It’s not uncommon for businesses to take on debt. Sometimes, that debt gets out of hand and businesses find themselves on the receiving end of calls from commercial debt collection agencies.
Calls from a commercial debt collector can create an enormous amount of stress for many business owners. However, the reality is that working with them is simply a matter of open communication.
Here’s everything businesses need to know about commercial debt collection agencies and how to manage communication without disrupting day-to-day operations.
What Do Commercial Debt Collection Agencies Do?
Debt collection agencies are organizations that attempt to collect debt on behalf of other businesses. A commercial debt collector works exclusively with B2B creditors that need to collect past due payments from other businesses.
Commercial debt collection agencies use a variety of tactics and tools to satisfy a delinquent account, including these common activities:
- Certified demand letters: A formal demand letter is one of the first attempts a commercial debt collector will make to communicate with a business. The letter will include a statement of the balance, how much needs to be paid, and a due date for the payoff.
- Negotiate payoff balances: In some cases, B2B creditors might authorize commercial debt collectors to make payment arrangements with their clients. This might be an installment plan, or it could be a discounted payoff if the balance is paid in full.
- Routine phone calls: Demand letters are a formal process that gives debt collectors leverage if they have to sue for the balance owed, but phone calls are the most common way commercial debt collection agencies will use to try to communicate with debtors.
Depending on the nature of the debt and how communicative the debtor is (or isn’t), commercial debt collectors can employ other tactics like investigating other debt and performing a skip trace on the owner to establish contact.
Many business owners assume that the Fair Debt Collection Practices Act (FDCPA) applies to commercial debt collectors. However, the FDCPA was created to protect consumers, and it doesn’t apply to businesses. Here are a few questions business owners often ask about commercial debt collection agencies and their rights.
How Do Commercial Debt Collectors Pursue Payment?
Commercial debt collectors will employ multiple tactics to elicit a response from businesses. They might send demand letters every 30 days while also calling the business phone number several times throughout the business day.
Some debt collectors will contact business owners or finance managers through email, and they might resort to investigative tactics if they cannot establish contact. As a last resort, commercial debt collection agencies will work with creditors to sue the business for the past due balance.
If the creditor wins, the debtor might also be responsible for any collection and legal fees.
How Long Can a Debt be Pursued?
It’s a common myth that debt “disappears” after so many years. It stems from the fact that personal delinquencies are removed from credit reports after seven years. There is no statute of limitations on debt, and commercial debt collectors can attempt to collect that balance until it is paid or the company is out of business.
The state of Texas does have a statute of limitations on personal debt: creditors and debt collectors can’t sue for a past due balance after four years. This statute might apply to sole proprietors that have mixed personal and business debt, but it doesn’t apply to business debt for LLCs, LLPs, and corporations.
Do Commercial Debt Collection Agencies Buy Debt?
There are two different approaches to how commercial debt collection agencies make money from their practices. The first method collection agencies use is purchasing packages of debt – that is, multiple accounts that are past due – from a company. The collection agency usually offers a fraction of the total value of the debt, but the creditor gets to write the debt off their books.
The other approach is for the agency to pursue the delinquent business at no cost to the creditor. When the debt collector receives payment from the debtor, they will keep a portion of it and remit the rest to the creditor who can then write off the remaining balance.
What Happens to Debt that is Sold to a Commercial Collection Agency?
Businesses can expect a few things when their debt is sold to a commercial collection agency. First, if the debt is secured with a personal guaranty, the creditor can mark the debt as “charged off” with the credit bureaus. Creditors that report business credit might report this status, as well.
The commercial debt collector will then initiate contact with the debtor, usually with a formal demand letter and a phone call. The letters and phone calls typically escalate. They might become more frequent or indicate that additional action could be taken.
In extenuating circumstances, the commercial debt collection agency might work with the creditor to file a lawsuit against the debtor. This could lead to bank account garnishment.
Can Commercial Debt Collectors Pursue Debtors at Home?
Consumer debt is regulated by the FDCPA at the federal level and any additional regulations are placed at the state level. The Texas Debt Collection Act regulates how consumer debt is handled, and it offers protection from disruptive collection tactics, which means that debt collectors have limited rights to contact them at home.
Unfortunately, these acts only cover “personal, family, and household debt,” which means commercial debt collection agencies don’t have to follow the same rules. They can contact business owners at home and aren’t necessarily bound by the same call and demand restraints.
It’s important to note, however, that commercial debt collection agencies can still be reported for harassment and threats, as well as fraudulent collection practices.
Is It Legal for Commercial Debt Collectors to Garnish Bank Accounts?
While the IRS doesn’t need court approval to garnish bank accounts, other creditors can file a lawsuit against businesses – and their owners, in some cases – to receive a judgment that requires payment in full. If the debtor doesn’t make arrangements with the court or creditor, the creditor can request a Writ of Garnishment. This is provided to the debtor’s bank so they can garnish the account.
Commercial debt collectors do not have the authority to pull funds from a bank account based on information provided to them by the original creditor. Any transactions processed can be disputed with the debtor’s financial institution. They also cannot sue for wage garnishment at any level.
What Businesses Need to Know About Texas Debt Collection Laws
Regardless of the business structure, it’s critical to understand that the Fair Debt Collection Practices Act and the Texas Debt Collection Act do not explicitly cover commercial debt collection.
Businesses, however, do have some rights concerning commercial debt collection practices. Here’s what Texas organizations need to know:
- The debt must be verified to be in the company name.
- The collection agency must provide a statement of balance.
- The collectors cannot threaten physical harm or abuse.
Texas doesn’t offer businesses a lot of protection from debt collectors, but there are minimum standards that agencies must uphold.
How to Manage Commercial Debt Collectors without Disrupting Business
Business debt can spiral out of control for many reasons. While the best approach to debt collectors is to avoid them, it can be hard to do that when managing payroll and trying to boost sales.
When debt is turned over to a commercial collection agency, establish communication and a plan for paying back the account in the future. If payment isn’t possible, commit to maintaining proactive contact while working out a solution for the debt.