Access to business credit is considered an essential tool for any entrepreneur. Options such as business lines of credit, equipment financing, credit cards, and loans provide business owners with the opportunity to develop sustainable businesses that are ready for growth.
However, an inability to repay debt is a sign of a larger problem for small business owners. Therefore, it is important to manage your business debts wisely, as commercial debt collection laws do not protect businesses in the same way that consumer debt laws protect ordinary individuals. If you find yourself facing a debt collection agency, be proactive in repaying your creditors.
Rules Governing Business Debt Collection
Business debt, also known as commercial debt, refers to any financial obligation owed by a company such as credit card debt, lines of credit, loans, and equipment leasing. Business debts also include expenses such as utilities and assets like equipment or owned property.
On the other hand, personal debt consists of revolving or non-revolving accounts such as credit cards, mortgages, student loans, and car loans opened for personal use. Personal debt shares with business debt the ability to borrow from a financial institution or the federal government. Like business debt, personal debt must also be repaid.
The significant difference between commercial and consumer credit is the laws that govern how creditors can seek repayment. The Fair Debt Collection Practices Act (FDCPA) was established to protect individuals from aggressive tactics employed by debt collection agencies to collect amounts owed. However, businesses are not protected under the FDCPA.
However, commercial debt collection agencies have the ability to take a more aggressive approach when seeking repayment from businesses. Commercial debt collection agencies can garnish bank accounts and freeze assets when pursuing amounts owed. Alternatively, commercial debt collection is governed by the Commercial Collection Agency Association (CCAA). A set of ethical standards for the CCAA was established by a group of commercial collection agencies, creditor’s rights attorneys, and legal listing publishers. This set of standards is used by members, and creditors are encouraged to use collection agencies that are considered members of the CCAA.
Note: Individuals using debt for business purposes are not protected by consumer protection laws. Instead, their debt is considered commercial.
There are also specific commercial laws in states to protect both creditors and debtors. Here are some examples:
- In California, collection agencies cannot share false information regarding consumer or commercial debt.
- Collection laws in Colorado state that a collection agency must identify its business within 60 seconds of confirming that it is speaking with the correct debtor.
- Collection agencies in Washington cannot publish or post “bad debt lists”.
- It is illegal to threaten to report a business to immigration authorities.
- Debt collection agencies in Texas cannot bribe the debtor with valuable information in an attempt to extract or understand information related to the business.
Commercial Debt Collection Process
When a business defaults on payments, a debt collection process is followed. Here are some common steps that are taken:
- Your creditors will start reaching out to you to seek repayment.
- If you do not complete a repayment plan with your creditors, they will sell the debt to a debt collection agency (DCA).
- The debt collection agency will start contacting and sending mail to persuade the business owner to establish a repayment plan.
- If you meet the repayment plan requirements, the collection agency will record the payment in your account.
- And with
- If you refuse, the debt collection agency has the right to pursue legal action in order to seize your assets.
Note: Keep making your loan payments on time. This will allow your company to rebuild its business credit.
What to do if your company is in debt?
If your company is facing financial difficulties and cannot repay your debts, you cannot ignore the problem. Instead, be proactive in your attempts to meet your financial obligations. Here are some ideas:
- Contact your creditors. Create a repayment plan that will allow you to regain your good standing with your creditor.
- Consult your accountant. Accountants can provide guidance that will allow you to restructure your business and even establish a repayment plan with your creditors.
- Seek legal advice. An attorney can represent you and negotiate on your behalf regarding repayment terms.
Note: Do not use personal funds like retirement accounts to pay off business debts.
Conclusion
As a business owner, you do not have the same debt protections as consumers. Business creditors have the ability to seize your assets as compensation for the credit extended to you. If you fall behind, you should communicate with your creditors to create a repayment plan. You can also seek help from an accountant or a small business development center where experts are available to support your needs. Consulting a legal advisor should be the last resort when managing business debt, as it can be costly.
Frequently Asked Questions (FAQs)
What happens to debts when a company closes?
When a company closes, debts must still be repaid. Any debts you personally guaranteed, such as a Small Business Administration (SBA) loan or equipment lease contracts, remain your responsibility. It is not uncommon for someone to file for debt relief by submitting a Chapter 7 bankruptcy petition to wipe out these debts.
How can you reduce debt in a business?
To reduce debt in your company, you will need to work with an accountant who can provide guidance on restructuring your debt and help you avoid further debt. You will also need to find creative ways to leverage the business.
Source: https://www.thebalancemoney.com/how-debt-collection-laws-impact-small-businesses-5224137
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