Month: July 2021

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How Does Commercial Collection Litigation Work?

Not all of your debtor-businesses will pay up. Sometimes, the best option for recovery is to obtain a court-ordered judgment against them.

So when should you pursue litigation? And how does collection litigation work?

When to Consider Litigation

If there are no consequences for nonpayment, many debtors simply will not pay. In commercial collections, creditors often hear, “So go ahead and sue me. I’m still not paying.” Debtors who use this objection know that, by delaying payment, they’re essentially getting a free loan, since the litigation process can sometimes take a year before resolution.

Litigation is a logical step to consider if:

  • The debtor owes you more than a few thousand dollars,
  • You have documentation to prove the debt is owed to you,
  • The debtor has the financial means to pay you, and
  • The debtor has ignored your payment demands for at least 90 days.

Before filing a lawsuit, a reputable commercial collection agency will perform a pre-legal investigation of assets. This process helps to determine which accounts are good candidates for litigation. 

Costs of Litigation

In deciding whether or not to pursue litigation, creditors should also consider the financial cost of filing a lawsuit. Typical litigation costs include attorney fees, filing fees, and miscellaneous costs for depositions, sheriff fees and process server fees.

Commercial collection agencies that also offer full-service legal assistance can estimate these costs upfront and help manage them for you.

Litigation Time Frame

It takes at least four months to receive and record a judgment against a debtor. If there are no complications, the standard time frame is as follows:

  • Two to four weeks for attorney to prepare and file lawsuit paperwork;
  • Two to four weeks to locate and serve debtor (see sidebar, “Who Will Be Served?);
  • Thirty to 45 days for debtor to respond;
  • If no response, two to four weeks for attorney to file for default judgment;
  • Two weeks to three months for court to issue judgment;
  • Once judgment is rendered, one week to two months for attorney to record the abstract and file necessary liens.

If there are no complications and delays, the above process can take about nine months. Occasionally (less than 5% of the time), a debtor may diligently fight the lawsuit. In that case, the process can take as long as18 months before a judgment is rendered.

Legal Venue

Lawsuits may be filed in state civil court (i.e., municipal court, superior court, justice court, county court, etc.) or in small claims court within the proper judicial district (or venue).

Most states (including California) allow creditors to sue in small claims court as long as the suit is not demanding more than the small claims limit (which in California is $5,000 for commercial collections). This limit varies by state. The advantage of small claims court is that the procedures are less formal and the process more streamlined than those of other courts.

The proper judicial district is normally that in which:

  • The debtor-business operates,
  • A business contract was signed,
  • A business contract was to be executed, or
  • Other events leading up to the lawsuit took place.

What to Expect

After the lawsuit has been filed, what should you expect?

Some commercial collection cases will settle favorably once litigation has begun, but before the process runs its course.

Other times, the creditor must “go a few rounds” with the debtor-business. In those instances, the case may have to be taken all the way to trial. These instances are rare, however, and trial is only necessary when factual issues are disputed. When the facts are undisputed, many collection matters are resolved by a summary judgment in the creditor’s favor.

After Judgment

Once a judgment has been rendered and docketed, the process of enforcing that judgment and recovering your money begins. There are several resources available to accomplish such recovery.

Subpoena. Debtors can be subpoenaed, requiring them to disclose their financial resources.

Seizure. In addition, assets may be seized.

Wage Garnishment. If there is a personal guarantee for the debt, the guarantor’s wages may be garnished.

Sometimes debtors will attempt to hide or transfer assets to prevent legitimate creditors from seizing them. This is where a commercial collection attorney can work to uncover hidden assets or wrongful transfers, making them once again available to satisfy the judgment.

All during this enforcement process, the amount owed to the creditor is accumulating post-judgment interest (at a rate that varies according to state).

An Important Step

Litigation is an important component in the commercial collection process. Without it, debtor-businesses can simply refuse to pay, knowing you will not follow through. Most business owners want to do the right thing but, unfortunately, that is not always the case.

When stronger steps are required to collect what’s rightfully owed to you, a collection attorney can be your staunchest ally.

At CAB, our legal expertise and proprietary methods work together to ensure the best possible outcomes for our clients who choose to pursue litigation. We would be honored to serve you.

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How Does Commercial Debt Collection Differ From Consumer Collections?

You’re a business owner who’s decided it’s time to hire an agency to collect on your past-due accounts. But finding one that’s right for you can be confusing and stressful.

First of all, should you retain a consumer collection agency or a commercial collector? It’s important to know the differences between the two, as they are significant.

Consumer Collections Explained

Whenever an individual owes money to a business, the business may hire a consumer collection agency to locate the individual consumer and encourage him or her to pay the debt. Typically, the amount of the consumer debt is considerably smaller than that which is owed in a business-to-business (i.e., commercial) transaction.

Consumer collection efforts are regulated by the Fair Debt Collections Practices Act (FDCPA). This federal law was enacted by Congress in 1977 to protect consumers from abusive third-party debt collection practices. The FDCPA establishes collection guidelines, defines consumer rights, and stipulates penalties for violations.

In addition, most states have their own debt collection laws. Some of these mirror the FDCPA. But some offer even more protection to consumers. For instance, California’s Rosenthal Fair Debt Collection Practices Act expands the definition of “debt collector” to include the original creditor.

Commercial Collections Explained

Commercial collections, on the other hand, involve the recovery of unpaid business debt owed to another business. This commercial debt is usually incurred when the debtor-business fails to pay the creditor as per the terms and conditions of a legally binding contract.

With much larger amounts involved, failure to pay commercial invoices can significantly impair a company’s cash flow, preventing them from paying their own vendors, even forcing them to halt production. Also, more entities are typically involved in the commercial debt recovery process (e.g., Accounts Payable personnel credit managers.

Commercial collection agencies are not regulated by the FDCPA. Even in situations involving a personal guarantor of a business debt, the debt is still not considered to be a “consumer” debt, and so it is not covered by the FDCPA.

Nor are commercial agencies regulated, per se, by any state debt collection laws. However, more than 20 states and several large municipalities currently require resident commercial collection agencies to be licensed. And in some jurisdictions, they must be licensed in the states in which they collect.

How Are Commercial Collections Regulated?

Even though commercial collection agencies are not governed by the FDCPA, that does not mean their activities are not subject to regulation. The principal body governing the activities of commercial debt collectors is the Commercial Collection Agencies of America (CCAA). While this association is not a government entity, it is nevertheless responsible for supervising the activities of commercial debt collectors.

In order to become a certified member of the CCAA, agencies must abide by high standards of practice and uphold strong ethics. Not only are aggressive and unethical tactics prohibited, but prospective CCAA members must meet rigorous certification criteria.

Do Your Research

It’s up to creditors themselves to research prospective agencies to ensure that both they and their debtors receive the highest standards of service when collecting on commercial accounts.

For instance, some collection agencies collect on both consumer and commercial accounts. But with such significant differences between the two, your company is much better served by selecting an agency that specializes in the type of debt you need to collect. Specialized agencies are usually more successful in recovering funds than those who handle both types of debt collection.

Also, because licensing is complicated and expensive, some collection agencies opt to forgo it. The negative ramifications of using an unlicensed agency can be serious. For one thing, a debtor-business owner who learns that your agency is unlicensed would likely avoid paying. (Wouldn’t you?)

CAB collects only on commercial accounts, and we’re licensed and bonded in all U.S. states and municipalities that require it.


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My Debtor Filed for Bankruptcy – What Should I Do?

You’ve just received a notice from the U.S. Bankruptcy Court that one of your debtors has filed for bankruptcy. How should you respond?

The answer depends on the type of bankruptcy that was filed.

Bankruptcy Chapters

Most people are surprised to learn that there are in fact six different bankruptcy types under the U.S. Bankruptcy Code:

  • Chapter 7 Liquidation — for both individuals and businesses
  • Chapter 9 Reorganization — for municipalities
  • Chapter 11 Reorganization — for corporations, partnerships or LLC’s
  • Chapter 12 Reorganization — for family farmers and fishermen
  • Chapter 13 Reorganization — for individuals and sole proprietorships
  • Chapter 15 Cross-Border Insolvency — for foreign companies with U.S. debts

For all of these bankruptcy types, once the petition has been filed, creditors are prohibited from attempting to collect the debt.

By far, the three most common bankruptcy types are Chapter 7, Chapter 11 and Chapter 13. So we’ll focus on these three.

Chapter 7 Liquidation

In a Chapter 7 bankruptcy, the debtor’s financial obligations are essentially wiped clean (with a few exceptions). Chapter 7 is available to both individuals and businesses.

The Notice of Bankruptcy sent to each creditor by the U.S. Bankruptcy Court includes information about a “Meeting of Creditors” (also known as a “341 Meeting,” based on section 341 of the bankruptcy code). The purpose of this meeting in a Chapter 7 is for the bankruptcy trustee to determine if the debtor owns assets which can be liquidated and distributed to creditors.

After the 341 Meeting, all creditors listed in the bankruptcy petition receive a notice from the court, indicating whether the Chapter 7 has been deemed an “asset” or “no asset” case. If the case is determined to be “no asset,” unsecured creditors will not receive any payments.

However, if the case is determined to an “asset” bankruptcy, and you are an unsecured creditor, you must submit a Proof of Claim in order to be included in the distribution of the debtor’s liquidated assets.

Chapter 11 Reorganization

Businesses that want to remain operational but need time to restructure their finances in order to pay their bills can file Chapter 11. Because of its complexity, this type of reorganization is typically used only by corporate entities.

The purpose of the 341 Meeting in a Chapter 11 is different than that of the Chapter 7. During the Chapter 11 meeting, the U.S. Trustee will:

  • Gather information about the debtor’s business plan,
  • Determine the plan’s feasibility,
  • Explain the debtor’s obligations, and
  • If necessary, inspect the debtor’s books.

Every Chapter 11 debtor-business has a 120-day period during which it has an exclusive right to file a reorganization plan with the court. After that, creditors can file competing plans.  

The Creditors’ Committee

Creditors’ committees often play a significant role in Chapter 11 cases. Their primary purpose is to ensure that unsecured creditors — who are often owed smaller sums — are adequately represented in the bankruptcy proceedings. In other words, creditors’ committee members represent the interests of the entire class of unsecured creditors.

The creditors’ committee must approve the debtor’s Chapter 11 reorganization plan before it can be approved by the bankruptcy court. There is no time limit on completing repayment of debt through the plan; however, six months to two years is the standard.

Chapter 11 Proof of Claim?

Creditors in a Chapter 11 do not need to file a Proof of Claim if the amount due listed in the bankruptcy petition is accurate. However, if the claim is listed as disputed, contingent or unliquidated — or if you believe you’re owed more money than the petition indicates — you should file a Proof of Claim for the full amount you believe you are owed. 

Chapter 13 Reorganization

Chapter 13 bankruptcy is another type of reorganization. It applies to both individuals and sole proprietors of businesses and involves a three-to-five-year repayment plan.

As with Chapter 7 and Chapter 11, all creditors listed in a Chapter 13 petition will receive a notice of the bankruptcy case filing, which includes a 341 meeting of creditors date, as well as deadlines for filing claims. With Chapter 13, the purpose of the 341 Meeting is to determine if the debtor’s proposed repayment plan is feasible in the eyes of the trustee.

Part of the Chapter 13 plan includes the proposed amount to be paid to unsecured creditors. This amount will vary, depending on the debtor’s disposable income. However, it cannot be less than what the creditor would have received if the debtor had filed a Chapter 7 bankruptcy that was determined to be an asset case.

What About Secured Debts in Chapter 13?

If you are listed as a creditor in a Chapter 13 bankruptcy and the debt is secured, the debtor has three available treatment options:

  1. He may surrender the property back to you.
  2. If he is not behind on his payments, the debtor may retain the secured property and continue to make regular payments to you “outside” of the Chapter 13 plan, just as he did before filing bankruptcy.
  3. If he is behind on his payments, the debtor may retain the property and pay for it through the monthly Chapter 13 plan payment.

Once the bankruptcy court has approved the Chapter 13 repayment plan, claims will be paid out based on priority. For example, secured debts are paid first, then priority debts (such as taxes and domestic support obligations), and then general unsecured debts. 

CAB has been a leader in bankruptcy recovery since 1954. We leverage our partnerships with major bankruptcy and financial advisory firms to ensure our clients will receive maximum debt recovery.


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