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Past-Due Diligence, Know the Laws When It Comes to Collecting Receivables

November 15, 2004


Many business owners are faced with the arduous task of collecting receivables that are due and owed to the business for services rendered by it. This is a daunting dilemma given the fact that many laws exist to protect a debtor from collection practices that a business owner, collection agency or attorney hired may employ to collect the debt. Many business owners are finding themselves unable to collect valid debts because they may have employed collection methods that are deemed abusive, deceptive or unfair.

So the question that many business owners are faced with is “How can I collect my accounts receivable in a cost efficient manner that complies with the laws of the Commonwealth?” The answer is not a simple one. It involves a detailed analysis of federal and state law to ensure compliance with both. Otherwise, the creditor or his attorney may be liable for violation of the Fair Debt Collection Practices Act and the Massachusetts General Laws.

In 1977 Congress passed the Fair Debt Collection Practices Act. It was passed after hearings were held before various Congressional committees indicating that there were widespread problems with collection practices employed by collection agencies. The Act was passed in order to ensure that debtors were not harassed, intimidated or abused by collection agencies in collecting a debt, whether valid or invalid. In addition to Congress enacting this Act, many states began to enact similar statutes protecting debtors from unfair and deceptive trade practices from collection agencies, creditors themselves or attorneys hired by the creditors to collect debts.

Laws promulgated in Massachusetts distinctly detail the practices that are prohibited in the collection of debts owed by a debtor. The Massachusetts laws pertain to anyone who is a creditor, an attorney for a creditor, or an assignee of a creditor attempting to collect a debt of any person present or residing in Massachusetts when the debt was incurred. The statute specifically states what constitutes unfair, deceptive and unreasonable practices when collecting or attempting to collect a debt.

There are four basic categories of debt collection practices that have been deemed unfair and deceptive in the Commonwealth of Massachusetts. The first category is creditor transmission of any information regarding a debt to anyone other than the person who owes the debt, or who might reasonably be expected to be liable for the debt. In some instances, a creditor may be tempted to forward a demand letter to the spouse, sibling or parent of a debtor. This is prohibited by the laws of the Commonwealth. However, this does not forbid a creditor from notifying the debtor that the debt is due and owed, that the debt may be reported to a credit bureau, or that an agent or attorney may be engaged for the purpose debt collection.

The second practice that has been deemed unfair and deceptive is direct creditor communication with the alleged debtor after notification from an attorney representing the debtor that all further communications relative to the debt should be addressed to him or her. Once a debtor has retained an attorney and the attorney has contacted the creditor, all communications must be directed to the attorney. This is critical, because if a creditor violates this provision, he or she could be liable to the debtor under the laws of the Commonwealth.

The third category is creditor communication with the alleged debtor in a manner intended to harass or embarrass the alleged debtor, including, but not limited to communication at an unreasonable hour, with unreasonable frequency, threats of violence and/or the use of offensive language, or threats of any action that the creditor does not customarily take in the usual course of business. Many creditors find it difficult to actually make contact with debtors. As a result they often make multiple attempts to contact the debtor that may not be in the normal course of business hours. This may be construed as a violation of the debt collection practice regulations.

The final practice deemed unfair and deceptive is creditor communication with alleged debtors through the use of forms or instruments that simulate the appearance of judicial process. One of the final steps in collecting a debt is instituting litigation against a debtor. Therefore, an attempt of a creditor to defraud a debtor into believing legal proceedings have already been initiated is contrary to the fair debt collection statute.

A creditor must ensure that none of above-reference practices are utilized in attempting to collect an outstanding debt. In the event that these practices are employed, the creditor may be subject to damages resulting from the unfair and deceptive collection practice.

Creditors must, however, be assured that their hands are not tied in collecting debts due and owed provided they do so in a manner that is efficient, reasonable and fair. In most instances, a business owner can forward a “demand letter” to a debtor to initiate the collection process. It is recommended to mail the demand letter via both certified, return receipt requested and regular mail. The purpose of this is so that the creditor has a record of receipt of the demand letter, which should consist of the nature of the debt and a copy of an invoice and contract, if relevant. The demand letter should also require a date by which the outstanding balance must be paid before further collection actions will be taken. In the event the balance is not paid within the specified time and no agreement has been made with the debtor, a lawsuit may be instituted to collect the debt.

Although the aforementioned is not an all-inclusive list of laws and practices currently enacted in the Commonwealth with regards to debt collection practices, it serves as an overview of what business owners must be aware of when attempting to collect outstanding debts. For a more extensive description of the laws in effect relative to fair debt collection practices, please refer to the Massachusetts General Laws, specifically, Chapter 93A and the Fair Debt Collection Practices Act. In the event that all else fails, a business owner may secure legal counsel to further pursue monies owed.

Benjamin M. Coyle is an associate in the Estate Planning and Elder Law department of Bacon & Wilson, P.C, Attorneys At Law. His specialties include the litigation of estate issues, business and municipal matters. He can be reached at 413-781-0560 or [email protected].

by: Benjamin M. Coyle, Esquire

November 2004