Some Thoughts On Collections & Personal Guarantees
During a period of economic volatility, it is essential for businesses to implement and maintain a collection program for accounts receivable and monies due, and maintain and adhere to a policy relative to personal guarantees. This article seeks to raise various issues for consideration by a business person on the topic of collections and guarantees.
1. Credit Information
Before extending services or goods on credit, a business person should obtain certain information from its customer/borrower. This information will naturally include names, addresses and relevant billing information. It should also include social security number or taxpayer identification number, where the customer/borrower banks, where the customer/borrower works if different from the entity to which credit is extended, the personal residence and home telephone number of the customer/borrower or a principal with the customer/borrower. Additional information should be secured relative to the spouse of a customer/borrower, including banking, employment and credit history information. The credit information allows the lender the means to seek recovery should the credit extension go bad.
2. Extension of Credit
An extension of credit should be in writing and should clearly state the terms upon which the credit is extended. While federal Truth In Lending requirements are generally applied only on consumer credit sales transactions, its requirements are instructive to businesses which extend credit in the normal course of their business. If interest is to be calculated, the total interest payable (“finance charge”) and the annual percentage rate (“APR”) should be disclosed with payment directions. The information should be clearly set forth on an invoice and should not be buried in legal boilerplate.
3. Uniform Billing Procedure
After goods or services have been extended, the recipient should receive a billing in a uniform format at regular intervals. Obviously, a monthly billing sent in a user-friendly format encourages payments. A billing format which gives rise to questions, is misleading or confusing, only discourages prompt repayment.
4. Follow-Up Billings
Any business extending goods or services on credit should have in place a format for dealing with those accounts that do not make payment within the terms of payment. Merely sending follow-up bills may not be enough. Special follow-up correspondence can be sent after a 60- or 90-day period has lapsed. This follow-up correspondence would be different in format than the normal billing and should include an actual signature from an individual. The lender needs to communicate a personal intervention at this stage for the customer/borrower to realize that the account is being monitored.
5. Personal Contact
If normal billing and a collection letter do not generate the hoped-for repayment, a telephone call or visit to the place of business should be scheduled. Such action should be taken if the account goes more than 90 days long. In a larger company, having this contact made by an individual other than the one that provided the services or sold the goods may be advisable. Having one person in the office who can handle this in a professional and courteous manner may be preferable to having the “client contact” do the collection.
6. Attorney’s Collection Letter
Should invoices, a follow-up collection letter, and a telephone call or personal visit not produce payment, a letter from an attorney or collection service is appropriate. An account which reaches a predetermined aging without payment should be promptly turned over to an attorney or collector. At this point, the tardy customer/borrower should be advised of the legal consequence of their continued failure to make payment. However, the lender should make no threats or accusations upon which it will not, in good faith, follow up.
7. Collection Suits
Outside of the recovery of money, a good collection procedure’s primary objective should be avoidance of litigation to collect delinquent accounts. Litigation is costly, inefficient, aggravating and distracting. A business that too frequently has to resort to litigation to collect obligations owed it probably does not have an appropriate standard for extending credit and a procedure in place for collection.
The lawyers at Mesch Clark Rothschild are available to consult with a business on the establishment of a collection procedure designed to a particular business.
GUARANTEES: GET THEM, DON’T GIVE THEM
1. Arizona law
Arizona law requires that any agreement to guarantee an obligation owed by a third party must be in writing.
In Arizona, there is a presumption that all property acquired during a marriage is community property. Therefore, if a guarantor’s community property is to be held answerable to the debt of a third party, it is critical for an extender of services or goods to get a written guarantee executed by both the husband and the wife.
2. Form of Guarantee
Following is a simple form of guarantee that can be included on an invoice, in a letter agreement or form of contract detailing the extension of goods or services on credit:
We, jointly and severally, unconditionally guarantee the payment by __________ , for monies now owed or incurred in the future. We waive presentment for payment, notice of non-payment, and protest any extensions of time of payment. This guarantee shall remain in full force and effect until written notice of termination.
(Husband’s signature) (Wife’s signature)
3. Purpose of Guarantee
Guarantees are critical in commerce, where most commercial transactions occur between corporations or other legal entities with limited liability for individuals. One of the primary purposes of incorporation is to protect individual shareholders, employees and directors from personal liability for the corporate affairs. Because of the limited capitalization of many corporations, the extension of credit to a corporation may well be a suspect transaction. Before extending credit to a corporation, a review of that corporation’s ability to repay should be accomplished. If the corporation is not creditworthy, a personal guarantee by the principals of that corporation may be considered. For these reasons, a person extending credit may want to obtain personal guarantees, while a party borrowing on credit will wish to avoid the giving of personal guarantees.
4. Guarantee of Real Estate Financing
The Arizona courts are filled with cases against guarantors and individual general partners who are liable for the debt of partnerships or third parties. Because real estate financing in Arizona has frequently required guarantees by third parties, the volitility in real estate values has led to a marked increase in collection attempts against guarantors. Similarly, with Arizona businesses closing at unprecedented rates, business creditors are more frequently proceeding against individuals unfortunate enough to have personally guaranteed the debt of the business.
5. Credit for the Value of the Collateral
The fair market value of a lender’s collateral must be subtracted from any judgment against a guarantor, a general partner or the original customer/borrower. Arizona law also clearly limits the lender’s claim, even after a judicial foreclosure, to the difference between the debt owed and either the fair market value or the sales price of the collateral, whichever is higher. A creditor may not foreclose on a guarantor’s personal residence, unless a guarantee judgment is unsatisfied after foreclosure on other property of the judgment debtor. Also a lender can sue a guarantor for the entire amount owed under a guarantee, regardless of whether the lender’s collateral is tied up in a bankruptcy proceeding or is otherwise unavailable. In such case, the guarantor will, however, receive a credit for the value of the collateral in the action against him.
A guarantor or person considering giving his own personal guarantee should be cognizant of the fact that, unless provided otherwise, a lender could waive the collateral provided for the loan and proceed on the guarantee for the full amount of the debt owing. While this is not often done, a prospective guarantor should be cognizant of this possibility before signing the guarantee.
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