1. Make sure you have what you need from the start
Take advantage of all information needed to collect at the time the loan is made or the services are provided, including obtaining a security interest in collateral. Remember, the borrower or customer wants your money or services and will be cooperative at this point. Information to obtain at this time includes social security numbers, place of employment, copies of driver’s licenses, home and business addresses, name of spouse, and spouse’s place of employment. This is also an opportune time to get written permission from the borrower to pull a credit report, both now and in the future.
2. Create detailed documents regarding the repayment terms
Make sure the loan and repayment terms are well documented and ensure the loan is properly secured for the type of loan or service being provided. If it is a business obligation, be sure to obtain personal guarantees from the business owner(s), and if in Arizona, the guarantor’s spouse must also sign a guaranty. Keep your documents in a safe place. Do not wait until the borrower/customer stops paying to locate your documents. Make sure everything was signed and that the documents are accessible. If the original agreement is lost, the borrower is more likely to cooperate and sign new documents when the loan is current. The best way to ensure these steps are met is to hire a transactional attorney to draft the loan and repayment agreement, as well as collect the information you need described in section I.
3. Stay in touch with the borrower and monitor the account
Review your documents and the account at least every 4-6 months to ensure the borrower is in compliance. Periodically contact the borrower to confirm that the initial information provided is still accurate, i.e., place of employment and addresses, and obtain updated information if necessary. If the borrower has missed payments or paid late, communicate with borrower immediately and negotiate to get the loan current before the delinquency increases.
4. If you have to exercise remedies to collect, don’t wait!
Chances are, if the borrower is in default, your obligation is not the only one the borrower has defaulted on, and there are likely other creditors chasing your borrower. Your borrower likely has limited funds to pay everyone. Waiting may cause the borrower to use assets to satisfy other obligations, and you are left with nothing.
5. Hire an attorney to help you collect
Often times a letter sent by an attorney will cause the borrower to settle / set up a payment plan. This lets the borrower know he or she cannot continue to ignore the problem, and that you are not going away. If you are unable to settle early, attorneys can garnish wages and bank accounts as part of execution on a judgment. Judgment debtor examinations can also be taken, at which debtors must disclose information regarding their income and assets. This can lead to the discovery of unencumbered assets which may be seized and sold to pay your judgment. Creditor attorneys can help you record the judgment, and advise you of your rights should the borrower file bankruptcy.
It is always important to do a cost / benefit analysis before pursuing litigation against a potentially insolvent debtor. Consulting with a collection attorney can help you make the best economic decision.