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Wednesday, July 19, 2006

Collection Before It Is Even A Debt

In the current business environment, a business owner, a health care provider, a construction services provider or anyone who provides a service expecting to be paid after the fact needs to be aware of what is necessary to legally collect a debt before it even becomes a debt. The key to what makes a debt collectible is good information. The more information, the more accurate information and the more up-to-date information you have, the more likely you are to collect one hundred percent of a debt that is owed. The less information, the older the information is, and thus the less accurate it is, the more likely you are to not be able to collect a debt.

The two items I would like to see every creditor come through my office door with are a complete credit application and a signed contract allowing for the recovery of attorney's fees and the costs of collection. I realize that is not always possible. However, if there is no impediment to you obtaining those two items from a customer, you should, no matter the cost and time involved, do so. A credit application should at the very minimum contain a customer's employer, including the name and telephone number of their immediate supervisor. That information is necessary so we can call to verify their employment prior to garnishing them. The credit application should also list all of the customer's banking accounts, including the name of the bank, the type of account and the account number. This information will be necessary so we can garnish their accounts. Although not commonly seen on most form credit applications, I would like to see information about any and all vehicles the customer owns identified by make, model, year, color, VIN and tag number. This information is priceless when sending the Sheriff out to pick up a debtor's vehicle.

The second item every business owner should obtain is a signature. Under Tennessee, and under most states' laws, a creditor cannot recovery the cost of filing a collection lawsuit, and most importantly attorney's fees, unless they have a written agreement to that effect signed by the debtor. This does not need to be a long document or anything fancy. It can simply say, "I agree to pay all costs of collections and attorney fees if it becomes necessary to file suit on any unpaid balance." This simple language will allow you to recover attorney's fees. While that may sound like the debt collection attorney looking out for himself, in actuality it means that the creditor can recover one hundred percent of the debt owed, and not be out of pocket twenty to fifty percent of the debt for having to collect it through a lawyer's office. A business owner should think of that signature as debt collection insurance.

If you are not utilizing some system to obtain these two basic simple amounts of information, please feel free to contact my office and I will be glad to review your documents and set up a system that allows you and your employees to obtain this information without your increasing your costs, offending your customers or slowing down your business

Tools of the Debt Collection Lawyer

An attorney has a wide variety of tools available to collect a debt. This arsenal of tools extends well beyond what is available to an original creditor or even a collection agency employed to collect the debt prior to the attorney becoming involved. Additionally, these tools offer a step-by-step increase in the ability to involuntarily wrest money away from the debtor.

The first tool employed by an attorney in collecting a debt is the Attorney Demand Letter. I will normally make a decision on whether or not to send the debtor an Attorney Demand Letter based on the debtor's prior history and the creditor's prior attempts to collect the debt. A creditor may question why an attorney is going to send a letter asking for payment when the creditor has done this on a number of occasions or may have even sent the debt to a collection agency who has not only sent demand letters, but made telephone calls to the debtor's home and place of employment.

There are three primary reasons for utilizing the Attorney Demand Letter. First, it has been my experience that somewhere between fifteen and twenty percent of debtors who have been adamant in their refusal to pay will, upon receipt of an Attorney Demand Letter, pay the full amount owed. There is something intimidating about receiving a letter saying you owe the money on an attorney's letterhead. The Attorney Demand Letter ratchets up the seriousness of the matter substantially.

The second reason for sending out the Attorney Demand Letter is to comply with certain state statutes and to allow for the possibility of recovery of attorney's fees in certain circumstances. For example, in the state of Mississippi when a debtor owes money and that debt is not based upon a contract or agreement which allows for attorney's fees, if the attorney sends an Attorney Demand Letter and gives the debtor a reasonable period of time to satisfy the debt prior to filing suit, the attorney may then recover attorney's fees in that suit. This is true regardless of the nature of the debt or how it was created. Therefore, I always utilize an Attorney Demand Letter in attempting to collect debts in the state of Mississippi. The state of Tennessee does not have a corresponding statute and attorney's fees are available only by agreement of the parties.

The third reason for sending out the Attorney Demand Letter is to establish the creditability of the creditor. Many times or the creditor or a collection agency employed by the creditor has told the debtor, "If you don't pay this debt, I am going to send it to an attorney for suit." Many times the debtor sees this merely as a bluff. When the letter arrives on attorney letterhead giving the debtor an exact number of days before a lawsuit is going to be filed, the debtor now realizes that the creditor has not been bluffing, nor making idle threats. That has the two-fold effect of creating increased credibility with that particular debtor and creating a reputation for the creditor that it does not make idle threats or bluff.

The next tool in the collection process is the actual filing of a lawsuit. Filing a lawsuit consists of the drafting of a legal document called a complaint, the filing of that complaint with the Court, and the service of that complaint upon the debtor. In the state of Tennessee, such a lawsuit may either be filed in the Court of General Sessions for debts up to $25,000.00 or in Circuit Court for debts above $25,000.00. In either case, I utilize a complaint on sworn account. This simply means that I prepare an affidavit to be signed by the creditor and sworn to stating that the debtor owes a specific amount of money. That sworn affidavit is attached to the complaint when the lawsuit is filed. The debtor is then served with a copy of the complaint and sworn affidavit and given a certain period of time to respond. In General Sessions Court, no formal written answer is required from the debtor and the matter is first heard before the Court within 10 to 15 days of the debtor being served. At that time, the debtor must then either admit to the debt and allow a judgment to be entered, or deny the debt and a trial will be scheduled. Trials in General Sessions usually take place within 30 days of the initial court date. Circuit Court is much more formal and the debtor is given 30 days from the date of service in which to file a formal written answer. If the debtor does not file a formal written answer, a default judgment can be taken. Most debtors, upwards of eighty five percent, are simply unequipped to deal with the complexities and requirements of the Court system. Those attempting to represent themselves simply do not stand a chance. Therefore, judgments are taken without dispute in approximately eighty five percent of the suits I file. Of the remaining fifteen percent, approximately ten percent result in judgments following a futile attempt by a pro se (no attorney) debtor to fight the system, and only five percent result in true contests where the outcome is not certain.

So now you have a judgment that is simply a piece of paper that says that the debtor legally owes you the amount of money you have been attempting to collect. That piece of paper changes everything. The judgment is a key that unlocks an entirely new chest of tools you can use to recover money from the debtor.

The first and most commonly utilized post judgment tool is the garnishment. A garnishment can be issued attempting to recover money from two separate sources. First, a garnishment can be issued against a debtor's bank account. In order to do this, you need to know where the debtor banks and generally their account number. Therefore, it is vitally important that you save, photocopy, and archive any check payments you receive from any customer or potential future debtor. These checks are invaluable in the collection process. When the bank receives a garnishment on an account, it will freeze all of the funds in that account and report to the Court the amount of money so frozen. Unless the debtor comes forward and objects and has good reason, that money will then the paid into the registry of the Court and ultimately disbursed to my law office to satisfy the debt.

The second pool of money a garnishment can be used to reach is a debtor's wages. A garnishment can be served upon a debtor's employer and then a certain amount of the debtor's paycheck each month (the amount is based on a statutory calculation based upon how much the debtor makes, how many children the debtor has, and what are the state statutory exemptions) will be paid into the registry of the Court and disbursed to my office to satisfy the debt.
The next post judgment tool a debt collection attorney can utilize if garnishments are unsuccessful is a Writ of Execution. A Writ of Execution is a request filed with the Court, instructing the Sheriff to go out and seize certain property owned by the debtor and sell that property at public auction to satisfy the debt. A Writ of Execution can be issued against any personal property of the debtor that you aware of, can be issued for cash that the debtor may have on hand or that a business may have in its cash register. But, the most effective way to collect a debt from an individual debtor on a Writ of Execution is to have the Sheriff seize the debtor's automobile. Regardless of the value of the automobile, this is an extremely effective tool. Typically, a debtor's automobile will be financed by a bank that will have a priority lien on that vehicle. That simply means that if the Sheriff does sell the car at a public auction, any money raised by that sale will first have to go to pay off the bank that financed the car before any money comes to my client. While this does not sound like an effective debt collection tool for my client, in reality once the debtor realizes that the Sheriff and not a repossession company has seized his only mode of transportation, the debtor will almost invariably contact you directly offering to satisfy the debt by any means possible in exchange for a release of the Writ of Execution and the return of the debtor's vehicle. Once the debt is paid, the Writ of Execution is released and the vehicle is returned without the sale ever taking place.

The most patient tool in the debt collection lawyer's arsenal is the real property lien. When a judgment is taken against the debtor, that judgment is enrolled among the land records as a lien against the debtor's house. That means absolutely nothing to the debtor until the moment comes that they want to sell their house. They then cannot sell their house and give clear title to someone else until that judgment is paid. If a debtor claims to have absolutely no ability to satisfy a judgment, sometimes you simply have to wait until you get that call from a closing lawyer saying the debtor simply did not tell them about this judgment and that is have to be paid before the closing at 3 o'clock that afternoon and wanting to know from you how much the judgment is, with interest, to date. The real property lien is not fast, but it is effective.
The final tool available to the debt collection lawyer is a judgment debtor examination. The creditor, now a judgment creditor, can ask the Court to issue a court subpoena requiring the debtor, now a judgment debtor, to appear at the debt collection lawyer's office and to give testimony under oath in response to questions the debt collection lawyer asks. Essentially, the debtor is put under oath in front of a court reporter and then you may ask any question about any of the debtor's potential assets. If you don't know anything about the assets of your debtor, this may be where you start, or if one the tools discussed above has failed to satisfy the debt, you may follow up with a judgment debtor examination to get the information necessary to use one of the other tools.

As you can see, from the methods discussed above, the debt collection lawyer has ways and means available to him to collect the debt that an original creditor or even a debt collection agency can’t dream of utilizing. It is these exclusive tools which make a debt that may be virtually uncollectible by a creditor or even a collection agency easy money for a skilled and experienced debt collection lawyer.