Collection Plate Series

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?

During childhood, our parents and teachers asked, instructed, and even demanded that we “be nice."  In Texas, we were raised to be southern gentlemen and polite young ladies.  As lawyers and business people, we had to, in a way, overcome that mantra and learn how to ask the tough questions, make demands of associates or perhaps even fire people.  We had to accept that not everyone would like us.

Some of us are better at this than others.  You may attribute it to “thick skin” or “inherent toughness."  But I would venture to say that many people who have trouble with the sticky aspects of collections are simply viewing it incorrectly.

When can I stop being nice? You might think the answer is “never."   However, I would respond by asking, “What do you mean by nice?"

Instead, reword the question as follows: When can I stop being professional?  Then, the answer is easily “never."  So, forget traditional childhood notions of how to “be nice."  Forget trying to make everyone like you.  Be professional and focused on business.

There is nothing wrong with expecting truthful answers from your customer.  There is nothing wrong with expecting prompt responses about a bill that is overdue.

I was collecting a debt for a client recently, and they had been getting the “runaround” for quite sometime.  I don’t go into a matter like this “guns-a-blazing," but always try to make up my mind about what is happening based on first hand observations.  So, I called the debtor, set a reasonable deadline for payment and then waited.  As the excuses started pouring in, I spoke with the debtor and said “We don’t believe you anymore."  You have lost all credibility by your actions."  When I told the client what I had said, the client was pleased, but admittedly a bit surprised at the bluntness of the statement.  Wasn’t I, in effect, calling the debtor a liar?  Who does that, in a business setting?  In that case, the debtor did not deny that he had lied (nor did I make him admit it)—he merely paid the bill.

If debtors believe that we will never “call them” on a lie, they may have little incentive to tell us the truth.  But at no time do I lose my professionalism.  You simply never have to.  If you get emotional or lose your cool, then you are clearly too invested in the situation and should pass off the problem to someone who can be more objective.

Much of the time when we, as collectors, try too hard to “be nice," we are, at the same time, letting a debtor take advantage of us.  We are waiving some rights, and we are not advancing the ball.  At the end of the day, we are no closer to payment.

You will inevitably get better at knowing whether a debtor’s excuses ring true in a given situation and how to respond.  It is possible to be sympathetic to a debtor’s situation and still make business decisions that benefit your employer or business.

In part II of the series, entitled: “My Dog Ate My Homework," I will discuss the most common reasons debtors give for nonpayment, and how to effectively respond, set deadlines and manage expectations on the road to payment.

If you have a question or a story to share, please post a comment.