Service Area: Collection Services

3 in 3: Try a Contingent Collection Agency Before Writing Off Debt

Posted on February 27, 2017 by - Credit Risk Management

Try a Contingent Collection Agency Before Writing Off Debt

Today’s 3-in-3 features NCS Attorney, Michelle Gerred. Read on to learn more about why you should use a contingent collection service before writing off bad debt.

What is a contingent collection and how does it work?

Michelle: NCS will work the commercial collection file on a contingent basis, meaning you pay a rate contingent on the amount of money NCS is able to collect.

The collection placement can be secured or unsecured and worked in-house or through an attorney.

Once NCS receives the commercial collection placement along with supporting documents, we complete additional research on the debtor to see if we can find alternative addresses, phone numbers, and contacts to reach out to.

From there, we send out the initial demand letter, along with proof of the debt (such as invoices or a statement of account) to the debtor.

Depending on the service you select, we then begin contacting the debtor via phone and email to see if we can collect the money owed or help resolve any existing dispute.

What are our different services & what are the differences between them?

Michelle: For in-house collections, we offer 2 different services: 10-day free demand and immediate collection placement.

The only difference is that, on the 10-day free demand, we send out the initial demand letter, but if you receive payment and notify NCS of the payment within the 10-day free demand period, the contingency fee will be waived, and the collection will be done at no charge.

On the 11th day, if payment in full was not made and reported to NCS, we will begin calling the debtor.

When immediate collection placement is selected we begin contacting the debtor within 24 hours of receiving the collection placement.

When trying to recover the debt, we can also work with the debtor to set up a payment plan or help resolve any dispute that may exist.

Why would I try contingent collections over just writing it off?

Michelle: The cost to write off bad debt is not just that bad debt; it costs a great deal more to recover that lost revenue.

For example, if you write off $50,000 at a 30% margin, you would have to generate $166,667 in additional sales to recover that lost profit.

Instead of writing it off, try contingent collections to help you recover that money.

3-in-3 Takeaways

  • Writing off bad debt is extremely costly.
  • Utilizing an agency to recover money is a sound business practice.
  • Contingent collections are a great alternative to simply writing off bad debt.

Wondering what to do with your past due accounts? Contact us & our in-house collection experts will review your situation and provide you with possible solutions!

What Should You Ask Your Customer When Their Invoices Are Past Due

Posted on February 3, 2017 by - In Other Commercial Credit News

What Should You Ask Your Customer When Their Invoices Are Past Due?

Past due invoices — it’s a simple fact (Although, what a world it would be if everyone paid on time every time!). Perhaps there is a dispute, so your customer is holding off on paying the invoice. Maybe your customer is in fiscal distress and just can’t pay the invoice. But, what should you do if your customer tells you they didn’t get the invoice?

In an article from International Association of Commercial Collectors there are 8 easy questions to ask your customer. A couple of the questions are standard such as confirming your customer’s current address as well as the contact information for the person who should be receiving the invoice.

However, as the author points out, it’s a best practice to also confirm:

“According to our records, the invoice corresponds to your purchase order number ___. Is this P.O. number valid in your system?

Do you have receiving documents for this open item?

Am I correct that the only reason this item remains unpaid is that you do not have an invoice copy on file?

Once you have received the invoice copy, is there any reason this invoice cannot be processed and paid this week?”

Why ask your customer so many questions? Per the author, for clarification purposes and to discourage future use of the tired excuse.

“There are two main reasons for turning a customer’s simple request for an invoice copy into a question-and-answer session:

You have to make certain that excuses for delaying payment once the invoice copy is received by the customer have been addressed and resolved, and

You have to discourage customers from using the “lost invoice” excuse as a regular reason for delaying payment. Customers are less likely to use this excuse in the future if they have to answer these kinds of questions every time they request an invoice copy.”

What questions would you add to this list? Do you have best practices to share?

Send us an email or give us a call to share your successes!

Standby Letters of Credit Show Willingness and Ability to Pay

Posted on January 30, 2017 by - Credit Risk Management

What is a Standby Letter of Credit?

A Standby Letter of Credit is a written guarantee issued by a bank to pay on behalf of their customer in the event their customer does not pay. If the bank’s customer fails to do something (pay on time, complete a project on time, or satisfy terms of a contract), the bank (not the customer who failed to deliver) pays you–the beneficiary.

How do I implement a Standby Letter of Credit?

Here are some basic steps you can take to implement a Standby Letter of Credit for your company:

Step 1

Work with your Sales and Credit Departments to establish guidelines for what kind of job or order will require a Standby Letter of Credit. These guidelines are usually set by very high dollar amounts. From there, you can set the terms of the Standby Letter of Credit for the customer.

Step 2

Communicate the terms of the Standby Letter of Credit to your customer. Make sure one of the terms in the Standby Letter of Credit is “irrevocable.”  Your customer, also known as the applicant, will apply to their bank for the Standby Letter of Credit and will have to provide collateral or meet certain credit standards to compel the bank to issue the Standby Letter of Credit.

Step 3

Once the Standby Letter of Credit has been issued and the issuing bank is viable, orders can be fulfilled/work can be performed for the customer.

*Make sure the total value of the goods/work is not more than the dollar amount of the protection described in the Standby Letter of Credit. It is critical to pay attention to this, especially when multiple orders are being fulfilled.

Why should I use it and what are the benefits?

  • Ultimately, the Standby Letter of Credit is never meant to be “used.”
  • The goal of the Standby Letter of Credit is to show a customer’s ability to repay credit. It prevents large dollar contracts from going unfulfilled if a customer does not pay or cannot pay.
  • If used correctly, a standby notice of credit will be payable upon demand–typically without any objection as long as the collection procedure is followed according to the Standby Letter of Credit.
  • The terms of the Standby Letter of Credit will detail the procedure for collection–it is important that you comply with the terms, as you are required to follow them in order to be paid from the letter of credit.

Standby for Summary

  • A Standby Letter of Credit is a guarantee from a bank to pay the debts of a customer in the event of non-payment.
  • It is a good business practice on both sides; shows willingness and ability to pay.
  • Make sure you keep track of the total value of the project or order, so the dollar amount does not exceed the amount protected by the Standby Letter of Credit.
  • In the event of non-payment, collection can be pursued, but you must comply with the terms of the Standby Letter of Credit and follow the collection procedure detailed in the terms in order to get paid.

Credit Survival Guide: Proof of Claim

Posted on September 27, 2016 by - Credit Risk Management

Credit Survival Guide: Proof of Claim

Maybe you heard it from a colleague, maybe you were notified by your customer’s bank, maybe you saw it online or received an alert from NCS via Bankruptcy Monitoring… It’s official. Your customer has filed for bankruptcy protection and their outstanding balance could have a significant impact on your accounts receivable.

What now?

Tip #36: Filing a Bankruptcy Proof of Claim as a Secured Creditor

Whenever possible, creditors should file a Proof of Claim as a secured creditor. In the event of a debtor’s bankruptcy, secured creditors are paid before unsecured creditors. Properly executing a Mechanic’s Lien, Bond Claim or UCC grants the creditor a secured interest, which increases the likelihood of payment in the event of a bankruptcy.

Mechanic’s Liens, Bond Claims & UCCs are credit tools, proven to put creditors in the best possible position to get paid, but they aren’t the only tools available. A creditor may also be considered secured if there is a Corporate Guarantee or Personal Guarantee in place.

It is important to remember, a creditor can have a secured & unsecured claim in the same bankruptcy.

Simple enough, right? Wrong.

Tip #53: Avoid Common Missteps with the Bankruptcy Proof of Claim Form

Beware! Although the Bankruptcy Proof of Claim form may seem straightforward, here are a few common missteps:

  1. Be on Time! Too often, creditors miss the bar date to file.
  2. Know Your Claim! Including all amounts owed for all accounts and affiliates is a must.
  3. Secured or Unsecured? That Is the Question! Know whether or not you are a secured creditor and file properly.

This takes us to our next tip…

Tip #55: Have NCS Determine If You Have Lien or Bond Claim Rights

Did you provide materials and/or labor to a construction project? If so, request NCS to determine whether lien or bond rights are available!

A review of your claim is easy & complimentary! All you need to do is check the box that reads “Request NCS to determine whether lien or bond rights are available” on your placement form.

After it’s all said and done, don’t let your customer’s debt slip through the cracks.

Tip #58: Keep Track of Unpaid Judgments and Liens

Don’t lose track of those unpaid judgments and liens, and consider renewing an old judgment before it expires.

Title companies may demand pay-offs on old judgments, liens and other encumbrances that remain of record on property being sold or refinanced.

Takeaway

The Proof of Claim can be critical in recovering your accounts receivable. Contact the experts at NCS to evaluate and file the Proof of Claim for you, help you avoid common mistakes, and make sure you are in the best position to get paid.

What Costs Should I Expect with Attorney Collection Efforts

Posted on August 1, 2016 by - Credit Risk Management

Today’s 3-in-3 Topic is: What Costs Should I Expect with Attorney Collection Efforts?

Today we sat down with Danielle Moon to discuss attorney collections and the fees you can expect regarding court costs and suit fees and whether or not you can recover these fees from your customer.

“Could you please explain the process of court costs and suit fees and how they differ?”

Danielle: The attorney will exhaust all amicable efforts to collect the balance prior to recommending suit. They will require the creditor to advance court costs and possibly suit fees, to proceed.

The court costs are used to establish and maintain the suit, including filing the complaint, service on all parties, and any necessary motions. The costs are set by the state, vary by jurisdiction, and are non-negotiable.

The suit fees, by industry standards, are an overall contingent suit fee taken only if funds are collected after suit is filed. Some attorneys will combine a contingent suit fee with a non-contingent suit fee which is a non-refundable fee to initiate the suit.

It is above and beyond the court costs and the contingent fees, and the attorney is entitled to this fee as an officer of the court.

“What factors do attorneys typically look at to determine if they’re going to charge a non-contingent suit fee?”

Danielle:  There are simple factors that may cause the attorney to ask for the fee.

  • If a dispute exists
  • If the attorney believes the suit will lead to an uncollectible judgment
  • If the debtor is in an area with limited legal resources or
  • Some attorneys have that “we’ve always done it this way” mentality, and will always ask for the fee.

The non-contingent suit fee is usually calculated as a percentage of the claim amount, or a flat fee. For example, with a $10,000 claim, you might be asked for a $500 non-contingent suit fee plus court costs.

“Can some of these fees be passed on to the debtor like interest charges and collection fees?”

Danielle:  Absolutely. That is the most common question we get from our clients. When the attorneys file suit, they always ask for interest, costs, and fees based on the client’s credit application, contract, or the statute.

Once a judgment is entered, the debtor is responsible for those fees. Though it’s not likely they will be paid, they are very useful in settlement negotiations. It often comes down to the time value of money.

Do you want to get paid your full judgment over time or take a lesser lump sum now? We’ve had clients who settle at a discount, such as $320,000 paid on a $335,000 claim, rather than go through lengthy, costly litigation…and clients who settle at a $10,000 lump sum now rather than taking the chance a debtor is going to pay a $15,000 judgment over time when they are struggling to keep their doors open.

3-in-3 Takeaways

  • When looking to file suit, the costs vary by jurisdiction and state.
  • Attorneys may charge a non-contingent suit fee, which will vary by the attorney and the specific case. It’s typically charged as a flat fee or a percentage of the full amount.
  • Fees can be passed on to the debtor, but look at the time value of money. Does it make sense to continue to chase a balance if you can settle for slightly less, as opposed to going through a lengthy litigation?

Please remember, every situation is different. If you have any questions, please do not hesitate to contact NCS!

Understanding Bankruptcy Claims and Periods

Posted on July 19, 2016 by - Credit Risk Management

Understanding Bankruptcy Claims and Periods, Plus the Difference between Chapter 7 vs. Chapter 11

What is the primary difference between Chapters 7 & 11? Chapter 7 is a liquidation and Chapter 11 is a reorganization. An entity that files for protection under Chapter 11 is typically an entity that wants to continue to do business.

According to The United States Bankruptcy Court, the debtor typically “proposes a plan of reorganization to keep its business alive and pay creditors over time.” Whereas, an entity that files for protection under Chapter 7 is likely to dissolve once their assets have been distributed – hence the term “liquidation.”

Debtor in Possession

Entities in bankruptcy need money. Seems obvious, right? Bob Eisenbach of Cooley LLP refers to this need for cash as a liquidity crisis.

“Companies in financial distress often find that their need for liquidity goes up just as the availability of traditional financing goes down. The borrowing base may shrink, the ability to get further advances may be cut off, and loans may go into default. Worse, new lenders may be unwilling to make loans given the distress. For many distressed businesses, revenues may also be declining and insufficient to cover expenses without additional financing. A liquidity crunch can quickly snowball into a liquidity crisis.”

You may hear the bankrupt entity referred to as Debtor in Possession (“DIP”). DIP means the business will remain in the possession of the debtor during the bankruptcy and it will continue its normal transactions, such as payments to creditors, under the bankruptcy guidelines.

DIP financing is exactly what you would think: it’s financing approved through the bankruptcy court that allows the debtor to continue to operate their business as usual. When the DIP has financing to pay bills, you, as a creditor, could benefit.

Are You a Secured Creditor?

If your customer files for bankruptcy protection and you have a security interest via a UCC filing or are securing mechanic’s lien rights, then you would be considered a secured creditor. In other words, you have secured your customer’s credit with some type of collateral.

If you have not secured your customer’s credit, then you are an unsecured creditor. (Always better to be a secured creditor!) Whether secured or unsecured, there are several bankruptcy claims and periods you should be aware of.

Bankruptcy Claims & Periods

  • 503(b)(9) Claim: the claim a creditor can make for the materials or services provided to the debtor within 20 days preceding the petition date, if “the goods have been sold to the debtor in the ordinary course of such debtor’s business.”
  • Reclamation Claim Period: the timeframe in which the creditor is permitted to take back certain goods sold to their insolvent customer. The reclamation notice needs to be sent within 20 days from the petition date and covers materials or services provided to the debtor within 45 days preceding the petition date.
  • Proof of Claim: defined by the United States Bankruptcy Court as “a written statement and verifying documentation filed by a creditor that describes the reason the debtor owes the creditor money.” – The due date for this document is determined by the court.
  • Preference Period: the 90-day period prior to the bankruptcy filing.  If the debtor makes any payments to the creditor within that preference period, the trustee can recall those payments.

Please bear in mind, this is not an exhaustive list. If you anticipate your customer filing for bankruptcy protection or if your customer has already filed for bankruptcy protection, quickly contact a legal professional for guidance.

Assessing and Reinforcing Litigation in Mexico Part 3

Posted on July 14, 2016 by - In Other Commercial Credit News

Assessing and Reinforcing Litigation in Mexico Part 3: Legal Strategy

Contribution by Mr. Romelio Hernández

Romelio Hernández is President at HMH Legal, a professional corporation specialized in credit and collection services in Mexico. He is based in Tijuana, Baja California, México, where he works extensively with foreign exporting companies and collection agencies assisting them with their out-of-court and legal collection efforts throughout Mexico. His litigation experience of sixteen years and exposure to international commercial law has allowed him to provide guidance to foreign companies in mitigating the various risks of selling international. Romelio graduated from Universidad Autónoma de Baja California, and was admitted to practice law in Mexico since 1997. Romelio holds a Masters’ Degree in Comparative Law (LL.M.) from the University of San Diego School of Law (2011).

This is the final in a 3 part series.

View Part 1: Costs & Rewards and Part 2: Risks

The last piece of the puzzle is all about reducing risks and raising your chances of success. This comes while confirming that you have a good quality case with moderate risks. The equation involves good legal counsel that is willing to share the risk, and a sound action plan that you can both come up with to control the costs and time of litigation. We should look into these factors in more detail.

A. Local Attorneys

The first thing I believe you need to know about attorneys in Mexico, is that ethical conduct is mostly unregulated. Attorneys in Mexico are not obligated to belong to a bar association to practice law, and thus, are not subject to penalties or disbarment for unethical behavior. This surely calls for caution when selecting a professional for legal representation. And while not all lawyers behave this way and there are many professionals who are worthy of trust, the key lies not only in finding a reliable source, but in finding one that is the right fit for your case. For instance, even when you come across a good transactional lawyer, you should question whether he would be the right fit to handle your litigation case. The same is true for a litigation attorney that deals only with tax or labor cases. Would he be the right fit for an international collection claim? Again, basic knowledge about these issues and common sense may help come up with the right answer.

The second thing I believe is important is knowing the current practices of the legal profession, and trying to come up with a good partnership. Because of the inefficiencies and problems of the Mexican legal system, few attorneys will be willing to handle a collection case based on contingency fees. In fact, most lawyers will offer services under hourly fees, or under fixed fees that may be contingent upon progress of your case but regardless of whether an actual recovery is made. The key is finding the right professional that is willing to share the risk by handling your case under contingency fees, or at least under a mix of fixed or hourly and contingency fees. For instance, you can negotiate a small advancement to prepare your complaint and handle the initial stages, but subject the main part of the fee on an actual recovery. I believe this to be a fair arrangement that any interested attorney would welcome. And if your attorney is just unwilling to handling the case under a contingency fee (but not opposed to hourly fees), you should seriously question whether your case is a worthy candidate for litigation.

B. Action Plan

A way to control time and costs in all projects, is with project management. Although there are many variables in litigation, I believe that good planning and follow up can help tremendously in controlling things and raising your chances of success. You simply will not leave your case with your attorney and turn your back. A good practice requires that your attorney explains in detail the type of case that he will file, the evidence required, and the overall strategy pursued to win the case and collect. You can complement this effort by trying to gain a basic knowledge of the legal landscape in Mexico, including the different proceedings available and the stages to reach a verdict. While you are not expected to become an expert, the effort to gain just basic knowledge will pay dividends when teaming up with your lawyer in setting up the best strategy.

Finally, a good strategy to discuss with your lawyer to keep costs under control, is the exit strategy. Many times you will not be convinced about litigation, or you will not have the resources to go all the way through. If this is the case, but you still want to try a strong action to see if you can get a reaction from your debtor, all while keeping your costs down, discuss with your attorney an exit strategy. There might be a possibility of filing preliminary actions, or going through the preliminary stages of a criminal or civil action without the risk of having to pay court costs. There are different possibilities out there, all of which will depend on the creativity of your legal team, under your approval and supervision.

C. Who Makes the Decision?

In the movie The Rainmaker, attorney Deck Shifflet (Danny DeVito) is teaching the young lawyer Rudy Baylor (Matt Damon) the tricks of the trade. After Rudy complains of that day’s lesson being blatant ambulance chasing, Deck objects: “who cares? There’s a lot of lawyers out there, it’s a marketplace, it’s a competition.” This scene illustrates a reality out there: that some attorneys may try to sell their services hard, and will often make recommendations for legal action when all facts point into another direction. This is specially the case when the attorney is looking to work under hourly or fixed fees, and is not willing to share the risk by handling your case under contingency fees.

Don’t get confused. While you are not the legal expert, it only takes knowledge of the issues raised here and good common sense to make a sound decision on whether to litigate or not. You will of course seek guidance from your local attorney, but the decision lies with you, not with him. Have the attorney provide all the information required, ask a lot of questions, and then come up with a sound business decision of your own.

Conclusion

Not all claims are candidates for litigation in Mexico. Thus, you have to be diligent enough to avoid throwing good money after bad. Discard those small claims that have no collateral or other security (such as pagarés) and that will not pay for good legal representation while returning a profit. With all larger claims do your due diligence to make sure that there are no unreasonable risks that will seriously put in jeopardy your collection, or that will result in unreasonable delay or cost. Once you have found the good candidates, make sure that you find the right partner that will share at least some of the risk of litigation, and put a game plan in place to reduce the remaining risk to the extent possible. Finally, keep good communication with your attorney to make sure that your plan is on track, and adjust whenever necessary to avoid any surprises.

While it is sad to write off a debt and accept the loss, it is a lot better than pursuing a cause that is doom for failure and that adds additional loss in money, time, and energy, aside from stress. You should now direct your efforts at building a system that will prevent or reduce future write-offs as reasonably possible, and on reinforcing litigation for those good quality claims that have their chance of success in court.

DISCLAIMER: The information you obtain in this article is not, nor is intended to be legal advice. The law office of HMH Legal will only provide legal advice after having entered into an attorney-client relationship. It is imperative that any action you undertake be done on the advice of counsel, and not based solely upon this article.

This material has been provided as free educational message by HMH Legal. We invite you to send us your comments or to call us for a free consultation. If you have any questions please call us at +1 (619) 819-5107 or 819-8518. You can also email us at info@hmhlegal.com. If you would like further information about our firm or our educational handouts, please visit us at www.hmhlegal.com.

Learn More about Contingent Collections

Posted on June 20, 2016 by - Credit Risk Management

Learning More About Contingent Collections: What Is a Contingent Collection?

You may be asking yourself what is meant by a contingent collection.  Well, a contingent collection means you only pay a contingency fee on the amount of money that is collected. This collection can be secured or unsecured, and worked in-house by NCS or through an attorney that is part of the NCS attorney network local to your debtor.

How Does It Work?

Once we receive the commercial collection placement and supporting documents from you, we will complete research on the debtor to locate alternative addresses, phone numbers, and contacts. From there, we will send the initial demand letter to the debtor and call them in an attempt to collect the money owed or to help resolve a dispute should there be one. If the debtor agrees the debt is owed, we may also work with them to set up a payment plan that meets your approval.

If there is a lien or bond claim in place and the debtor is requesting a release, NCS can act as an exchange service. Throughout the process, NCS will keep your dedicated collections contact apprised of all progress as the debt is pursued.

I’m Just Going to Write-Off the Debt

Now you may be asking yourself, why would I not just write off the bad debt? Writing off bad debt is not as simple as just that bad debt; it generally costs a great deal more to recover that lost revenue.

For example, if you write off $50,000 at a 30% margin you would have to generate over $166,000 in additional sales to recover that lost profit. And since a contingent collection placement typically does not cost you anything unless money is recovered, the question you should be asking is:  Why wouldn’t I try a collection placement before just writing off the debt?

Interested in learning more about the real cost of a write-off? Check out this infographic!

Need assistance with collecting a past due account or have questions about our collection services? Contact us today!