U.S. state laws on fair debt collection generally fall into two categories: laws which require persons who are collecting debts from consumers to be licensed, registered or bonded in order to collect from consumers in their states, and laws that protect consumers from specific unfair practices by debt collectors, which may include collection agencies and sometimes original creditors. Many state laws–unlike the FDCPA–cover original creditors, thus providing greater protections to consumers than the Federal FDCPA.
Although not all states have such laws, the unfair practices that are prohibited generally track those that are also prohibited under the FDCPA. Some states have a complete prohibition against collecting from its residents unless the collection agency has complied with licensing or bonding, others exempt out-of-state collectors from those requirements. Examples of prohibitions of unfair practices by collectors include contacting employers after having been given notice not to do so, pretending to be a government agency, pretending to be an attorney or falsely threatening with a lawsuit. Many state fair debt collection laws also provide for a private right of action (consumers can sue the debt collector) by consumers against collectors that violate their provisions.
Deciding when it is time to get serious about recovering bad debts may be as simple as reviewing current procedures and systems for debt collection. There are proven strategies to make the job less tedious and more efficient. Following these strategies will help you to make great strides in producing more positive results for controlling your bad debts and save you time as well.
Have a written policy on how to deal with bad debt Having a plan or policy about how best to deal with bad debt is an important aspect of debt control and can be incorporated as part of the regular operations for the business. A written policy could include step by step instructions including –
Setting a time limit on overdue accounts
Contacting the customer by phone
Sending reminder notices
Issuing a demand letter
Hand the matter over to a collection agency
Ensure customers understand the terms and conditions of the credit contract
Before approving a credit account with any new customer, make sure they have read and understand your terms and conditions. If a credit agreement clearly states your expectations and is executed by the customer, you have a better chance of the customer honouring your terms and paying on time.
Request a deposit before goods are received
For larger purchases and new customers that don’t have a proven trade history, it is always a safe option to request a deposit or part payment for the goods before they take delivery.
Implement progress payments for services
Some industries use progress payments as normal practice. A builder, for example, will perform the work in stages and invoice at the end of completed tasks. This same principle can be applied to anyone providing services and can be a useful way to introduce a debt recovery agency if the customer defaults at any step.
Maintain accurate records
Maintaining accurate records for all sales, services and related payments is imperative to getting your debts under control and actually preventing bad debts in the future. Therefore, in the event a debtor disputes an amount owing, you will have accurate information to back up your claim for the unpaid moneys.
Document all dealings with the customer
Documenting all phone calls, visits and correspondence with the customer will be invaluable if the account has to be settled in the legal system further down the track. It also gives you information at your finger tips when dealing with the customer at any time.
Hand the debt over to a collection agency after a given time has lapsed
It is important not to let a bad debt accumulated over time as this can have a negative effect on your cash flow and business operations. Handing the debt over to a collection agency makes good sense if you have tried without success to clear an old debt. Furthermore, debt collection agencies are experts in recovery of overdue debt. They will give you the greatest chance of recovery and also allow you to spend time on what you do best.
Prevention
If you find yourself continually having to chase debt, it could be that you need to spend some time improving your existing methods for account control. Preventing customer accounts from exceeding your trading terms could save you valuable time in the long term. Credit checks are also a useful tool to help prevent debts. These can be performed by most mercantile debt collection agencies.
Whatever the type of business, be it large or small, with a single employee or hundreds of staff, all are susceptible to that financial plague known as bad debt.
It is a well-known fact that a business is only as strong as its customers. If those customers are not reliable when it comes to the payment of due bills, then without an effective system in place to recover the outstanding debt and maintain adequate cash flow, the business will head down the slippery slope to oblivion. Debt collection is a necessary aspect of every company.
Most people at one time or another either forget or misplace an outstanding bill. A simple, polite, written reminder or telephone call is normally sufficient to nudge this type of debtor to settle their account and inevitably, immediate payment will follow.
Next are the customers who become slightly overextended and will take a week or so over the normal 30-day credit period to settle their account. Finally we have what may be termed the serial debtor. This is a customer who, having received the goods or services from the business, just either cannot afford to settle the debt or indeed has no intention to do so.
If a business carries out its own debt collection, it must remove staff from their existing jobs so they may be deployed chasing up the outstanding debts, unless of course, additional staff are specifically employed to carry out this function. In either event, it is not really cost-effective for the business to do this, since the first option would mean existing staff are unable to undertake the jobs for which they were originally employed, whilst the second option, will place additional expenses on the business.
Debt collection can be very challenging and involves a lot more than just issuing a few letters to wayward debtors. If handled incorrectly, the business could lose not only money but valued customers and credibility and, in extreme instances, could find itself at loggerheads with the law.
Outstanding debtors curtail business profits, restrict growth and more important, reduce cash flow available for business development.
Debt collection companies can reduce both the costs and risks involved with the process of recovering outstanding debts. A professional debt collection company has the experience necessary to issue non-threatening yet persuasive letters, that encourage the majority of debtors to settle their outstanding accounts in a time frame more acceptable to the business.
As with any other type of business, there are both good and bad debt collection companies. When selecting one, the business should look and examine the following points:
the history of the company and its owners
expertise of staff
methods of debt collection
experience in credit management
client references
calculation of fees
A professional debt collection company will aid any business to increase cash flow, and retain good customer relations, whilst at the same time, freeing up its own staff and resources to take the business forward.
Child support payments are distributed in a variety of ways. In cases where an obligor is liable for specific expenses such as school tuition, they may pay them directly instead of through the obligee.
In some jurisdictions, obligors (paying parents) are required to remit their payments to the governing federal or state child support enforcement agency. The payments are recorded, any portion required to reimburse the government is subtracted, and then the remainder is passed on to the obligee (receiving parent), either through direct deposit or checks.
The first payee for child support depends on the current welfare status of the payee. For example, if the obligee is currently receiving a monthly check from the government, all current support collected during said month is paid to the government to reimburse the monies paid to the obligee. Regarding families formerly on assistance, current support is paid to the family first, and only after said support is received, the government may then collect additional payments to reimburse itself for previously paid assistance to the obligee (receiving parent). See 42 USC 657: “(A) Current Support Payments: To the extent that the amount so collected does not exceed the amount required to be paid to the family for the month in which collected, the State shall distribute the amount so collected to the family.”.
Within the United States, a 2007 study conducted through the University of Baltimore estimates that 50% of all child support arrears are owed to the government to reimburse welfare expenses. Half of U.S. states pass along none of the child support they collect to low-income families receiving welfare and other assistance, instead reimbursing themselves and the federal government. Most of the rest only pass along $50.00 per month. The bipartisan 2006 Deficit Reduction Act and other measures have sought to reduce the amount of money claimed by the government and to ensure that more funds are accessible by children and families, noting that more obligors (paying parents) are willing to pay child support when their children directly benefit from payments.
Regulations and laws on the enforcement of child support orders vary by country and state. In some jurisdictions, such as Australia, enforcement is overseen by a national office. In others, such as Canada, the responsibility to enforce child support orders rests with individual provinces, with financial and logistical assistance from the federal government. In the United States child support enforcement is also handled largely at the state level, but non compliant parents who meet certain criteria, such as traveling across state lines to circumvent orders or owing more than two years of support payments, may be subjected to federal prosecution under the Federal Deadbeat Punishment Act.
One focus of Article 27 of the Declaration of the Rights of the Child is the establishment and strengthening of international treaties to further aid in child support order enforcement across national and international boundaries. Under these agreements, orders established in one country are considered valid and enforceable in another country, and may be pursued through local court processes. The goal of such conventions is to ensure that noncompliant parents will not be able to evade support payments by crossing an international border.
To this end, various international conventions regarding inter-jurisdictional enforcement of maintenance orders have been created, including the Hague Conference’s 1973 Convention on the Recognition and Enforcement of Decisions relating to Maintenance Obligations and the 1956 United Nations Convention on the Recovery Abroad of Maintenance.
More than 100 nations currently have reciprocal arrangements for child support orders. Examples of reciprocal agreements include the UK Reciprocal Enforcement of Maintenance Orders (REMO) and those of Canada, Australia and New Zealand, the United States and the European Union.
Consequences of non-payment vary by jurisdiction, the length of time the parent has been noncompliant, and the amount owed. Typical penalties include wage garnishment and denial or suspension of drivers, hunting and professional licenses. In the United States, noncompliant parents who are more than $2500 in arrears may be denied passports under the Passport Denial Program. Australia, Austria, and Finland do not imprison persons for failure to pay child-support arrears. In the U.S., in contrast, non-payment of child support may be treated as a criminal offense or a civil offense, and it can result in a prison or jail term. On a typically day, roughly 50,000 persons are incarcerated in U.S. jails and prisons as a result of child-support debts. In addition, child-support debtors are subject to fines and property seizure.
The enforcement provisions affecting US passports have thus far survived Constitutional challenges in Weinstein v Albright (2001), Eunique v Powell (2002), In re James K. Walker (2002), Dept of Revenue v Nesbitt (2008), Risenhoover v Washington (2008), and Borracchini v Jones (2009).
In divorce cases, child support payments may be determined as part of the divorce settlement, along with other issues, such as alimony, custody and visitation. In other cases, there are several steps that must be undertaken to receive court-ordered child support. Some parents anticipating that they will receive child support may hire lawyers to oversee their child support cases for them; others may file their own applications in their local courthouses.
While procedures vary by jurisdiction, the process of filing a motion for court ordered child support typically has several basic steps.
1. One parent, or his or her or her attorney, must appear at the local magistrate or courthouse to file an application or complaint for the establishment of child support. The information required varies by jurisdiction, but generally collects identifying data about both parents and the child(ren) involved in the case, including their names, social security or tax identification numbers and dates of birth. Parents may also be required to furnish details relating to their marriage and divorce, if applicable, as well as documents certifying the identity and parentage of the child(ren). Local jurisdictions may charge fees for filing such applications, however, if the filing parent is receiving any sort of public assistance, these fees may be waived.
2. The other parent is located, and served a court summons by a local sheriff, police officer, or process server. The summons informs the other parent that they are being sued for child support. Once served, the other parent must attend a mandatory court hearing to determine if they are responsible for child support payments.
3. In cases where parentage of a child is denied, has not been established by marriage or is not listed on the birth certificate, or where paternity fraud is suspected, courts may order or require establishment of paternity. Paternity may be established voluntarily if the father signs an affidavit or may be proven through DNA testing in contested cases. Once the identity of the father is confirmed through DNA testing, the child’s birth certificate may be amended to include the father’s name.
4. After the responsibility for child support is established and questions of paternity have been answered to the court’s satisfaction, the court will notify the obligor and order that parent to make timely child support payments and establish any other provisions, such as medical orders.
Alimony has been discussed in ancient legal texts including the Babylonian Code of Hammurabi (#137-#142) and the Code of Justinian. The concept of modern alimony in the United States derives from English ecclesiastical courts that awarded alimony in cases of separation and divorce. Alimony Pendente lite was given until the divorce decree, based on the husband’s duty to support the wife during a marriage that still continued. Post-divorce or permanent alimony was also based on the notion that the marriage continued, as ecclesiastical courts could only award a divorce a mensa et thora, similar to a legal separation today. As divorce did not end the marriage, the husband’s duty to support his wife remained intact.
The term alimony comes from the Latin word alimōnia (“nourishment, sustenance”, from alere, “to nourish”), from which also alimentary (of, or relating to food, nutrition, or digestion) and the Scots law concept of aliment, and was a rule of sustenance to assure the wife’s lodging, food, clothing, and other necessities after divorce.
Liberalization of divorce occurred in the nineteenth century, but divorce was only possible in cases of marital misconduct. As a result, the requirement to pay alimony became linked to the concept of fault in the divorce. Alimony to wives was paid because it was assumed that the marriage, and the wife’s right to support, would have continued but for the misbehavior of husband. Ending alimony on divorce would have permitted a guilty husband to profit from his own misconduct. In contrast, if the wife committed the misconduct, she was considered to have forfeited any claim to ongoing support. However, during the period, parties could rarely afford alimony, and so it was rarely awarded by courts. As males’ incomes increased, and with it the possibility of paying alimony, the awarding of alimony increased, generally because a wife could show a need for ongoing financial support, and the husband had the ability to pay.
No-fault divorce led to changes in alimony. Whereas spousal support was considered a right under the fault-based system, it became conditional under the no-fault approach. According to the American Bar Association, marital fault is a “factor” in awarding alimony in 25 states and the District of Columbia. Permanent alimony began to fall out of favor, as it prevented former spouses from beginning new lives, though in some states (e.g., Massachusetts, Mississippi, and Tennessee), permanent alimony awards continued. Alimony moved beyond support to permitting the more dependent spouse to become financially independent or to have the same standard of living as during the marriage or common law marriage, though this was not possible in most cases.
In the 1970s, the United States Supreme Court ruled against gender bias in alimony awards, and the percentage of alimony recipients who are male rose to 3.6% in 2006. In states like Massachusetts and Louisiana, the salaries of new spouses may be used in determining the alimony paid to the previous partners. Most recently, in several high profile divorces, females such as Britney Spears, Victoria Principal, and Jessica Simpson have paid multi-million dollar settlements in lieu of alimony to ex-husbands who were independently wealthy. According to lawyers, males are becoming more aggressive in the pursuit of alimony awards as the stigma associated with asking for alimony fades.
A company uses various kinds of debt to finance its operations. The various types of debt can generally be categorized into: 1) secured and unsecured debt, 2) private and public debt, 3) syndicated and bilateral debt, and 4) other types of debt that display one or more of the characteristics noted above.
A debt obligation is considered secured, if creditors have recourse to the assets of the company on a proprietary basis or otherwise ahead of general claims against the company. Unsecured debt comprises financial obligations, where creditors do not have recourse to the assets of the borrower to satisfy their claims.
Private debt comprises bank-loan type obligations, whether senior or mezzanine. Public debt is a general definition covering all financial instruments that are freely tradeable on a public exchange or over the counter, with few if any restrictions.
A basic loan or “term loan” is the simplest form of debt. It consists of an agreement to lend a fixed amount of money, called the principal sum, for a fixed period of time, with this amount to be repaid by a certain date. In commercial loans interest, calculated as a percentage of the principal sum per year, will also have to be paid by that date, or may be paid periodically in the interval, such as annually or monthly. Such loans are also colloquially called bullet loans, particularly if there is only a single payment at the end – the “bullet” – without a “stream” of interest payments during the “life” of the loan. There are many conventions on how interest is calculated – see day count convention for some – while a standard convention is the annual percentage rate (APR), widely used and required by regulation in the United States and United Kingdom, though there are different forms of APR.
In some loans, the amount actually loaned to the debtor is less than the principal sum to be repaid; the additional principal has the same economic effect as a higher interest rate (see point), and is sometimes referred to as a banker’s dozen, a play on “baker’s dozen” – owe twelve (a dozen), receive a loan of eleven (a banker’s dozen). Note that the effective interest rate is not equal to the discount: if one borrows $10 and must repay $11, then this is ($11–$10)/$10 = 10% interest; however, if one borrows $9 and must repay $10, then this is ($10–$9)/$9 = 11 1/9 % interest.
Rather than the entire principal amount of the loan being due at the end of the loan, the principal may be slowly repaid or “amortized” over the course of the loan – see amortizing loan. This is particularly common in mortgages and in the minimum payment on credit cards.
A syndicated loan is a loan that is granted to companies that wish to borrow more money than any single lender is prepared to risk in a single loan, usually many millions of dollars. In such a case, a syndicate of banks can each agree to put forward a portion of the principal sum. Loan syndication is a risk management tool that allows the lead banks underwriting the debt to reduce their risk and free up lending capacity.
A bond is a debt security issued by certain institutions such as companies and governments. A bond entitles the holder to repayment of the principal sum, plus interest. Bonds are issued to investors in a marketplace when an institution wishes to borrow money. Bonds have a fixed lifetime, usually a number of years; with long-term bonds, lasting over 30 years, being less common. At the end of the bond’s life the money should be repaid in full. Interest may be added to the end payment, or can be paid in regular installments (known as coupons) during the life of the bond. Bonds may be traded in the bond markets, and are widely used as relatively safe investments in comparison to equity.
An increasing number of collection agencies, sometimes referred to as “debt buyers”, purchase debts from creditors for a percentage of the value of the debt and pursue the debtor for the full balance, sometimes plus “interest”. This prevents a debtor from merely defaulting or forgetting a debt. It also generates immediate revenue, albeit much reduced, for the creditor and reduces the public relations risks involved with defaulted debt collection.
Some states have specific laws regarding debt buying. For example, Kansas does not allow wage garnishments on purchased debt.
Debtors
The person who owes the bill or debt is the debtor. Debtors may fail to pay (default) for various reasons: because of a lack of financial planning or overcommitment on their part; due to an unforeseen eventuality such as the loss of a job or health problems; dispute or disagreement over the debt or what is being billed for; or dishonesty on the part of either the creditor or the debtor. The debtor may be either a person or an entity such as a company. Collection of debts from individual people is subject to much more restrictive rules than enforcement against a business.
A debt collection agency is a business that pursues payments of debts owed by individuals or businesses. Most collection agencies operate as agents of creditors and collect debts for a fee or percentage of the total amount owed.
There are many types of debt collection agencies. First-party debt collection agencies are oftentimes subsidiaries of the original company the debt is owed to. Third-party agencies are separate companies contracted by a company to collect debts on their behalf for a fee. Debt buyers purchase the debt at a percentage of its value, then attempt to collect it. Each country has its own rules and regulations regarding them.
