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I often receive calls from business clients who have received notice in the mail announcing the filing of a bankruptcy by someone who, after a series of broken promises, still owes the client for goods provided or services rendered. Most of the time, there is little that can be done at this stage to collect the bad debt. After dispensing the "bad news," our conversation invariably turns to the question of how these circumstances can be avoided in the future.
The answer, of course, is not a simple. Business bad debt is, and notwithstanding the good credit practices, will always be, a fact of life....... one of the unavoidable risks of doing business. There are, however, some things that your business can do in an effort to minimize the risk of non-payment. Here are a few suggestions to keep in mind:
1. Know Your Customer. In an ever more complicated world of joint ventures, limited liability companies, and sole proprietorships with "fictitious name" (dba) filings, it is important for you to understand who it is you are dealing with, i.e., who is it that will have the legal or contractual responsibility for payment. Keep in mind that, except in extraordinary circumstances, business "owners" (e.g., corporate shareholders, officers, and directors, and limited liability members, officers and governors) have no personal liability for the contractual obligations owed to your business. Where no individual liability exists and cash flow gets tight, it is fairly common for these accounts payable to receive very low payment priority. If large or extended transactions on open account are anticipated, consider requesting one or more Personal Guaranties from the principal owners of your business customer. These documents can be very simple in form, and, at the beginning of the business relationship, are often forthcoming. Although a personal guaranty is no actual guaranty of future payment, it will at least increase the "attention" given to the account owed to your business.
2. Collateral. Article 9 of Minnesota's Uniform Commercial Code was designed to protect those who extend credit for the purchase of goods or inventory for resale. With some planning, your business can routinely and inexpensively structure credit sales which are "secured" by a purchase money security interest in goods supplied to customers. This security interest creates a lien on the goods to secure future payment of the purchase price, interest, and costs of collection, including attorneys fees. In the worst case, the lien will "survive" the filing of a bankruptcy. The extension of a purchase money security interest to your business generally will not interfere with your customer's banking relationships, as the need for, and reasonableness of, these types of liens are routinely recognized and "authorized" by the lenders. Also keep in mind that, for some types of businesses, there are other non-consensual "statutory" liens and/or payments bonds which are available to assist you in your collection efforts. Talk to your lawyer about these.
3. The Squeaky Wheel Gets the Oil. It is common for lenders to "eliminate" accounts receivable older than 90 days from the borrowing base of a borrower's line of credit, and we have all heard of the statistics which demonstrate what happens to the collectability of accounts receivable as they age. There really is no substitute for "attentive" collection practices for your business. Many accounts receivable, even small amounts, get paid simply because it is easier, and perhaps even cheaper, to pay what is owed rather than deal with repeated (courteous, but firm) telephone calls. Remember, however: the collection of "consumer debt" is carefully regulated by both Minnesota and federal law. Your business must be familiar with these consumer debt regulations before traveling down this path.
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For more information on bankruptcy, creditor-debtor and loan workout issues, contact Frederick Dudderar, fad@hanftlaw.com or 218-722-4766.
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The information provided in this article is general in nature and should not be used as a substitute for professional services and advice. The communication and receipt of this information is not intended to create an attorney-client relationship. Readers should consult with their legal counsel before taking any action on matters covered in this article.
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Copyright 2001 by Hanft Fride, P.A. All rights reserved. Hanft Fride, A Professional Association, 1000 U.S. Bank Place, 130 W. Superior Street, Duluth, MN 55802. Phone 218-722-4766; fax 218-529-2401.
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