Filing a lawsuit to enforce your rights on an equipment finance agreement or lease may be a foregone conclusion. However, what steps you take before taking legal action are just as important. Doing your homework and exploring resolution opportunities prior to filing the lawsuit can save a lot in costs and time. Here are some helpful tips to help navigate the pre-litigation collection process:
While typically not an issue in equipment finance agreements, a threshold question is whether the debt is consumer or commercial in nature. The answer to this question will determine how and when you can make contact with your debtor. A debt incurred for “personal, family, or household use” would be a consumer debt and governed by the myriad of consumer protection statutes like the Fair Debt Collection Practices Act and the Truth In Lending Act (among others). A debt incurred for a business purpose is commercial in nature, and not subject to these extra consumer protections.
Next, background research on your debtor is needed to ensure up-to-date information. Noting the proper address, telephone number, names of owners and offices of the company, and the actual corporate entity is important for contact. Cross-reference this information with your internal records to see if anything has changed.
Making contact with your debtor is an integral part of the process that will dictate the next steps. On a defaulted debt, a letter is the first contact you should make. The letter should display the seriousness of the matter and demand concrete action. The letter should notify the debtor of the exact contract provisions that are in default, the amount of the debt (including all interest and fees), the action required (payment or contact), a certain date for the required action, and the appropriate person in your organization to contact. Also, do not forget any specific legal disclosures required by the state or federal government.
Once the letter is sent, phone calls should follow shortly thereafter. Hopefully, your research has uncovered the most up-to-date contact information. The response to your phone calls will determine where the case goes. An engaging response by your debtor will open the door to possible resolution. Lack of response will mean a decision whether or not to pursue legal action.
If you receive an engaging response to your inquiry, an offer of resolution could be forthcoming. The debtor may make a lump sum offer to settle, offer a new payment plan, ask for a forbearance, or offer the return of the secured collateral. The next step in the process should guide your decision.
Before making any decision on a settlement offer proposed by the debtor, an asset search should be conducted and evaluated to determine if this is a favorable deal for you. It is essential to take the time to research the assets of the business and all liable parties.
When researching the business, there are many relevant questions to answer:
Next, background research on your debtor is needed to ensure up-to-date information. Noting the proper address, telephone number, names of owners and offices of the company, and the actual corporate entity is important for contact. Cross-reference this information with your internal records to see if anything has changed.
Making contact with your debtor is an integral part of the process that will dictate the next steps. On a defaulted debt, a letter is the first contact you should make. The letter should display the seriousness of the matter and demand concrete action. The letter should notify the debtor of the exact contract provisions that are in default, the amount of the debt (including all interest and fees), the action required (payment or contact), a certain date for the required action, and the appropriate person in your organization to contact. Also, do not forget any specific legal disclosures required by the state or federal government.
Once the letter is sent, phone calls should follow shortly thereafter. Hopefully, your research has uncovered the most up-to-date contact information. The response to your phone calls will determine where the case goes. An engaging response by your debtor will open the door to possible resolution. Lack of response will mean a decision whether or not to pursue legal action.
If you receive an engaging response to your inquiry, an offer of resolution could be forthcoming. The debtor may make a lump sum offer to settle, offer a new payment plan, ask for a forbearance, or offer the return of the secured collateral. The next step in the process should guide your decision.
Before making any decision on a settlement offer proposed by the debtor, an asset search should be conducted and evaluated to determine if this is a favorable deal for you. It is essential to take the time to research the assets of the business and all liable parties.
When researching the business, there are many relevant questions to answer:
- Is the business a proper corporate entity? If not, the owners of the business, or the signer of the contract, may be personally liable. Also, research showing that the corporate entity is no longer registered as an entity with the state could mean that it is no longer operational. Sometimes, a simple call to the business can let you know whether it still exists.
- How many liens are on the business? This information can be gained by reviewing your state’s UCC’s filings with the Secretary of State. It is helpful to know how heavily liened the business assets are, and the timing of these liens in regards to your rights to the collateral. Also, try to determine the extent that the IRS and state taxing authorities have an interest in the business property.
- What does the business own? Reviewing public records can reveal whether the business owns its own land and facilities, fleet of vehicles, equipment, and/or inventory. It’s important to cross-reference this information with the lien information to determine the encumbrances on the assets.
- Is the business now operating in a new location? Occasionally a business will close in one location and open up in another under a new name or corporate entity. It is important to determine whether the new business is merely a successor to the old and thus possibly liable for the original business debt. This is a factual determination that will review such factors as the type of business, phone numbers, employees, websites, client lists, ownerships, etc. It is also important to determine if the old business transferred assets to the new business without consideration in an attempt to defraud creditors. While this information may help the negotiation process, it is also needed for any eventual lawsuit on debt that may arise.
- What is the guarantor’s financial condition? Hopefully, you have one or more guarantors personally liable on the debt. Researching information on their property ownership, vehicles, employment, liens, etc., helps analyze your settlement position. Also, reviewing whether there has been a bankruptcy filing or death has a major impact on your rights to enforce the agreement and guaranty.
There are several helpful resources to obtain the information you need:
- The Secretary of State has UCC and corporate information
- Local county auditor and recorder’s offices have property records
- Online court records can show other lawsuits and/or judgments against your debtor
- Credit reporting agencies can provide a snapshot as to debts and employment
- LexisNexis, Westlaw Edge, and other pay sites allow for extensive public records searches (including property ownership, judgments, lawsuits, employment, location information, vehicle registrations, criminal records, etc.)
- Simple internet searches on your debtor can yield useful information. You may find information as to whether the business website is still operational, any local news stories about the business, or possible business asset sales.
Armed with your research, it is now time for the final step in the pre-litigation collection process. Any settlement proposals advanced by your debtor can now be properly analyzed in light of the background and asset information you have. For example, it may be appropriate to accept a smaller monthly payment plan if the business is closed and the guarantor is retired on a fixed income. Alternatively, smaller monthly payments from an operational business that retains the collateral would not be a good candidate for settlement.
While you may still end up in litigation after concluding this process, the advantages cannot be overstated. Researching your debtor’s assets, claims, and overall financial position can give you a boost during litigation and streamline the process for post-judgment execution.
For more comprehensive information and insights, watch our Ask a Pro: Everything You Need to Know About Commercial Collections webinar.
This blog is not a solicitation for business and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.
