Commercial Collections Law Commercial collections law applies to those situations where one business fails to pay a debt owed to another business. When a debt becomes overdue, the company to whom the debt is owed typically will undertake some combination of letters, phone calls, or personal visits to remind the customer of the debt and to encourage payment.
The patience shown by the creditor will normally depend on the prior business relationship with the overdue customer, with long-standing customers given more leeway than one-time or first-time customers. Creditors are under no obligation to grant leeway to customers with overdue bills. They have the right to take legal steps to collect the debt as soon customer is in default. The considerations for how best to proceed are usually driven by business concerns. Suing every customer as soon as the debt was overdue by a day could, of course, drive away customers and drive up costs unnecessarily.
In this discussion, we're presuming that the company owed the debt has done what it can to collect the debt without resort to legal means, and it now wants to know its options. The law in this area is primarily based on Illinois law and decisions.
Secured debts. The creditor business's options depend upon the status of the debt. The business is in the best position to collect if the debt is secured by collateral. If the value of the collateral exceeds the value of the debt, it's just a matter of taking possession of the collateral and selling it, which is rarely as easy as it sounds.
The rule for when creditors can simply take possession of the collateral, without having to resort to the courts, is that they can take possession when it doesn't breach the peace, which usually means when they have the debtor's permission. Note that the creditor can never take possession of real estate. Creditors should be very careful about sneaking around and taking possession of collateral without the debtor's permission. Such actions, if not handled appropriately, could subject the creditor to legal liability.
If the creditor does not have the debtor's permission and cannot repossess the collateral without breaching the peace, the creditor will have to file a legal action to recover the goods. The end result of a successful action is that the sheriff will repossess the goods and turn them over to the creditor.
Unsecured debt. If the debt is unsecured, the creditor has a couple of options. Both of these options also apply to the secured creditor where the value of the collateral is less than the debt. The secured creditor is considered to be an unsecured creditor for any amount of the debt in excess of the value of the collateral.
One option is to continue to pursue collection of the debt through a collection agency. The collection agency will pick up where the creditor left off. The collection agency will typically charge as a fee a percentage of what is collected. The collection agency, however, won't take on the work unless the debt is fairly large or there are many debts to collect because otherwise the tiny fee isn't worth their effort. Using a collection agency makes sense where the creditor has been unable to collect the debt despite its best efforts.
The other option is to sue the debtor to collect the debt. In many cases, the debtor won't respond to the suit and a default judgment will be entered against the debtor for the amount of the debt, plus attorney's fees and costs. If the debtor does respond, the creditor will need to prove the debt in court.
Post-judgment remedies. Once a judgment is obtained against the debtor, the creditor will file the judgment with the county clerk. The filing acts as public notice of the debt owed to the creditor.
Once the creditor has a judgment, it can seek to have certain of the debtor's assets seized to pay the judgment. Some assets may be exempt from seizure under state law. If the debtor has no assets to seize to pay the judgment, the debtor is said to be judgment proof.
Bankruptcy. Where a debtor is in financial difficulty, the creditor who wants to collect the debt needs to be cautious. Overzealous efforts to collect the debt could drive the debtor into bankruptcy. If the debtor files for bankruptcy, an unsecured creditor may end up getting just a few cents on the dollar or nothing at all.
Getting help. One of the more difficult decisions for businesses in when to escalate debt-collection efforts from a gentle reminder of the debt to more aggressive tactics. Businesses have to balance the need for revenues against the wish not to alienate customers. And, of course, they have to consider the costs involved, not just in the cost of an attorney or a collection agency, but also in terms of time lost in pursuing overdue debts.
One idea is to develop an approach and to apply it consistently. For example, a business might identify the customers it won't pursue action against no matter what. The others would all be sent a letter after their debt was 30 days overdue and a second letter after the debt was 60 days overdue. All debts 90 days old would be turned over to a collection agency. All debts that remained unpaid after six months with the collection agency would be turned over to a lawyer, unless the debtor were determined to be judgment proof.
The approach described above won't work for every business or every industry. The important point is to develop a policy that removes the difficult decision of when to escalate collection efforts from having to be made anew with every debtor.