I recently loaned someone over $2,000. I did to try to help someone who was short on cash, and trying to make a go of it in business. Foolishly, I did it on a handshake. This is no way to make a contract. But it did make for an opportunity. I now set things up so that it’s easy to collect payment. If someone doesn’t want to pay, my documentation and debt collection process won’t create additional liabilities for me.
Restrictions on collecting debt have grown more burdensome. That’s partly because well-intended polices have led to rules that enable people to get in over their heads. These people need help: it is hard to climb out of debt. And it is in everyone’s best interest that we do help people who need this help. That’s why bankruptcy is provided in the U.S. Constitution, Article I.
But the policies, and the rules created under them, have had unintended consequences. It is harder to collect debt now than ever. Worse, lawyers—pushing the interests of their clients, but probably misapplying the rules—sue debt collectors under questionable legal theories. First and foremost, if you attempt to collect a consumer debt, be sure you are within the rules. It is a minefield, and there are more ways to get sued than to collect.
From the beginning, ensure you have proper documentation. Don’t make my mistake. Have the debtor sign a promissory note. Secure the loan with some kind of property. No bank would do any less. Why should you? Also, make sure to register any security interest with the Secretary of State. Otherwise, you might have to stand in line when the asset securing the debt is sold, and take the leftovers. (There aren’t any leftovers.)
If you are in business, and find yourself as a creditor—for example, a net-90 wholesaler—you need your documentation up front. Additionally, get a personal guaranty. If you move forward without protecting your downside, be sure the business risk is worth it.
If you have questions about debt collection practices, or setting up financing arrangements, feel free to get in touch.