Yes. A demand letter is not the end of the conversation with a creditor. For most businesses it is the first step toward a successful settlement. Demand letters can be chilling, with language conveying a sense of finality. Business owners who are struggling financially often feel tempted to put demand letters aside, either because they don’t know any better or out of denial. But ignoring demand letters will make the situation worse and hurt you later when it comes time to defend yourself.
A demand letter is simply someone who is writing to you (or your business) telling you that you are liable for something (e.g. a vendor’s bill for products/services, or your landlord’s bill for commercial rent) and demanding payment of the money that you allegedly owe. If you don’t pay it in the time specified, they may sue you or take some other collection action. The letter should include a little summary of why you owe the money, how much you owe, and the deadline to pay the money before a lawsuit or other action will be taken. Sometimes companies send demand letters to try to settle their claims without having to go through the trouble and expense of a lawsuit. Other times the letter is the notice a contract requires before the creditor can pursue other remedies.
So what should a business owner do after receiving a demand letter? Should the creditor be disregarded and risk facing a lawsuit? Or should the debtor immediately settle for the amount requested in the letter? Neither. The sensible path is to respond first and dispute the demand if it appears incorrect. This process involves figuring out the credibility of the demand and then deciding whether to negotiate or not.
What Silence Costs
Start with what silence costs. Picture a typical case. The creditor sent a demand letter that the owner never responded to. When the creditor sued, it turned out that the contract not only had an attorneys’ fees provision giving the prevailing party the right to those fees, it also had other penalty provisions. So, on top of the amount the owner owed, the judgment also included the creditor’s costs and disbursements in the lawsuit. The damage can go further. If the letter was the notice a lease or mortgage requires, staying silent can open the door to eviction or foreclosure. If the borrower had guaranteed their loan or lease personally, failure to cure may subject them to personal liability. The business started losing the moment the demand letter went unattended.
The reality is that if it comes to court, your demand letter will likely become an exhibit before the judge and jury. They are going to judge your response to it, and if the claim is justified, your refusal to respond or consider changing course might be taken as evidence of intentional wrongdoing or even willfulness. So take that letter seriously, and give your earlier decision a good reexamination.
Check Things Carefully
Taking it seriously does not mean taking it at face value, so check things carefully before you jump at the first thing someone tells you to do. A demand letter makes no guarantees that all or even part of what is requested is valid. For example, maybe you never accepted the goods, or the creditor breached the contract. The statute of limitations may have passed on the claim entirely. Other laws may limit the creditor’s ability to recover against you. The review might reveal the existence of a counterclaim or an affirmative defense, which may offset what you owe. Or the contract terms may not authorize the charges at all, or may be modified by state or federal law. None of this is academic. Your ability to negotiate to settle the debt for less than the claimed amount is directly related to your leverage. Leverage depends on both the creditor’s need to collect the debt and the nature of any defenses you have against the suit.
Negotiate with Your Creditor
Even if you do not want to argue that you do not owe the amount, you can try to negotiate with your creditor. You can try to settle the matter for a reduced amount, a payment plan or another concession. The point is to convince the creditor that if they do not offer a discount or other terms, it will have to spend money on collection or suing you. Whatever you agree to is going to need to be put in a writing that, among other things, is free from hidden dangers that catch you by surprise down the road. Other matters, like a personal guaranty the owners of your business signed are important considerations. A settlement agreement is no better than the words it contains.
Timing matters as much as the terms. Chances are, if you have let the letter go unanswered and now the creditor has sunk money into legal fees just to initiate an expensive lawsuit, then the creditor will be less likely to come back with some offer of concession. So the best window for negotiation is immediately upon the letter coming in — before the deadline in the letter.
There is one more reason not to wait, and it is easy to miss. Many business contracts call for mediation or arbitration, or give the parties options about which state’s courts hear a dispute and which state’s laws apply. Those options or that choice of law clause in the middle of a contract doesn’t just reference a matter of legal theory, it may have important effects on the outcome of the case. In fact, ignoring the letter can cause you to lose the rights to which you’re entitled in the contract. You might lose the right to bring suit in federal court if that would be more advantageous, or to have local law apply instead of the law of the other state, or to resolve a claim through mediation or arbitration. If your business is in one state and the creditor is in another, the race to the courthouse in which the case will be filed may be the deciding factor in whose courts the case is heard, and a creditor will usually try to file in its own state. Respond late and you may end up defending yourself far from home.
So yes, you can negotiate business debt after a demand letter, and the letter itself is often the opening. To sum up, you should never simply shove a demand letter into a drawer. Have someone qualified look at the claim before you answer. Your attorney can help you see what is negotiable and what is not. Get the claim assessed and respond.
