Collecting Your Money

In my many years of practice, I have encountered many clients who have trouble collecting debts owed to them. My first such encounter was a “simple” collection matter. I asked the client to forward his “file” and it consisted of a single invoice (Names are changed for ethical reasons):

ABC Company

1234 Main Street

City, State 11111

July 1, 20–

Mr. & Mrs. Smith

For services rendered $5000.00

Yes, this was the ENTIRE file presented by my client. No contract, no address, no required disclosures – merely the invoice shown above.

While businesses have matured and the obvious mistakes, both tangible and implied, characterized by this invoice are not longer made, this document is symbolic of errors of omission and commission present even in today’s business. Summarizing my experience in collecting debts, errors are categorized as follows: (1) Enforcement issues, and (2) Legal issues.

Enforcement Issues

Initially a company should be sure any contract entered into is enforceable. This means more than a “meeting of the minds.” It also requires that covenants contained in your agreement are enforceable.

Webster simply defines a contract as “A formal agreement between 2 or more persons.” In actuality, it is a bit more complicated. Black’s Law Dictionary is a bit more illustrative of the elements of an enforceable contract by stating a contract is “An agreement, upon sufficient consideration, to do or not to do a particular thing.” It goes on, “It is [an] agreement creating [an] obligation in which there must be competent parties, …legal consideration…, [and] mutuality of agreement…”.

Legal mumbo-jumbo, yes, but the enforcement of your agreement depends upon your ability to prove the defined elements of contract. To enforce your contract these elements must be present in any agreement.

So, what should be contained in my contract in order to enforce the agreement? Here is a short list:

1. Obtain the FULL and LEGAL NAME(S) of the other party.

2. Get the CORRECT ADDRESS. The location where you are performing your services or where you are delivering the goods may not be where the party resides or its main place of business..

3. Be sure you fully define what service or material you are providing.

4. Set forth the terms and amount of your compensation as well as when payment is due.

5. If the other party is preparing the contract make sure all terms, exhibits, and addendums are attached to the executed copy.

What additional information should I collect? Sometimes, in spite of your efforts issues arise regarding the terms of the contract. The following is a list of recommendations:

1. Retain summaries of telephone conversations you have with customers.

2. Maintain labor and material job costs.

3. If possible obtain the social security number or federal identification number of the other party.

Legal Issues

Beyond the ordinary terms of any contract are statutory and legal requirements that impact on the enforceability of any contract. Consumerism, politics and legal precedent have posed additional burdens upon any business.

Over the years, the courts have ruled upon many issues, particularly the enforceability of certain covenants of a contract. Among the covenants applicable are:

Liquidated Damage Clauses – Uniformly, most states have looked unfavorably upon these clauses. Typically, they call for the party to pay a given amount as “liquidated damages” for the party’s of certain terms of the contract. Generally, the courts have severely limited the enforceability of such clauses. The courts have ruled there must be some correlation between the stipulated damages and the actual damages incurred by the contractor. The burden is upon the creditor to prove these damages. The inability of the creditor to prove these damages renders the clause unenforceable.

Warranty Waivers – Most contracts have some limitation to the warranties given by a party. With the advent of the “Uniform Commercial Code,” which has a major impact the law relating to sales of goods, the waiver of warranties or other representations require definitive language to render them enforceable. Each state has promulgated its own rules. I strongly recommend you seek assistance of a professional to determine whether your limitation of warranties clause is statutorily correct.

Collection Clauses – Typically these clauses call for the owner to pay all costs of collection, including attorneys fees, in the event the contractor must sue to collect. The courts seldom enforce these clauses. The reasoning behind this is based upon “public policy,” i.e. that the clauses are fundamentally unfair.

The states have placed additional statutory burdens upon the creditor. Among laws having applicability are:

Consumer Protection Laws – These laws generally define what are unfair sales practices and run the gambit from “bait-and-switch” schemes to sales tactics. Among the more pertinent laws relate to home solicitation sales and estimate requirements. Both laws require statutory language be included in every contract. Home solicitation laws generally require specific language notifying the consumer of their right to cancel a contract within a specific period of time and a form containing additional language outlining their rights. Estimate laws require the contractor to notify the consumer of their right to obtain an estimate for services to be rendered. Both laws materially affect the enforceability of a contract as they provide leverage for the consumer in the event the contractor fails to comply with these statutory requirements.

I also suggest a detailed reading of the provisions of this act. This act has provisions that regulate more than “home solicitation sales.” Consumer protection laws are used to protect the personal consumer against private lenders, auto repair shops, small furniture stores, etc. The regulations enacted under the statutory law has broadened the provisions of the act enormously.

Debt Collection Laws – The Federal government has enacted the “Fair Debt Collection Act” which sets forth rules a collector must follow when collecting a debt on behalf of a client. A number of states have incorporated these rules indirectly by setting forth a violation of the act as an unconscionable act under their consumer laws.

Regulation “Z” – This Federal regulation is applicable to those regularly extending debt. The regulation defines who is a “creditor.” Those thinking such regulations only to banks or other such institutions are patently wrong. The definition includes many small businesses such as car dealers, rental companies, and even individuals allowing for payment over time.

As you can see there are a number of steps you can take to protect the collectibility of monies owed you. Additionally, there are steps you can take to prevent legal entanglements that could prevent the collection of monies owed you. A little accounts receivable management using some of the techniques and preventive measures outline above will go a long way in insuring the collection of money owed you.