There comes a point when the stories that debtors tell don’t have the same emotional impact on us that they used to. Maybe because we hear the same stories time and again. Maybe because people in trouble often take liberties with the truth. What is your reaction to, for example, the following statements made by a debtor when you are trying to collect?
“If you file a lawsuit, I will be forced to file bankruptcy”
“The bank officer told me that XYZ would happen, and it didn’t”
“I have a sale of the property lined up for next month, so if you can just wait until then, you will get paid.”
If you could verify that these excuses were true, you might take very different approaches to collection. So what do you do?
First, don’t judge people (or their stories) too quickly. Even honest people can be embarrassed or in denial, and fail to confront the situation immediately.
On the other end of the spectrum, there are those who will call you incessantly, talk your ear off and seem like they really want to solve this problem. But you often hang up the phone puzzled or unsure of what is supposed to happen next. Ultimately, you may realize that they are shady characters who have every intention of trying to get out of paying their debt. The Shakespearean phrase “The Lady doth protest too much” comes to mind.
In short, you must keep an open mind during the debt collection process.
Second, set some simple deadlines—meetings or production of documents, for example—and just gather information. While you certainly don’t have to know the whole story in order to conduct a workout or pursue collection, it is helpful to have a general idea of what is keeping your debtor from paying. Once you are able to assess the situation, you can decide how hard to push.
The real basis for nonpayment usually boils down to 1 of 3 reasons, or some combination of the three.
I don’t have the money
Without a doubt, financial distress is the main reason for nonpayment. This can range anywhere from a debtor on the verge of bankruptcy, to a temporary slowdown in a particular industry. Often, the cause is poor money management by the debtor.
You need to assess the degree of financial stress. Are you the primary creditor or are you merely the proverbial straw that will break the camel’s back?
Suffice it to say, bankruptcy is not typically a way to collect money quickly. However, bankruptcy can be a good thing in certain circumstances. In an upcoming segment of this series, I will talk, in greater depth, about bankruptcy laws and procedures that will affect how you should go about collecting on a debt and your chances of recovery.
But let’s assume that you would prefer your debtor not file bankruptcy. Are their threats real? Many times not. But remember that you can only control a small part of what is going on in your debtor’s financial situation. Bankruptcy may be inevitable. The influx of cash they are expecting may never come. The economy may not get better. The debtor may have no way out, regardless of what you do. So the mere threat of bankruptcy should not greatly alter your plan.
Gather as much information as the debtor will share and then decide what you are willing to live with. If you believe the debtor has or will have funds sufficient to pay you in full, then there is little reason to discount the debt. Instead, look at alternative methods or timing of payments, and additional security such as collateral, or an agreed judgment.
I don’t want to give you my money
Undoubtedly, no debtor will actually tell you this is the reason for nonpayment. However, some people will never have enough money to want to share it with you, or any other creditor for that matter. They haggle for discounts or delay payment for no apparent reason.
The people who simply don’t want to pay their debts only respond to more aggressive tactics. Make your debt a priority in the debtor’s life. Set firm deadlines and file suit if you are not provided with the information or money you request. Adopt a dual track approach—proceeding with your lawsuit and negotiating in between litigation deadlines. Blame it on your boss or your attorney, if you want to remain the good guy.
I shouldn’t have to give you my money
Some people genuinely believe that you, the lender or collector, did something wrong and some accommodation should be made. Or, they may believe that a third party did something wrong and should be held accountable. These people can be polite or they can be aggressive.
Note that I said “genuinely." Just because someone hints or threatens a claim outright doesn’t mean they fall into this category. They may very well fall into category number two—and just not want to give you the money. When you are threatened with liability, even if the threats are subtle and even if you believe the threats to be disingenuous, you should get your lawyer involved and cease direct contact. This transition does not have to be frenzied and you don’t want to seem like you have done anything wrong. You should calmly state that it is probably best if the lawyers handle things at this point.
The lawyer is more apt to be objective, less defensive and say all the right things when negotiating with a debtor who claims the lender has done something wrong. The lawyer is there to fight for you, so you need not worry that the lawyer will agree with the debtor or make things worse. A lawyer is also better equipped to “test” the debtor’s claims and ask the debtor the hard questions to determine if there is any real risk.
On the other hand, some debtors who believe that a third party has some responsibility for the situation can quickly be made to realize that those issues don’t involve the lender. If the debtor has a dispute with someone else, it should not impact your ability to pursue payment of your debt. Make sure and extricate and insulate yourself from those disputes.
In the next segment, I will discuss Current Trends in Lender Liability. What are the claims against lenders that we are seeing today, and what can a lender do to avoid or defend against them?