When you see your name on a collection agency or law firm’s letterhead, or hear a lawyer say on the phone that they represent your lender, it lands hard. Seeing or hearing that does not feel good. That is not something you were expecting to hear. At this point, you are probably wondering what the next steps are, how bad things are, and if it’s even worth it to respond. First, don’t panic. Whether it’s a collection attorney or a debt collector, there is usually a legitimate reason for their action. This means there is likely a solution.
It helps to know how the loan got here. It starts with a late payment. The lender sends reminders and may assess late fees. After 30 days, it’s considered delinquent, and the creditor reaches out to try to recover the balance. If it stays that way long enough, for example six months, the lender may charge it off, meaning the original creditor will write the amount off as a loss, and a third party takes over collecting. This is a standard timeline, but you might encounter variations. Once a collection attorney takes over a loan, they typically contact the borrower by phone and mail to attempt collection. If the debt still goes unresolved, a lawsuit can follow.
When the attorney calls, the best thing you can do is let them talk. It’s natural to be upset and might feel like lashing out, but if there is a genuine reason behind their call, it’s important to hear them out. Don’t get emotional. The second thing you should do is take notes. Get the name of the person calling and their firm. Write down the name of the lender they represent. Note how much is owed, the date, and any other relevant information. You also don’t want to hang up and try to remember the details in your head. Then say you will look into it and set a time to follow up, which gives you room to research and talk to your accountant or attorney. If you feel overwhelmed or confused, don’t hesitate to ask the attorney questions.
Next, check whether the debt is valid. Is it yours? Is it the correct amount? Most of the time it will be exactly what the attorney says. But sometimes there will be discrepancies. Make sure the name on the account is correct, and that the dollar amount due and date are also accurate. Check to make sure you haven’t already paid it off. Or maybe you made a payment but the attorney hasn’t yet been notified. The debt could also be one that was already discharged or is no longer legally collectible, called zombie debt. As crazy as it may seem, identity theft does happen. If there is an error or discrepancy of any kind, do not agree to pay the balance. A rule of thumb is to never accept anything at face value. Ask for written proof of the debt, showing the creditor and the amount owed.
Be careful how much you say, too. You might know the issue is real, but don’t give any more information than you have to. Don’t disclose any information that isn’t strictly necessary. You should also avoid getting into any long discussions or making commitments. Don’t say how much you have or don’t have, how much you make or don’t make, or anything else about your revenue. If it does turn out to be zombie debt, saying too much could risk reactivating it.
It also helps to know where you stand legally. Many business owners assume the Fair Debt Collection Practices Act protects them, but this law primarily covers consumer debtors, not businesses. However, many states have laws that apply to business debts. This is not an exact science, and it’s always best to consult with an attorney on this part. There is also the Uniform Commercial Code (UCC), which applies to commercial transactions. Lenders can make UCC-1 filings to obtain rights to your collateral. The Commercial Collection Agencies of America (CCAA) is also an organization for commercial collection agencies. Its members must follow ethical standards, which tell you what treatment to expect.
Whatever else you do, don’t go silent. Don’t avoid calls and emails from the lender, attorney, or collection agency. Do respond to them to keep the lines of communication open. If you don’t respond, the collection attorney may file a lawsuit to collect the debt. It’s best to proactively respond, even if it’s just to clarify information or show good faith.
Payment Plan
If the debt is valid, the next step is to work out a payment plan. Paying in full is ideal, but if you need time, you can try to negotiate to pay in installments. From the lender’s side, any payment is a win, which gives you some leverage. Before you follow up, work through your budget. See how much revenue you have, how much you can realistically commit to a payment, and what kind of plan you can put together. This is also where you should talk to your accountant or lawyer, since it may not make sense to set up a payment plan that you can’t actually afford.
Before you pay anything, though, get an agreement in writing first. No matter how pressing it is, don’t agree to pay the balance without an agreement in writing. Some collectors will ask for an initial payment over the phone as a show of goodwill. Don’t go off and send payments on faith. Talk about it on the phone, but get the terms of the payment plan in writing. Specifically, you want the debt to be marked paid in full with no additional balance or penalties once you pay. You don’t want to be in a position where you pay a partial amount on the debt and the lender or collection agency wants to collect the whole thing from you. If they won’t put it in writing, talk to your attorney. So get it in writing, get a copy, and keep track of every dollar that you pay.
Unfair or Abusive Tactics
If you think the attorney is using unfair or abusive tactics, document their behavior and report it. Harassment, threats, and false or misleading statements are all prohibited, generally, though for businesses the protections come from state and local law. Keep notes about what is said and when, and if it’s extreme or illegal, call an attorney and start to file complaints. Your state Department of Commerce or a similar agency can offer guidance, and you can also report it to the FTC, the Federal Trade Commission.
And if you simply cannot afford to pay, even on a plan? You still have options, but they come with risks. A debt consolidation loan can pull together your debts into a single payment, potentially with lower interest. However, this is still a debt you have to pay, and it may take longer to pay off, even if the payment is more affordable. Another option is debt settlement. Restructuring and bankruptcy are on the table too, each with potentially serious consequences for your business. There are trade-offs to every option. Get advice from your attorney and accountant before you decide. Whatever you choose, communicate with the creditor or attorney and stick to your payment plan.
A call or letter from a collection attorney is serious, but it is not the end of your business. There are steps you can take to stay in control. Keep the lines of communication open and, if possible, reach a solution with the lender and collection attorney. Before you pay any money, confirm that the debt is valid and correct. As long as you take the right steps, you should be able to turn this around and get your business back on track.
