Commercial Collections Law

Businesses often face the difficult task of collecting debts owed to them by consumers or other businesses. Creditors have an indisputable right to seek payment on outstanding debts, and there are various methods by which to do so. However, there is also a variety of state and federal laws that regulate collection activity to protect both consumers and businesses from abusive practices. This chapter outlines some methods for improving debt collection and identifies those practices that are prohibited.

Creating the Debt

Many commercial and consumer transactions are a one-time occurrence. Goods or services are exchanged for payment on the spot, and there is no further contact between the parties, at least until the next transaction. Some transactions, however, create an on-going credit relationship between the parties. This relationship may be created in accordance with a specific credit agreement, through an installment sale, through a consumer loan or a revolving credit agreement, or in another manner. Regardless of the form, most states require full disclosure of the terms of the agreement. A lawyer familiar with this area of practice can help a business prepare and understand these forms of agreement.

Improving Collections

Most people and businesses pay their debts in a timely manner. Sometimes, however, it is necessary for the creditor, the party that extended the credit, to seek payment that is past due from a debtor, the party who received the credit. The first step in collecting a debt often is identifying and locating the debtor. It is particularly important for a creditor to immediately determine the residence, place of employment or business address, and exact legal description of the debtor, such as whether the debtor is an individual, a partnership, a corporation, or some other entity. The legal status of the debtor may affect who is liable for the debt. There are numerous sources for obtaining this information, including the telephone book, a city directory, a creditor's own debtor index based on past claims and experiences, credit reports or applications, the assessor's office and registry of deeds, the city clerk's office, the Secretary of State, the Registry of Motor Vehicles, and court dockets.

The next step is determining the nature of the debt. It may be important to distinguish between consumer debts and commercial debts. A consumer debt is a debt incurred by an individual, primarily for a personal, family, or household purpose. A commercial debt arises from an obligation to pay for goods or services used in the conduct of a business or profession. These different types of debt may help a creditor in determining which federal and state laws apply to the collection of the debt. A debt also may be secured or unsecured. A debt is secured when the debtor has offered collateral for the debt. Most commercial debts, however, are unsecured. Creditors generally should keep all documentation available on an unsecured claim in case it is necessary to establish the existence of a valid claim. This documentation would include any sales or credit agreement, past payment records, and correspondence with the debtor.

Establishing Procedures

A variety of collection techniques are available to creditors, from personal contact with the debtor to using a collection agency to bringing a lawsuit. In deciding which course of action to pursue, a creditor should consider the relative costs and effectiveness of different methods, the value of the debt, the creditor's business history with the debtor, and general good business practices. In the collection of consumer claims, a creditor should pay special attention to federal and state regulations dealing with consumer debt collection. A lawyer experienced in debt collection can help a creditor determine the best methods for debt collection for that creditor or for a particular debt.

Personal contact is often a valuable first step and may be all that is necessary to collect the debt. Often a telephone call will bring forth a promise to pay in full or on an installment basis. Through personal contact a creditor may determine the debtor's attitude with respect to payment, the debtor's ability to pay, and the seriousness of any claim by the debtor that the debt is not valid or collectible. When contact is made by telephone, the creditor or creditor's representative should obtain as much information as possible about the debtor, and make sure that the debtor knows who is making the call and that the purpose of the call is to attempt to adjust or settle the debt. A creditor may hire a lawyer to make this contact with the debtor and seek payment of the debt. Any arrangement for payment other than for immediate payment in full generally is subject to approval by the creditor. The agreement should be confirmed in writing with the debtor. A creditor also may use a collection agency to collect the debt.

If a debt is secured and it appears that the debtor is unwilling or unable to pay, a creditor may seek to obtain possession of the collateral offered for the debt. The creditor or the creditor's representative may attempt to repossess collateral by appearing at the debtor's premises and requesting the goods. If the debtor refuses to give up possession, however, the creditor or creditor's representative may not breach the peace or otherwise violate the law in an attempt to recover the goods. The creditor then must resort to legal process.

Due to the time and expense involved, a trial generally should be a last alternative in the collection of a debt. It sometimes is necessary, however, for a creditor to bring a lawsuit against a debtor. Prior to beginning the suit, the creditor should ensure that he or she has sufficient documentation to establish the validity of the claim. Once a lawsuit has been filed, a creditor may have several options available to ensure that the debtor does not sell or dispose of any assets or otherwise try to limit the amount of money that will be available if the creditor prevails. A creditor may seek to attach the debtor's property. Attachment is a legal process that puts the property under the custody of the court until a judgment is reached. A creditor also may seek a temporary restraining order to keep the debtor from selling or otherwise disposing of goods to which the creditor may be entitled. Despite these options, a creditor still may seek to negotiate and settle the debt prior to or during trial. Any settlement that is quick and fair, and is based on the resolution of any dispute regarding the validity of the debt and a candid disclosure of the debtor's ability to pay, is desirable because it avoids the inevitable delay and expense of litigation.

If a debtor fails to respond to a lawsuit, a creditor may seek a default judgment against the debtor. The court may hold a hearing to determine whether entry of a default judgment is appropriate and what the correct amount of the judgment should be. If a creditor succeeds at trial and gets a judgment from the court establishing the debtor's liability and the amount of the debt, he or she is a "judgment creditor" and may seek to enforce that judgment. Other procedures for collecting the judgment debt then are available, such as formal execution on the judgment, which entitles the creditor to use legal process to seize the money or property of the debtor. A creditor also may be entitled to garnish or attach the debtor's wages. A lawyer experienced in debt collection or collecting judgments should be able to fully explain these options and help a creditor make an appropriate choice of remedy. If a debtor has declared bankruptcy or is in bankruptcy proceedings, this also may affect a creditor's rights. See the Bankruptcy and Workout Law Chapter for additional information.

Federal Regulation of Debt Collection

Federal law regulates the collection of consumer debts. The Fair Debt Collection Practices Act was enacted to eliminate abusive debt collection practices by debt collectors, to ensure that those debt collectors that do not use abusive practices are not competitively disadvantaged, and to promote consistent state action and legislation in this area. The Federal Trade Commission has primary responsibility for enforcing the Act. The Act applies to persons, including attorneys, who use any means of interstate commerce or the mails in any business having debt collection as its principal purpose, or persons who regularly collect or attempt to collect debts that are owed to another. The law also applies to any creditor who, while collecting his or her own debt, uses a name that suggests that a third party is trying to collect the debt.

Communication

The Act limits a debt collector's communications with and about a consumer debtor. The collector may not communicate with the consumer debtor at any unusual time or place, or at a time known to be inconvenient, including any time before 8:00 a.m. and after 9:00 p.m. The collector generally cannot contact the debtor at his or her place of employment if the collector knows or should know that the debtor's employer prohibits such communications. A debt collector must cease communications with the debtor about the debt if the debtor notifies the collector in writing that he or she refuses to pay the debt or that he or she wishes the collector to cease further communication. If the debt collector knows the debtor is represented by a lawyer, the collector may generally only communicate with that lawyer. The collector may not communicate with the debtor or any third party by post card, or use any indication on any correspondence that identifies that the communication relates to the collection of a debt. The Act also places limitations on debt collectors who attempt to acquire information on the location of a debtor from any person other than the debtor. The debt collector must identify himself or herself, state that he or she is confirming or correcting location information, and only identify his or her employer if specifically requested. The debt collector may not state that the debtor owes any debt.

Validation of Debts

A debt collector must send the consumer debtor a written notice, which basically serves to verify the validity of the debt and to provide the debtor with an opportunity to dispute the debt. The notice must show the amount of the debt and the name of the creditor to whom the debt is owed. The notice also must state that the debt will be presumed valid by the collector if the debtor does not dispute the validity of the debt in writing within 30 days. If the debtor notifies the debt collector that he or she disputes the debt, the collector must stop collection of the debt until the collector obtains verification. The debtor's failure to dispute the debt does not necessarily constitute an admission that he or she is liable on the debt. If a debtor owes multiple debts and makes a single payment to a debt collector, the collector may not apply the payment to any disputed debt.

Prohibited Practices

The Fair Debt Collection Practices Act generally prohibits unfair or unconscionable practices by debt collectors in the collection of consumer claims. The Act also lists particular practices that are violations, including the collection of any amount in addition to the debt unless the amount is specifically authorized by law or by the agreement creating the debt; the solicitation or acceptance of a check postdated by more than five days; the deposit or threat to deposit a postdated check prior to the date on it; causing telephone or telegram charges to be made to any person by concealing the purpose of the communication; taking or threatening to take nonjudicial action without legal right or intention; communicating about a debt by post card; and using any language or symbol other than the debt collector's address on an envelope when communicating with a consumer debtor.

Prohibited Methods of Collection in Texas
Although most debt collectors operate in an ethical manner, some resort to abusive or fraudulent tactics to collect on an account that is past due. Most states have very specific guidelines regulating what debt collection agencies can and cannot do when attempting to collect unpaid debts. The Texas Debt Collection Practices Act regulates consumer debt collection practices. Consumer debts are obligations arising out of consumer transactions that are primarily for personal, family, or household purposes. A debt collector is any person engaging directly or indirectly in any action, conduct or practice of soliciting debts for collection or in collecting debts owed or due to a creditor by a consumer.

Under the Texas Debt Collection Practices Act, a person who is collecting consumer debts cannot:

Use or threaten to use violence or other criminal means

Tell or threaten to tell any other person that the debtor is willfully refusing to pay an undisputed debt if the debt is in dispute

Threaten to sell or assign the debt to another and falsely represent that the debtor would thereby lose any defense to the debt

Threaten that non-payment may result in seizure, repossession or sale of the debtor's property without proper court proceedings

Use profane or obscene language

Harass the debtor or any other person with frequent communication

Use any name other than the true business or legal name of the debt collector

Misrepresent the character, extent, or amount of a debt

Falsely represent that the debt collector is authorized by or affiliated with an attorney or any agent or official of the government

The Act also provides that debt collectors must hold a surety bond in order to collect debts in Texas. A copy of the bond must be filed with the Texas Secretary of State. Any person who violates any provision of the Act is guilty of a misdemeanor and subject to a fine of $100 to $500. Violators of the Act also may be subject to civil action for damages or injunctive relief. Unauthorized or illegal debt collection practices also may violate the Texas Deceptive Trade Practices-Consumer Protection Act. An attorney familiar with collections law will be able to advise a business or consumer about proper collection practices.