A demand letter from a creditor is just one stage of the collection process. It’s your cue to pay attention. If you are getting one, you have already started down the debt collection process. By the time a creditor sends you a demand letter, the company has already tried to collect payment, but couldn’t. There have usually been reminders by phone or email, then a firmer follow-up.
Demand letters are detailed notes describing how a debt is overdue and what the next step is. A typical letter gives the total amount that the debtor owes for a debt. It includes the deadline to make payments. The letter is essentially a warning of what would happen if the debt is not repaid. And while the tone is usually formal, it often has a threat or threat-like element.
A demand letter is the creditor’s way of saying “get ready.” If the creditor doesn’t get the payment, it is setting the stage to take you to court. A business that intends to sue generally needs this letter first, because it can be admitted as evidence that the creditor tried in good faith to recover the money before turning to tougher measures. Most people worry about court when they see the demand letter. Instead, they should be alarmed by the reality that the process to get there is now underway.
Don’t ignore it. These letters are usually a final effort before legal action. That means you have time to respond before any serious legal action is taken. You can even respond to the demand letter in writing to try to convince the creditor to back down. But you need to move quickly.
If the deadline passes without an answer, the creditor has two roads to choose from. The first is to sue the debtor. The second is to hand the account to a commercial debt collection agency.
It also helps to know where you stand. Because the money is owed by one business to another, this is commercial debt, and the Fair Debt Collection Practices Act does not apply. That’s the main federal law protecting consumers from abusive debt collection tactics. The protections that go along with consumer debt don’t apply the same way to business debt.
Read It Carefully and Assess Its Validity
The first thing to do if you get a demand letter is read it carefully and assess its validity. Is it legitimate, and how much is the debt actually owed? Get out your debt ledger or receipts and compare the amount owed to your records. If you signed a contract, take a look at the section about late payments. Does the debt include any late fees or interest? How is it being calculated?
Work Out an Agreement
Then pick up the phone. Remember that the business on the other end is probably facing cash flow issues of its own. Your late payment is likely triggering a cash crunch. They need their money, and they need it now. So reach out to them, let them know you received the letter, and talk. Offer reasons for why the payment is late and come up with a proposed solution. Try to work out an agreement for a new due date or a payment plan. Vendors don’t want to treat a large account as delinquent but if you can’t make the payment, you have to tell them before the deadline passes.
You may have more leverage than you think. Going to court eats up time and resources, and the creditor may just want to avoid this. When considering legal action, the creditor will assess the costs against the value of the debt itself. They would need to determine whether it’s actually profitable to take a case to court.
Your history with the creditor counts, too. A customer who has been prompt with payments in the past is an attractive proposition for a creditor, so they may be more willing to renegotiate terms. If you buy a lot from them, the creditor may see you as a valuable customer and want to maintain that relationship, and plenty of creditors will allow a longer payment period rather than lose a customer and the goodwill that goes with it.
So don’t treat the amount and the deadline in the letter as final. You can push back. You don’t have to agree to everything they ask you to do, and you can counter-propose with whatever you can afford. If you can convince the creditor to wait an extra month to receive payment while you catch up on your invoices, you have pushed back the deadline to litigation. If they do accept, make sure the terms are workable for your business. The business needs cash flow, and negotiating can help them get a portion of the money sooner rather than later. Don’t turn down an offer in good faith, just to play the waiting game.
Collection Agency
If the account has already been passed to a collection agency, expect the pressure to rise. Collection agencies operate for profit. It’s their business to collect money. They specialize in business debts and usually have more experience, time and resources than the creditor. They’ll call, and call, and call. Certified letters and hints at legal action are common too. You may find that the constant calls you receive are the agency’s way of applying pressure without breaking the rules. Even better, they may be willing to negotiate, too. So don’t ignore the call or the letter. Reaching out to them is your best option, and the same rules apply: check the figures, explain your position and put a realistic plan on the table. Commercial debt laws can vary widely from state to state. Some states cap fees or require collection agencies to hold a license, so it is fair to ask who you are dealing with.
Collection rarely moves fast and often stretches over weeks or months. That said, waiting too long is a risk. Demand letters are often treated like a deadline. The creditor, hearing nothing, will start pushing the process to the next stage, and you’ll lose your chance to negotiate. A creditor will often consider negotiating with you to avoid going to court, but only while you are talking. To protect yourself, don’t agree to any payment plan or settlement you can’t realistically meet. If you try to commit to something you can’t deliver, you risk inviting more consequences.
At the end of the day, a demand letter from a creditor should be seen as a call to action. Be aware that there is a deadline approaching, and the consequences of not paying by that date are real. Take the chance to respond and to work out a reasonable arrangement for both sides to survive and succeed.
