From “persistent” to “aggressive” – the red line Accounts Receivable doesn’t want to cross

Collecting outstanding debts and maintaining cash flow all comes down to the persistence of you and your Accounts Receivable (A/R) team members.

Being seen as “persistent” in your industry is the ideal spot you want to be. On the other hand, being perceived as “aggressive” by customers late to pay a bill can open a legal can of worms you and your company don’t need.

Chances are you don’t train staffers on the ins and outs of the federal Fair Debt Collection Practices Act (FDCPA), which Congress enacted decades ago to prevent criminal activities by debt collection agencies. The majority of “no-nos” under the FDCPA are fairly extreme practices you wouldn’t condone from employees, such as making threats, intimidation or public ridicule of a company that’s failed to pay you.

However: There are two FDCPA-restricted practices that any well-intentioned A/R team could make with a debtor you may want to discuss.

Friendly reminders or harassment? Don’t let a court decide

Pamela Fagan, president of Audit Business Services, described an all-too-common way an A/R department could become liable for harassment during a recent Premier Learning webinar, Today’s Strategies for Better, More Effective Debt Collections:

“Let’s say you contact a client on a Monday. The client says it’ll mail you a check by this Friday. One of your A/R employees then calls to leave reminders on Tuesday and Thursday. This can and often is considered harassment in a court of law.”

According to the FDCPA, harassment is “unreasonable” collections pursuits to the point where a debtor can’t maintain a normal life or run a business. As Fagan’s example above illustrates, there’s a lot of gray area as to what the law determines to be harassment.

Overly aggressive collection tactics, such as multiple reminders and warnings, may be construed as threats and lead to a civil lawsuit.

Keep in mind 21 states and Washington DC have laws on the books that are tougher on creditors in one or more ways than the FDCPA (the states are California, Colorado, Connecticut, Florida, Hawaii, Iowa, Louisiana, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New York, North Carolina, Oregon, Pennsylvania, South Carolina, Texas, Vermont, West Virginia and Wisconsin.)

Fagan warns even if you’re not located in or trying to collect from a debtor in one of those states, you can still be sued by a debtor that feels it’s been wronged. And judges tend to be sympathetic to debtors and not as understanding of collectors or business in general.

Be very careful about whom you talk to

It’s human nature: You’ve ran into a customer who dodges your collection calls and doesn’t seem the least bit concerned your firm’s stuck. You do business with good companies, maybe even in the same town, and you don’t want them to make the same mistake.

While it may seem like the right thing to do, you or anyone else from your organization should discuss or share details about an outstanding debt with third parties.

The third-party disclosure stipulation in the FDCPA restricts sharing of info to just three sources:

• the debtor’s attorney
• your legal counsel and collections arm, and
• credit reporting agencies (CRAs).

Good news: Notifying CRAs is a clear-cut fair warning, not a threat, per the FDCPA. If done in writing, let the debtor know your company will report it by a certain date if the debt’s not paid in full or some agreed-upon schedule. A verbal notification on a phone call is also fair warning and complies with guidelines in the FDCPA.

The threat of a credit downgrade is liable to get a debtor’s attention in this economy. More businesses are refusing to extend credit to companies these days.