Collections: Debt Collections: You Need a Plan, From the Beginning

     Any business or lending institution that extends credit to its customers or members will inevitably be faced with bad debts. To insure maximum collection results, creditors should establish credit and collection policies before a problem occurs. 

     Before you extend credit, there are several things that you can do to reduce your risk. 

     1. Obtain full names, addresses, telephone numbers, places of work, social security numbers and dates of birth. 

   2. Obtain the name of the customer's bank, branch, and account number. 

     3. Review a credit report. 

     4. Ensure that all credit terms are clear. 

     5. Have personal guarantees for small businesses. 

     6. Perfect security interest in events of large credit. 

     When accepting personal checks, take the following precautions: 

     1. Insist on two pieces of identification, at least one of which has the customer's photo. A driver's license and a credit card are ideal. 

     2. Require checks to be made out in your presence. 

     3. Compare the signature on the check with that on the ID. 

     4. Limit checks to the exact amount of the sale. 

     5. Accept only checks drawn on local banks. 

   6. Verify the customer's address and phone number on the check. Also notethe customer's social security number and/or driver's license number.

    7. Be cautious when accepting checks with low numbers (indicating that the account was recently opened).

    8. Consider subscribing to a check verifying service. For a modest fee, such a service allows you to call a toll-free number and learn immediately if you can safely accept the check. If a check bounces after being verified using this procedure, the service will cover your loss.

     When the debt is in default, act promptly! The longer you wait, the harder collection will probably be. The firm of Lafayette, Ayers & Whitlock, PLC usually recommends immediate telephone calls, followed by a series of two or three letters. In the final letter, give a definite and short deadline with the promise of attorney action.

     The decision as to when a creditor should deliver its accounts to counsel for collection is not always an easy one. Some creditors deliver collections accounts to counsel after the initial demand has failed to produce results. Some creditors desire to have their credit/collection manager take their judgment and attempt collection by payment plan, garnishment, or even sometimes, sheriff's levy.

     The problem frequently encountered by creditors who pursue their own judgments, however, is that in most cases the ability to collect without the assistance of counsel ends prior to the receipt of payment in full. When this occurs, counsel must normally assume collection activities after the trail is cold. Further, since the creditor was not represented by counsel at the time of judgment, the judgment order does not include attorney's fees; nevertheless, attorney fees will now be charged to the creditor. In addition, if the creditor's credit/collection manager failed to properly docket the judgment, collection could be forever impaired.

     The firm recommends that creditors immediately deliver accounts to counsel upon the failure of the demand for payment. Creditors should ensure that provisions for attorney fees and interest are included in all loan, contract and/or account documents so that counsel can assess these costs upon delivery. The firm further recommends that all accounts be delivered while the "trail" is still warm--no more then sixty days from default.

     The firm has aggressive collection counsel and staff who represent numerous Credit Unions, Homeowner Associations, property management companies, loan companies, businesses, doctor's offices, and private citizens.

Collections: Equal Opportunity Credit Act

     In a past blog, I announced that we would begin a multi-issue review of the Equal Opportunity Credit Act, 15 U.S.C. §1691 ("the ECOA" or "the Act").
     The ECOA was enacted in 1974 to prohibit discrimination by lenders on the basis of race, color, national origin, sex, marital status, age, religion and welfare status. The statute was originally aimed at discrimination against married women who were often denied credit unless they could get their husband's signatures. The statute, in many respects, has been taken to many illogical extremes.
     Lenders who violate the statute can be sued for actual damages, punitive damages up to $10,000, and costs and attorney's fees. Punitive damages can be awarded even if there are no actual damages, and even if the lender did not have a specific intention to discriminate. In practice, this means that the Act could be used in a counterclaim, not just a defense. In regard to a counterclaim, there is a two year statute of limitations for suits under the Act, which will usually have passed by the time a legal action by the creditor has begun. Most courts have ruled that the two year statute of limitations does not apply when the Act is raised as a defense.
     There are many potential issues that have been raised under the Act; listed below are those which have been cited most frequently.
     1. Requiring the signature of a spouse. Under federal regulations, "[A] creditor shall not require the signature of an applicant's spouse ... on any credit instrument if the applicant qualifies under the creditor's standards of creditworthiness for the amount and terms of the credit requested."(12 C.F.R. §202.7(d)(1).). There have been many cases litigated regarding this. The Virginia Supreme Court found that a bank violated the Act when a husband sought a loan for his construction company and the bank required his wife's signature as a guarantor, even though the husband was individually creditworthy, the wife had no interest in the company and was not a joint applicant, and the bank made no inquiry into her credit standing. The Court made these factual findings, but the company, ultimately, did not have assets to cover the debt. When the husband's construction company defaulted on the loan, after the husband died, the bank sought recovery from the wife and the husband's estate. When the Court found that this violated the Act, it ruled that there could be no recovery against the wife, as "Contracts executed in violation of law cannot be enforced....To deny [the wife] the right to use the ECOA violation defensively would be to enforce conduct that is forbidden by the Act." Debtor's attorneys are using this defense in foreclosure proceedings to prevent summary judgment on the foreclosure, stall for time, release a spouse from liability, and force the lender to defend against a complex and expensive federal claim.
     2. Asking for information about a spouse or former spouse, unless the applicant is relying on the spouse's income or lives in a community property state (Virginia is not - it is a Common Law state).
     3. Asking for sources of an applicant's income without saying that the applicant does not have to mention alimony or child support unless he or she wants the lender to consider it when it decides whether to extend credit.
     4. Taking race, sex or national origin into account when making a credit decision (although a bank can consider immigration status).
     5. Using statistics to judge the reliability of income from alimony, child support, pensions or welfare. Even if child support payments are statistically unreliable, a bank must consider whether the individual applicant has consistently received payments in the past.
     6. Ascribing a negative value to an applicant's age unless it relates to a "pertinent element of creditworthiness," such as the length of time the applicant has until retirement or the adequacy of security where a mortgage term exceeds the applicant's life expectancy.
     We will continue our review of the Act in future blogs.

Collections: Debt Collections: You Need a Plan, From the Beginning

     Any business or lending institution that extends credit to its customers or members will inevitably be faced with bad debts. To insure maximum collection results, creditors should establish credit and collection policies before a problem occurs.
     Before you extend credit, there are several things that you can do to reduce your risk.
     1. Obtain full names, addresses, telephone numbers, places of work, social security numbers and dates of birth.
     2. Obtain the name of the customer's bank, branch, and account number.
     3. Review a credit report.
     4. Ensure that all credit terms are clear.
     5. Have personal guarantees for small businesses.
     6. Perfect security interest in events of large credit.
     When accepting personal checks, take the following precautions:
     1. Insist on two pieces of identification, at least one of which has the customer's photo. A driver's license and a credit card are ideal.
     2. Require checks to be made out in your presence.
     3. Compare the signature on the check with that on the ID.
     4. Limit checks to the exact amount of the sale.
     5. Accept only checks drawn on local banks.
     6. Verify the customer's address and phone number on the check. Also note the customer's social security number and/or driver's license number.
     7. Be cautious when accepting checks with low numbers (indicating that the account was recently opened).
     8. Consider subscribing to a check verifying service. For a modest fee, such a service allows you to call a toll-free number and learn immediately if you can safely accept the check. If a check bounces after being verified using this procedure, the service will cover your loss.
     When the debt is in default, act promptly! The longer you wait, the harder collection will probably be. The firm of Lafayette, Ayers & Whitlock, PLC usually recommends immediate telephone calls, followed by a series of two or three letters. In the final letter, give a definite and short deadline with the promise of attorney action.
     The decision as to when a creditor should deliver its accounts to counsel for collection is not always an easy one. Some creditors deliver collections accounts to counsel after the initial demand has failed to produce results. Some creditors desire to have their credit/collection manager take their judgment and attempt collection by payment plan, garnishment, or even sometimes, sheriff's levy.   
     The problem frequently encountered by creditors who pursue their own judgments, however, is that in most cases the ability to collect without the assistance of counsel ends prior to the receipt of payment in full. When this occurs, counsel must normally assume collection activities after the trail is cold. Further, since the creditor was not represented by counsel at the time of judgment, the judgment order does not include attorney's fees; nevertheless, attorney fees will now be charged to the creditor. In addition, if the creditor's credit/collection manager failed to properly docket the judgment, collection could be forever impaired.
     The firm recommends that creditors immediately deliver accounts to counsel upon the failure of the demand for payment. Creditors should ensure that provisions for attorney fees and interest are included in all loan, contract and/or account documents so that counsel can assess these costs upon delivery. The firm further recommends that all accounts be delivered while the "trail" is still warm--no more then sixty days from default.
     The firm has aggressive collection counsel and staff who represent numerous Credit Unions, Homeowner Associations, property management companies, loan companies, businesses, doctor's offices, and private citizens. The firm is willing to pursue accounts from start to finish, or even finish accounts already in progress.