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Business of Law

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by Pat Nolan

SBJ Contributing Writer

Collecting from debtors is no easy task, said C. Dudley Martin, president and chief executive officer of C. Dudley Martin and Associates.

Martin and several other area lawyers said staying on top of accounts receivable is the most important part of debt collection.

"Keep accounts receivable under 60 days," said Daniel Wichmer, an attorney with Miller and Sanford. "By no means let (a bad account) go beyond 90 days before kicking it over to a collector."

As a general rule, the ability to collect a debt diminishes 5 percent per month past due. Martin said the collector needs to understand the psychology of the debtor.

At 30 days past due, the debtor remembers a benefit and may feel guilty about owing the money. At 60 days, that feeling is diminished. At 90 days, the memory of benefits received from incurring the debt has faded a great deal, he said. At six months, the debtor has usually forgotten any benefit received. Then it gets worse.

Wichmer said the success rate for collecting on accounts over six months old is about 25 percent.

Most people are honest and well-intentioned, Martin said. But frequently the person that gets paid first is the person who makes the most noise.

"To avoid throwing good money after bad, ask your attorney to verify your debtor's assets and income before you file suit," Martin said. The attorney should have a search capability. "Can your attorney find your debtor, identify your debtor, locate off-shore bank accounts, real estate and stock holdings?"

Mike Bridges, of Blackwell Sanders, said he uses several data bases, as well as private investigation firms to locate debtors who have moved or attempted to abscond without paying their debts.

The average trace costs about $150, but traces can range from as little as $75 to as much as $600, said Leilani Canella, an investigator with Faber Investigations. The cost depends on the person's skill at hiding.

"If we have a Social Security number and a name, it can be fairly easy to find someone," Canella said. "But if someone has learned how to create an alternate identity or live without creating a trail, it can be difficult."

Local attorneys advise that creditors protect themselves from the outset in the case that a lawsuit is eventually necessary.

"Protection before extending credit is extremely important," Bridges said.

The potential debtor should fill out a credit application which includes protective clauses. The clauses should state the venue for court action if the account should go past due, as well as the interest rate that will be charged on the balance while the account is in collection, Bridges said. The credit application should also include language providing for the debtor to pay the creditor's attorney's fees and collection costs.

"If it isn't in a contract, you're stuck," Bridges said, referring to fees and court costs.

"There are things a creditor can do to protect themselves," Wichmer said. Getting a credit application and filing a financing statement or security agreement called a UCC-1 with the secretary of state are steps that will help protect the creditor's rights in case the debtor files for bankruptcy protection.

The secretary of state's office, which is located in the state office building on the square, provides the UCC Manual of Laws and Procedures, relating to Articles of the Uniform Commercial Code, free of charge.

Bridges said if a creditor has failed to take proper steps to protect its investment in the debtor, it may lose a substantial amount to bankruptcy. Often the smaller the companies are, the less consistent they are in protecting their collectable assets.

Collecting a debt can be very expensive, Bridges said. "I can't imagine any case that went to trial in which you'd spend less than $2,000."

"I advise a lot of people to utilize small claims courts," Wichmer said. "It may not be cost-effective to see a lawyer for small amounts."

Attorneys are not necessary for small claims courts. Even corporations can be represented by an officer of the corporation without having an attorney present. Filing a case in small claims court costs $10 to file and $25 to serve each defendant in Greene County. A person wishing to file can pick up the form and an instruction booklet in the associate clerk's office on the second floor of the Greene County Courthouse, 1010 Boonville.

However, not getting a lawyer and going to small claims court can be a mistake for many creditors, Martin said. "On TV, both sides to small claims listen respectfully to Judge Wapner, then abide by his decision. In real life, most small-claims judgments are ignored. We enforce judgment we are the credit police. Small claims court is an illusion; one of those things that should work, but doesn't. Judicial decisions are not self-enforcing. You have to get someone that can enforce a judicial decision.

"That's what we do. We collect money: $1,000, $3,000, $10,000 or $100,000 we may be as gentle as writing letters, making phone calls or even paying a personal visit."

Businesses collecting on past-due debts need to be aware of the Fair Credit Collection Act, Bridges said. Each violation of the act can be punished by up to $1,000 in damages. The act was aimed at curbing certain collection procedures used by collection agencies. A copy of the act can be found at Southwest Missouri State University's Meyer Library.

"Every creditor beginning to collect on an account needs to ask: What is it going to cost me to collect this account?" Wichmer said. "If it is something over $5,000, and it looks like an account you will have trouble collecting, get it to an attorney as soon as possible."

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