Collecting Debts

Summary

Time is the essence of credit and collections. The follow-up must be made on a timely basis in order to be effective. A timely, accurate, monthly-aged trial balance of the company's accounts receivable is a most valuable method of reviewing and controlling the collections as well as for reference when granting further credit.

Holding customers' orders when an account is past due is an extremely effective collection tool. Prompt contact with the customer, tactfully and courteously made, will generally produce results. It is important to respond rapidly in the event that the customer does clear the account so that unnecessary delays in shipping are avoided. It is essential, therefore, that the credit department and accounts receivable bookkeeper have close communication with each other.

Since the credit department is responsible for the protection of working capital along with the promotion of profitable sales, periodic review of these goals should be made. Simple reports can be made for review and a comparison on a month-to-month basis to establish trends for evaluation.

One such report is the monthly collection index. This is a percentage of collection during the month to receivables at the beginning of the month.

Another is the accounts receivable turnover period. This is normally expressed as Days Sales Outstanding and is computed as follows:

Days Sales Outstanding = Average A/R Balance Last 3 month-end x 90 / Sales for Last 3 Months

When computed monthly, along with aging data, Days Sales Outstanding proves an excellent means for watching collection trends.

Once you have requested payment and specified which method is acceptable to you, you will have to collect what is owed to your company. In most cases, collecting payment is not a problem, you simply follow the collection procedure for the method of a payment selected. However, collection payments may not always be easy, especially if you deal with an unscrupulous buyer to whom you have already provided goods and services. Before taking legal action, you may want to take the following steps:

Late payment
Late payment occurs when you are not paid at the date specified in the contract but at some time thereafter. In order to avoid late payments, ensure that you are paid on time by using the following strategies:

• Make clear to the buyer when payment is due.
  If you have to be paid after the goods or services are provided, be sure to indicate the payment due-date on the invoice or an estimate.

• Do not provide the goods or services until you are paid.
  Even if that will not always be possible, this is the best way to ensure payment. If your agreement with your client allows him/her to take delivery of your goods or services before payment, be sure to have him/her sign an invoice or other document to that effect.

• Do not accept postdated cheques.
  They can be sent back by the bank because of insufficient funds and they do not allow you to be paid immediately.

• Develop incentives for clients paying on time.
  You can charge interest on late payments (be careful to respect the provisions of the Criminal Code and the federal Interest Act on charging interest) or offer a discount for payments received before the due-date.

If payment of your goods or services is overdue, consider taking the following measures:

• Act immediately.
  Let your client know that the payment is overdue and request the amount owed. This can be done by telephone, mail or fax. Document all your collection attempts by sending written notices and keeping copies of all of them.

• Stop providing goods or services to the client until you receive full payment.
  Be cautious. This may not be wise if the client in question is an important one who provides you with ongoing business. Examine the terms of the contract before hand to ensure that they do not prevent you from taking this action.

• Do not extend credit to the client until all payments are up-to-date.

If after taking these measures you still have not received payment for your goods and services, your only option may be to take legal action against the client.

Partial payment
Accepting partial payment for your goods and services when full payment is due can lead to problems. To ensure that your legal rights are protected, indicate to your client in writing and at the time of payment that what you are accepting is a partial payment only on account of the purchase price. For example if you receive $100 for a $500 item, you should mark the invoice as follows: "$100 paid on account of the purchase of $500, $400 remaining due and owing, dated July 14, 2007"
In addition, have the client acknowledge the amount owed by initialing your notation. When demanding payment for the outstanding amount, you should use a demand letter to document your collection procedures.
 
No payment
There are many reasons why you might not receive payment for your goods and services. The client may forget to pay you, refuse to pay (if not satisfied with the goods or services), or simply cannot pay you. To avoid these situations, you should follow the guidelines set out for late and partial payment. If it becomes clear that you are not going to be paid, you should send a demand letter requiring payment by a certain date. You may, if you wish, add that if you do not receive payment in full by the specified date, you will take whatever legal action is necessary to enforce your rights. If payment is not made as demanded, you should consider beginning legal action against the client. Nearly every province has established legislation creating a lien in favour of a person who repairs or stores goods. A lien is a right that allows you to retain possession (or some claim) over property until the debt relating to that property is paid. In some jurisdictions you are also entitled to sell the property to recover the amount owing on the debt.

When all else fails
When you have tried everything to collect an outstanding balance from an individual customer or company, and it is simply not working, three choices are available to you:

• Write off the account
  By writing off an account, you decide that the amount owed is uncollectible and that it is not worth spending more time and money attempting to collect it. You should consider writing off an account in the following circumstances:
  • the amount owed is not significant enough to justify any further action.
  • the company which owes you money has gone out of business and has no assets
  • the customer who owes you money has serious financial difficulties and there is no likelihood of being paid.

• Assign the account to a collection agency
  Collection agencies deals with the collection procedures on behalf of businesses for a fee or a percentage of the amount collected. If you only have a few accounts annually, you should find a collection agency whose core business is made up of small businesses. You will find collection agencies listed in the telephone directory. You may want to meet with the agency to discuss their approach and collection procedures. In all cases, you should confirm that the agency will not incur any costs or commit you to litigation without your knowledge and permission.

• Initiate legal action
  Keep in mind that suing is no guarantee of being paid. Before making a final decision to proceed with legal action, you should determine if there is any likelihood of collection. Evaluate the customer's defense against your action and if he/she has sufficient assets to cover the debt and the legal fees.
  First, organize your documentation. Gather all the materials and information relating to the outstanding debt. The following checklist includes the documents commonly used to substantiate a claim in court. Not all of them will apply in your situation:
  - signed credit application from the customer
  - purchase order
  - work order
  - amount of deposit received
  - special instructions
  - copy of the packing slip
  - receipt for the delivery of goods
  - copy of the sales receipt
  - copies of invoices
  - NSF notices
  - copies of any past due notices
  - relevant correspondence
  - your diary of conversations with the customer
  - evidence of any default in confirmed payment arrangement
  You should review these documents and prepare an information synopsis (written summary of the facts).

In Alberta, there is a maximum monetary limit of $25,000 for which an action can be filed in the Civil Division of the Provincial Court. If the amount of the debt exceeds $25,000, you can either abandon the amount over $25,000 and sue for up to $25,000 in Provincial Court or file an action in the Court of Queen's Bench. If you decide to sue in the Court of Queen's Bench, we recommend that you seek the advice of a lawyer or a legal service in your community. The Provincial Court is structured in such a way that you can proceed with or without the assistance of a lawyer. The court will be able to provide you with all the information you need to commence an action. In order to locate the Civil Division of the Provincial Court in your area, contact:
       
Government of Alberta
Regional Information
Telephone Enquiry Centre
Toll-free: 310-0000 and then 427-2711
Web Site: http://www.albertacourts.ab.ca/contact/index.htm 

Even if the judge rules in your favour, this decision does not ensure that your customer will pay. However, the following remedies are available to help you collect:
Attachment of wages
Once the necessary papers are served, an employer is obligated to remit a portion of the customer's wages to the court office. In Alberta, a portion of employment earnings is exempted from being seized. Wages are attachable according to the rules set out in the Civil Enforcement Act.
Attachment of bank account
You are also entitled to attach the bank account of a customer and seize 100% of the funds in the bank account up to the amount of the judgement. In case of a joint account, the bank will pay in that portion which is considered to be the debtor's (normally one half of the funds).
Lien against property
If a customer owns real property, you may file a Writ of Enforcement After Judgement with the Land Titles Office which becomes a lien against any real property owned by the customer in the jurisdiction in which it is filed. Whenever the customer attempts to sell or mortgage the property, an arrangement must be made to remove your lien before the transaction can be completed.
Seizure of assets
You may also request a Civil Enforcement Agency to seize and sells assets owned by the customer by filing a Writ of Enforcement After Judgement with the Personal Property Registry.        
Examination of the Judgment debtor
The customer can be compelled to attend an examination to answer questions under oath about his/her financial situation and any other relevant questions.

This document is intended to provide general information and is not a substitute for legal advice.