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During our Research Assistant Peer Group meeting, we discussed an often-overlooked topic, how to initiate collection efforts on a commercial account. Commercial debt, also known as business debt, is debt owed by one company to another company. This is distinct from consumer debt, which involves individuals and is defined in section 803 of the Fair Debt Collection Practices Act, FDCPA, as any obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance or services which are the subject of the transaction are primarily for personal, family or household purposes. They are very different types of debt.
Commercial debt is not bound by the FDCPA, unlike consumer debt which is in almost all states. The recent rules, soon effective in California, require commercial debt collection activity to adhere to the FDCPA requirements.
Adjusting your approach to commercial debt collection
If you’re accustomed to collecting consumer debt, it’s important to adjust your workflow for commercial debt. For example, consumer debt requires sending a validation notice, respecting a 30-day validation period, verifying the right party before discussing the debt, and following Regulation F’s communication limitations. In contrast, with commercial debt, these steps are not required. You can simply contact the business directly, request to speak with the person responsible for paying bills, the accounting department, or the owner. There is no requirement for a validation notice, right party contact, or limitations on calls or emails. This streamlined approach can make it easier to reach the appropriate party and expedite payment.
There’s an unwritten understanding in commercial debt collection: if you can’t secure voluntary payment after a few attempts, whether through phone calls or emails, you will likely need to file a suit to force payment.
When sending written communication, do not include the mini-Miranda disclosure or the 30-day language to dispute or request more information. Simply contact and demand payment for the business-to-business debt.
Many commercial debt collection agencies avoid immediately sending letters when an account is turned. Instead, they often contact the debtor in the same manner as their client did. For example, if the previous communications were through email, the agency would likely send an email demand, if through texts, they would text and so on. Normally if the communication was through letters and by phone, they would call first, ask for the person in charge, and request immediate payment.
When dealing with commercial debt, there’s often a history of prior communications, contracts, and other legal documents. It’s essential to review these materials to fully understand the interactions between the parties and the nature of the debt. This helps prepare you to address any questions and overcome potential stalls when requesting payment in full.
In commercial debt collection, full payment is typically expected. Payment plans, if offered, should be short-term, usually not exceeding a few months.
A business may be registered with the Secretary of State and have corporate protection, or it may operate as a DBA (doing business as) without such protections. Regardless, if the debt was incurred for business purposes, it is considered commercial debt.
If a company has defaulted due to bankruptcy, the type of bankruptcy they file matters. Chapter 7 typically involves liquidating assets to pay creditors, but unsecured creditors may recover little. Chapter 11 allows the business to reorganize and may offer a payment reimbursement plan for past creditors to file claims and recover a portion of their debt.
In summary, though there are privacy laws that must be followed, and common sense to your attempts, collecting commercial debt differs significantly from consumer debt. By focusing on direct communication and avoiding unnecessary formalities, businesses can enhance their chances of recovering payment for services and goods provided.
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