Posted on Apr 22, 2015 by Audra M. Byrd
Uncollected business-to-business debt is a huge problem for most small companies, and unlike consumer debt, there are no laws in South Carolina that directly address either the rights of creditors or debtors. Hardly a day goes by that we don’t hear from a client seeking advice on how to collect on a long-overdue commercial debt. Here is a list of best practices to help collect bad commercial debts, and to avoid ending up with these tough-to-collect liabilities in the first place.
Small problems become big problems
One common mistake is to not recognize early on when an account shows signs of becoming a problem. With a customer who has paid regularly in the past, you’re likely safe not worrying about it until an invoice is 30 days late. For a customer who routinely is late or sends partial payments, your concern should kick in within days of an overdue invoice.
Take action, gently at first
Start with a polite, but business-like, written notice that asks for payment by a certain date, along with a conciliatory, “If there’s a problem, let us know,” message. Ask the customer to call you to acknowledge receipt, and then follow up with a call if you don’t receive a response.
This is the stage for firmness, but don’t make it personal.
Ask why the bill hasn’t been paid
Often, it’s just a matter of timing. Perhaps everything came due at once for the customer and created a cash flow problem, but there’s no underlying financial crisis. This is easily resolved.
If the customer has larger financial issues, but is dealing in good faith, you may want to negotiate a reduction in the amount due. For those customers who can’t or simply refuse to pay, you’re going to have to escalate.
Collection agency or lawyer?
If the customer isn’t responding to your calls and letters, then it’s time to go outside. A possible advantage of a collection agency is that it may take the matter on contingency whereas many attorneys will not. Sometimes just a call from the collection agency will show the customer that you are serious, and the bill will be paid.
Many law firms will not collect debts on contingency and will charge you an hourly rate. If a collection agency letter shows that you are serious, then a letter from a lawyer says – even if those words aren’t used – that you are prepared to go to court to collect the debt. The lawyer usually will begin the process by sending a demand letter, which will give a deadline for payment.
While the letter from a law firm will get the debtor’s attention, you’ll have to weigh the cost of this strategy. The debt probably needs to be at least $5,000 to justify the expense of further litigation (beyond the initial demand letter), and this tactic is easier if you have an ongoing relationship with a law firm that can integrate this service into everything else it does for you. If we represent you on a range of matters, it’s not a big deal to send out a demand letter to a debtor. If you have to retain a law firm specifically for that purpose, it will likely be more expensive.
While we don’t recommend pro se litigation for substantial matters, the South Carolina Magistrate’s Court is an option for debts up to $7,500. You can represent yourself and obtain all the forms online, and the filing fee is only $80. Cases move quickly, and if the other party doesn’t answer, you can obtain a default judgment that attaches to all real property and lasts 10 years.
Due diligence is key
Nobody wants to go through these steps, which are time-consuming and aggravating, to say nothing of expensive. Do your due diligence on the front-end before extending credit, asking for references and permission to do a credit check. Ask the customer to sign a credit agreement that includes provisions that add penalty fees for late payments and attorneys’ fees. Set clear rules and expectations for payment when you begin the business relationship, and you’ll be more likely to avoid problems down the road.
Audra M. Byrd is an attorney in the Myrtle Beach, S.C. office of Turner Padget, where she has an active commercial and business torts litigation practice. She routinely assists her corporate clients with debt collection and contract disputes. She may be reached at (843) 213-5520 or by email at firstname.lastname@example.org.