collection Law Group, we provide practical insights into how businesses can protect their financial interests while remaining compliant with applicable laws.
The Importance of UCC Filings for Collections: A Case Study
One of the cornerstones of successful collections is imposing consequences upon debtors for nonpayment. For instance, many times a debtor only finds a way to repay a debt when they are informed that litigation will be initiated if they don’t. Another consequence that can motivate a debtor to pay is when a UCC filing is in place. This is because a first position UCC filing puts all other creditors on notice that they are in a lower position against the assets of the debtor. This is important from a collection perspective because being in the first position may prevent other creditors from lending money to the debtor. This protects the original creditor from having to deal with other lenders when the original loan goes awry. This case study documents a case in which a delinquent debtor only became interested in resolving a debt when he realized the importance of releasing a UCC filing.
The creditor in this case is a large financial institution. The debtor is a health and wellness center. The total amount owed was about $30,000. Of this, about $20,000 was unpaid principal and $10,000 was unpaid fees. The case was referred to our outside collection law firm after no payments were made for about a year. The creditor reported that the debtor had been contentious and was refusing to pay.
We first contacted the debtor by phone, and he expressed an interest in resolving the matter with a lump sum payment. He stated that he had been working towards a goal of getting all UCC filings against him released as the UCCs were hindering his ability to raise additional capital. He told us that he had been prioritizing paying off several Merchant Cash Advances ahead of making payments to our client. He spoke at length about his perception that the fees on his account were unfair and about his antagonistic relationship with the creditor. He asked if we could get the creditor to waive the fees and then he would make a lump sum payment to settle the matter in full for the discounted amount.
We discussed the matter with the creditor, and they decided to waive half of the fees and offer a discounted lump sum settlement of $25,000 payable in one month. The debtor initially accepted this offer. He was very concerned about getting a settlement letter, which we promptly prepared.
It turned out that the debtor thought that the settlement letter would be enough to improve his credit with respect to getting a new loan. When we explained that he actually had to pay the settlement to initiate the process of releasing the UCC filing, he then revealed that he didn’t have the money to pay the settlement.
After some negotiation, we were able to get the creditor and debtor to agree that he could pay off the amount of $25,000 at the rate of $1,000 per month. A new settlement letter was prepared outlining this agreement. After 3 payments were made, the debtor contacted a credit bureau and tried to use the new settlement letter to improve his credit. When this didn’t work, he contacted us to see if we could “fix his credit”. Our Managing Lawyer again explained that the settlement had to be completed before the UCC filing would be released.
The debtor made one more monthly payment with the goal of completing the settlement with a lump sum the following month. Paying off this loan now became a top priority to him because he believed the UCC filing was hurting his business. The next month, he made the payment to complete the settlement. Once the payment cleared, we instructed the creditor to initiate the process of releasing all UCC filings/liens related to the loan.
The main take away from this case study is that when a UCC is filed against a debtor, collectors have a powerful tool to motivate a debtor to pay. This is because the UCC filing often has real life consequences for debtors. There were many signs that this debtor might not have paid to resolve this debt if the UCC had not been filed. Also, as in this case, collectors can work with a debtor to complete a payment plan early when the debtor is invested in getting a UCC filing released. Finally, although the UCC is filed by the creditor, collectors can encourage their clients to make filing a UCC standard practice as part of their loan underwriting process.
Collecting From Commercial Debtors Who Cite the Fair Debt Practices Act: A Case Study
The Fair Debt Practices Act (FDCPA) (15 USC 1692 et seq.) is a U.S. statute that applies to consumer collections. It was designed with the purpose of eliminating unfair, abusive, and deceptive collection practices. It does not apply to commercial collections, although commercial debtors frequently do not know this. Still, the FDCPA can be used as a guide for commercial debt collectors to operate professionally and ethically. This case study describes a case in which a debtor cited the FDCPA to try to control commercial collection activity and how that was handled to result in a successful collection outcome.
The creditor in this case is a large financial institution. The debtor is a software company. The total amount owed was about $55,000, with about $40,000 being unpaid principal and 15,000 being unpaid fees. The case was referred to our outside collection law firm after no payments were made for about five months.
We initially contacted the debtor and he agreed to a $2,000 per month payment plan to pay off the total amount due. However, he then did not make any payments and became unresponsive for six months. We then received a certified letter from him stating that “pursuant to the Fair Debt Collection Practices Act, 15 USC 1692g Sec. 809 (b), I am disputing your claim, and requesting validation of the debt.
In this letter, the debtor stated that his was not a refusal to pay, but rather a request for evidence that he had any legal obligation to pay the debt. He also requested that we cease all collection activity until we send him the information that he had asked for and that he would file a complaint with the Federal Trade Commission and the state Attorney if we do not comply. There were also further threats of legal action against us if we had caused a negative mark on his credit or if we continue collection efforts without responding to his debt validation letter.
After reviewing this letter, our Managing Lawyer called the debtor and left a voicemail. In this voicemail, he first said that we had received the letter and would be emailing documents that would provide evidence to validate the debt. He then, in a brief and clear way, stated that the Fair Debt Collection Practices Act does not apply to commercial debts even though we wanted to respond to the debtors requests out of courtesy. Our Managing Lawyer also invited the debtor to call him if he would like to discuss the matter further, either before or after reviewing the requested documents.
Within a few days, our office gathered and then emailed the Financing Agreement, signed Personal Guaranty, and Statement of Account for the loan to the debtor. The debtor very politely responded to this email and said he would call us in a few days after reviewing the documents. He followed through with this call and discussed the matter with our Managing Lawyer who further explained how the Fair Debt Collection Practices Act only applies to consumer debts. However, that said, our Managing Lawyer also said that we still will always treat the debtor fairly and respectfully, and be happy to provide any evidence that the debtor needs to validate the debt.
At this point, the debtor explained that he wanted to resolve the matter but could not afford the $2,000 per month payment plan that he had previously agreed to. Our Managing Lawyer asked him how much he could afford per month and the debtor stated that he needed to discuss the amount with his wife. He asked if we could schedule a call in a few days to decide upon a payment plan that he could afford. As the call was coming to an end, the debtor thanked our Managing Lawyer for the information he provided about the Fair Debt Collection Practices Act and for his professionalism in his response to the letter.
In a few days, a payment plan of $850 per month was put in place, with a plan to assess increasing payments every 3 months. The first payment was made immediately, and the debtor was responsive to all future communications. The monthly payments eventually increased to $2,000 per month until the debt was paid in full.
There are several take aways from this case study. First, it is important that debt collectors are well informed about the Fair Debt Collection Practices Act and it’s application to only consumer debts. When a debtor cites the FDCPA incorrectly, debtor collectors can educate the debtor about it’s applications. Still, the FDCPA can be used as a guide to avoid unfair, abusive, and deceptive collection practices for commercial debts. Finally, even when a debtor uses threatening language to make demands of a debt collector, the response still needs to be professional and cooperative to demands that are reasonable. This case study provides an example of how to go from a debtor incorrectly citing the Fair Debt Collection Practices Act to get to a successful collection result.
How To Approach Debtors Who Make Demands About Credit Reporting: A Case Study
As debt collectors, we often deal with debtors who are concerned about their credit report. In fact, sometimes this concern is their primary motivation to resolve a delinquent debt. Debt collectors can use this motivation to their advantage, but it is important that they understand what can and cannot be done with regard to credit reporting. This case study describes a case in which a debtor initially made agreement to a payment plan contingent on his demands about credit reporting. In presenting this case, this newsletter will describe how our collection law firm approached this debtor to achieve a successful outcome. This will also include a discussion of the reporting regulations and debtor rights involved in credit bureau reporting.
The debtor in this case is in the property management industry. The creditor is a large financial institution. The amount owed was about $80,000, with about $7,000 being unpaid principal and $10,000 being unpaid interest. The debtor signed a personal guarantee for the loan.
The debtor responded to our initial email contact by providing the contact information for his lawyer. Our Managing Lawyer contacted his lawyer who requested that we email him all of the loan documents. We then emailed him the Statement of Account, Financing Agreement, and Personal Guarantee for the account.
After reviewing these documents, the debtor’s lawyer came back with a proposal to pay off $74,000 at the rate of $2,000 per month. The creditor agreed to this payment plan and we prepared a Settlement Letter. However, the debtor did not sign the Settlement Letter and the first payment was not made as agreed.
When Our Managing Lawyer followed up about the payment plan, the debtor’s lawyer emailed that the client needed negative creditor reporting removed or changed to settled in order to continue paying. Our Managing Lawyer responded that we want to work with him to resolve this for his client, but we have to do it within the constraints of the law and our client’s policies. He explained that in general credit reporting that is accurate cannot be removed, only inaccurate credit reporting. He added that if we are told about something inaccurate, we will work to get it removed. Our Managing Lawyer also informed the debtor’s lawyer that the account can’t be changed to “settled” until the settlement is complete and explained that if the debtor was interested in a lump sum settlement, that could expedite the process.
However, the debtor’s lawyer continued to argue that if we update the credit reporting to settled/current after 6 payments are made, the client will agree to the payment plan. The lawyer stated that the debtor needed the negative/past due payment reporting removed. Our Managing Lawyer responded that our client does make settlements based on credit bureau deletion or exclusions. He also stated the reality that the creditor cannot make any inaccurate reporting to the Bureaus and, if they do, the debtor can file a discrepancy complaint with the Bureaus to get any inaccurate information removed. Our Managing Lawyer also noted that once a settlement is completed, our client will initiate the process of releasing all liens/UCC filings related to the loan.
When asked if we could move forward on the above basis, the debtor’s lawyer responded that there has to be some way to get the credit reporting removed by the creditor or changed out of delinquent status when there is a payment plan in place. He stated that, if not, the debtor will not agree to any settlement no matter how good. Our Managing lawyer stood his ground, stating that, as a policy, our client simply does not change or alter anything to do with the credit bureaus. They just do not negotiate as part of any settlement to change the truth of past reporting. He then also explained that because of the above policy we recommend the following to debtors:
Have the debtor get copies of the credit bureau reports and if anything is not accurate, they can file a report with the bureaus to get anything inaccurate removed.
In addition to 1 above, the debtor can contact the creditor bureaus after they make all payments to us per the settlement agreement we have and tell the bureaus this matter has settled, and they would like the report to reflect that.
Additionally, our Managing Lawyer stated that if the debtor did not want to take care of the matter and do 1 or 2 above, then the outstanding debt will simply stay on their report and hurt their credit in the future. Finally, our Managing Lawyer stated that he truly believed it is best for the debtor to move forward with the settlement and take care of the credit bureau aspect on their own.
The debtor’s lawyer relayed this conversation to the debtor, who initially continued to refuse to agree to the payment plan. The debtor also said that the debt should not have been reported on his personal credit report because it was a business debt. The debtor then stated: “just let them proceed with a judgement”.
At this point, our Managing Lawyer responded that the reporting against the debtor personally was accurate as he signed a personal guarantee guaranteeing the money owed and as such the debt was a business debt. He again asserted that the debtor could accomplish what they want if they file correcting reports with the bureaus. Then, a few days after all this back and forth, the debtor asked us to send an agreement for $74,000.00 at the rate of $2,000 per month with the first payment to be made in the next month.
There are several take aways from this case study. First, it is of primary importance that debt collectors clearly understand what can and cannot be done with regard to credit reporting, both in terms of the policies of their clients and the procedures of the credit bureaus themselves. Improving their credit standing is often a significant motivator for debtors and resolving a debt will ultimately work towards this end. This can be explained to debtors to facilitate collections. However, debt collectors must take a firm stand if asked to report credit information that is against client policies or the law.
To conclude, successfully navigating advanced issues in commercial collections requires a combination of legal knowledge, strategic negotiation, and adherence to ethical collection practices. The case studies in this article highlight the importance of leveraging UCC filings to secure payment, properly addressing commercial debtors who invoke consumer protection laws, and managing debtor concerns about credit reporting within legal and policy constraints. By understanding these key aspects, creditors and collection professionals can enhance their ability to recover outstanding debts while maintaining compliance and professionalism. Ultimately, a well-informed and strategic approach to commercial collections leads to more effective resolutions and stronger financial protections for creditors.
About Brad Magill
Brad Magill, Esq. - The Collection Law Group, Inc.
Brad Magill is a lawyer and a CPA. He has spent the last 20 years of his professional career in the commercial accounts receivable management and commercial collection arena. Mr. Magill is not only a lawyer but a seasoned commercial debt collector and experienced business manager. Mr. Magill performs collection work on behalf of clients and also manages all collection litigation activity. Brad can be reached at brmagill@tclginc.com.