Running a business involves the provision of goods or services in exchange for payment. In a perfect world, this exchange should be seamless. However, we are not in a perfect world, and sometimes clients may fall back on their payments. Unfortunately, this tends to strain your business operations.
The good news is that it is your right to collect on debts as long as you follow the right legal procedures. If you operate a B2B model, you are required to follow business debt collection laws. If you owe or another business owes you, you are in good company because this article discusses the nitty-gritty of business debt collection laws.
What are Business Debt Collection Laws?
Although commercial debtors do not enjoy the same level of protection as consumer debtors do, this does not mean they are left at the mercy of creditors and debt collection agencies (DCAs). The business debt collection laws protect them.
Like the Fair Debt Collection Practices Act, the U.S. business debt collection laws are regulations that safeguard businesses in commercial debt from harsh debt recovery practices by creditors and debt collection agencies. Under these laws, both the creditor or DCA and the debtor have defined rights.
Business debt collection laws are governed by neither the state or federal governments. Instead, they were formulated by the Commercial Collection Agency Association (CCAA), a non-governmental body under the Commercial Law League of America (CLLA). The agency was established in 1974 to supervise and improve the commercial debt collection industry. To become certified members of the CCAA, commercial debt collection agencies must:
- Have been operational for at least four years before their application to the CCAA
- Have a different Trust Account where all funds collected on behalf of creditors are deposited (this account is subject to two reviews by executive directors of the CCAA).
- Engage in commercial operations – up to 80% of their entire operations.
- Have at least one agent who is a member of the Commercial Law League of America
- Abide by the CCAAs strict standards of practice and ethics
- Offer a bond of about $300,000 to protect the creditors it serves
- Be open to random visits from the executive directors of the CCAA
However, as a non-governmental body, the CCAA has no jurisdiction over agencies that are non-members.
What is Commercial Debt?
Before discussing the laws in detail, you must understand the difference between commercial and consumer debt. That said, a commercial debt refers to any debt owed by a business to another business. Also known as a business or corporate debt, commercial debt is often incurred when the debtor fails to pay the creditor back as per the terms and conditions of a legally binding business contract.
Can a Business be Sent to Collections?
The short answer to this is yes. The U.S. business debt collection laws give creditors the right to transfer a delinquent’s account to a collection agency immediately after issuing a letter of demand. What’s more, the collection agency is allowed to demand from a court of law the seizure of the debtor’s assets (for instance, office buildings, if any) if less drastic collection efforts are not successful.
However, the creditor and their collection agency are prohibited from issuing legal threats that do not apply to B2B debt collection, and from using false or invalid information to intimidate the debtor.
What Does a Company Need to Send You to Collections?
If you owe a commercial debt, all your creditor needs to do after sending an informative letter to you is transfer your accounts profile to the collection agency. This includes:
- A detailed account statement highlighting all the payments and charges relevant to the missed or late payments.
- Basic contact information, such as your phone number, email, social security number, and business address.
- Documentation of any prior payment arrangements or contracts referencing payment terms and conditions you may have agreed to with the creditor.
Does the Fair Debt Collection Act Apply to Businesses?
The Fair Debt Collection Practices Act, commonly referred to as the FDCPA, was enacted to protect individual debtors from their creditors and debt collection agencies. The act prohibits creditors and agencies that work on their behalf from harassing or misleading consumer debtors. It specifically applies to personal and household debts. What this means is that the act does not, in any way, regulate the activities of commercial collection agencies, or protect the interests of the commercial debtor. But thanks to business debt collection laws governed by the CCAA, commercial debtors are not alone.
Business to Business Debt Collection
Now that you know the basics of commercial debt collection laws, here is how creditors are expected to go about the business to business debt collection process:
Demand for Payment
Suppose the creditor has tried sending reminders and politely requesting the debtor to clear their delinquent account without any success, they can initiate the legal collection process by sending a demand letter. This letter offers the debtor the opportunity to accept or deny their debt. It also allows the debtor to request alternative debt repayment solutions and allows the creditor to confirm the debtor’s contact information. The demand letter should contain:
- Name and business of both the creditor and the debtor
- Debt collection notice with details about due payments
- Information about the debt
- A timeline within which the debtor should clear their delinquent account, and a notice that failure to do so shall be the beginning of a litigation process.
Debt Recovery Litigation
In most cases, a demand letter is usually enough to prompt the debtor to make a voluntary payment. However, if it does not get anywhere, you can initiate an official debt recovery process by filing a small claims court case. Although this is often enough to compel the debtor to pay up, it is quite expensive. Also, some debtors are too stubborn, and even this will not work.
Attempt Contact and Investigating Tactics
If a small claims court does not work or is not a viable option, the creditor can attempt contact. Note that since commercial debts are not subject to the FDCPA, the creditor is often allowed to employ prohibited tactics such as skip tracing or calling too many times to attempt debt recovery. They can also do a little investigative work on their own to see if the debtor is in a position to pay up. For instance, the creditor can employ methods they deem suitable to determine if the debtor has hidden assets they can use to clear their debt and then use this information to initiate negotiations.
Transfer to Collection Agencies
If all fails, then the creditor can go ahead and transfer the delinquent accounts to a commercial collection agency. Hiring a collection agency is often advisable as it will enable the creditor to get their money back without damaging their relationship with the debtor with a lawsuit. Besides, commercial collection agencies are often created with one objective; to facilitate a smooth sailing debt recovery process.
This means they have the resources, the professionals, and the experience to handle stubborn debtors. Also, since the collection agency does all the work, the creditor will no longer worry about the debtor skipping town or blocking calls. The agency’s professionals will handle all this. If you are a creditor and have decided to transfer a debtor’s account to an agency, make sure the agency is:
- Licensed with the CCAA
- Has a proven track record of debt recovery and finding debtors who may have skipped town
- Operated in line with the CCAAs ethics codes
Manage Commercial Debts Today
Unpaid debts can have a detrimental impact on your business. Unfortunately, being too lenient on commercial debtors can make your company bankrupt in a heartbeat. On the other hand, being too strict permanently damages your relationship with great customers who just needed a little understanding. Also, handling this aggressively could easily see you get sued. Having a debt collection agency handle your commercial debtors is the ideal way to avoid such situations and keep your business running seamlessly without the financial constraints associated with debts.