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Basic Business Credit Advice

During difficult economic times, businesses often face creditor rights and bankruptcy issues. The poor business conditions lead to customers having problems paying, or revealing companies internal problems.

Dealing With Customers
Review your contracts. Make sure contracts have provisions for the payment of attorney fees, selection of venue and choice of law. Consider charging interest at a high rate, e.g., 18 percent or 21 percent per annum, for late payments.
Include security interests in agreements. If you allow customers to pay over time, consider getting a security interest in the goods you are currently selling. With secured debt, there is usually a right to seize identifiable property in the event of default. Secured claims generally will not go away in bankruptcy, so you have a better chance of getting paid. Also, a security agreement for an outstanding account receivable can be a good step, but note that the grant of a secured interest might be negated if your debtor files bankruptcy within 90 days.
Monitor accounts receivable closely and consider payment plans. Contact customers immediately when a payment is missed. Also, consider written concrete payment plans with fixed dates and amounts for slow-paying customers. The written plan should have the customer waive any potential claim against you. If a customer stops paying on time and a resolution cannot be reached, you should consider filing a lawsuit immediately. The old saying, the squeaky wheel gets the grease, is still true.
Guaranties. Guaranties are agreements that hold an individual responsible for the payment of another's debt if that person does not perform as legally obligated. Think of guaranties as being similar to co-signing. Guaranties are generally enforceable, so you should try to get them, but not to sign them yourself. (You should especially avoid signing unlimited guarantees).
Reclaim goods from insolvent customers. If an insolvent customer has not yet filed for bankruptcy, the seller can reclaim goods sold on credit, within 10 days from the time the customer received the goods or within 45 days of a customer’s bankruptcy filing.
Always file a Proof of Claim if given an opportunity to do so by the Court. This is often an option for creditors after the debtor files bankruptcy. A proof of claim is a form filed with the court which establishes the creditor's claim.
Know you rights regarding bad checks. Clients are seeing an increase in the number of bad checks they receive. Under Indiana law, liability includes the face amount of the check, interest at the rate of 18 percent per annum, attorney fees of not less than $100 and collection costs. Failure to pay, after written notice and the lapse of 30 days can increase liability to include treble damages.
The nature of Indiana judgments. In Indiana, judgments are good for 20 years and can be renewable. Under certain circumstances, judgments serve as liens, good for 10 years. The rate of interest a judgment bears is currently 8 percent per annum. As a result, you may have important leverage that allows you to collect on your judgment well into the future as your customer’s financial situation improves.
Dealing With Internal Problems
Handle problems early, while they are small. Monitor your accounts receivable and cut expenses aggressively to match your sales activity. This should help prevent problems. However, if you get in trouble, contact your lender to see if they are agreeable to a workout. If a workout is not possible, consult with legal counsel early on to discuss your options. Most people wait too long to consider bankruptcy. Bankruptcy gives filing entities/individuals a fresh financial start. Types of bankruptcy include the following:

  • Chapter 7 is known as “liquidation.” It requires a debtor to give up property which exceeds certain exemption limits. Ask an attorney for clarification, so the property can be sold to pay creditors.
  • Chapter 11, known as “reorganization,” is used by businesses and individual debtors with very large debt.
  • Chapter 13, which is for individuals only, is called “debt adjustment” bankruptcy. It requires a debtor to file a plan to pay debts in small, regular payments out of current income.

Always pay your taxes. It is a common phenomenon for distressed business owners to stop paying their taxes. DO NOT DO THIS. Tax debt is not dischargeable in bankruptcy and does not go away. If taxes are not paid on time, you can be held personally liable for penalties and interest, in addition to owing the tax debt.
Don’t get sloppy and give someone a chance to pierce the corporate veil. If proper formalities are not followed, creditors can go after business owners personally to recover outstanding liabilities. To avoid this, make sure you file all necessary paperwork on time with the Indiana Secretary of State. Make sure you are not comingling funds, treating the corporation – or even an LLC – as an alter ego, or forgetting to hold annual board and shareholder meetings. On the other hand, be mindful that your debtors may be exposing their owners to personal responsibility for your receivable if they have misused a business entity.
What happens to your house and car if you file for bankruptcy? In most cases you will not lose your home or car after filing bankruptcy, if you keep making regular payments and your equity in the property falls within the exemptions. Even if your property is not fully exempt, you will likely be able to keep it if you pay its non-exempt value to unsecured creditors. However, some of your creditors may have a security interest in your house or car (i.e., if that creditor has a mortgage on the house or if your car was used as collateral). Filing for bankruptcy will not discharge the claims of creditors with security interests. But, if you keep paying those creditors, you will still generally be able to keep your home or car.
As we continue to weather these difficult times, businesses need to be proactive with their customers and with their own internal financial practices. Attention to these basic, but important, credit issues will help forestall huge problems later.
For more information, contact Scott R. Leisz.

  • Scott  Leisz

    Scott has over 30 years of experience in litigation and trial practice. He concentrates his practice in the area of business litigation in federal and state trial and appellate courts, including: corporate governance and ...



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