All debts are not equal. Personal, commercial, and consumer debt all present unique challenges when it comes to collections. Collecting personal accounts is particularly difficult because creditors often have a significant relationship with the debtor which they wish to preserve. This desire can make collection difficult.
How Personal Debts Differ From Commercial and Consumer Accounts
Commercial debts are obligations between two business entities. Consumer debts involve a business lender and an individual consumer. In general, these are arms-length transactions between parties who know they are entering a business relationship. Commercial accounts typically include detailed contracts or established terms that apply to the agreement. Consumer accounts also involve a contract and are further governed by the Fair Debt Collection Practices Act (FDCPA).
Alternatively, personal debts frequently occur between friends and family members. While a business entity can sometimes be involved, the parties typically have a strong personal relationship that makes the creditor wish to “help out” the debtor. Often there is no written agreement documenting the loan or establishing concrete repayment terms. Consequently, these obligations can be difficult to enforce for both personal and legal reasons.
Tips to Help Collect Personal Debts
Attempting to collect a personal debt is a thorny situation. Creditors are often reluctant to take action because they feel uncomfortable making harsh demands on people close to them. Sometimes they feel bad asking for payment because they believe they could damage an important relationship.
Remember that you didn’t cause the problem. You helped a friend or family member by loaning them money. The debtor broke a promise to you by failing to repay. You are doing nothing wrong by asking them to keep their word.
1. Make Sure to Document the Obligation With a Promissory Note
A promissory note is a document that sets out the amount owed and the repayment terms. Terms can include a payment schedule and interest, although personal debts often waive interest.
Documenting the obligation with a promissory note is critical because it will be much more difficult to prove the existence of the debt if you run into difficulty with repayment. Also, a promissory note “formalizes” the agreement and makes it more likely the debtor will pay.
Yes, it can feel awkward asking a close friend or relative to sign a contract. Many people will feel as if you don’t trust them or doubt they will repay. However, you can point out that a written agreement will provide clarity and prevent misunderstandings at a later date.
2. Remind the Debtor of the Obligation
When you first run into difficulty collecting the loan, simply remind the debtor about the agreement. It can help to point out that they asked for a loan and the problems they were facing when you offered to help. Ask them if they had a different understanding concerning the amount, the date of the loan, and the repayment schedule.
You hope the debtor will immediately repay you after you remind them of their obligation. More often, debtors will promise to pay you back soon. If possible, get a written acknowledgment of their duty to repay including all of the terms such as time, the amount of any installments, and interest. The worst outcome is that the debtor will either ignore you, insist that the loan was a gift, or assert that you had promised them more time to repay.
If the debtor tries to deny the obligation, don’t argue. Simply insist on the original terms and tell them you expect repayment.
3. Send a Letter
If reminding your debtor of their duty to pay doesn’t work, send them a letter. A written letter will often convince the debtor that you’re serious about enforcing the agreement. Make sure to include the amount owed, when you expect repayment, and the circumstances that led to the loan.
Don’t get emotional or berate the debtor. Keep it professional. Remember that the letter can later become evidence if you must take legal action to enforce the loan.
4. Seek Collection Help From a Third Party
If all of the above attempts fail, do not harass, berate, or threaten the debtor. Instead, seek help from a third party such as a lawyer or collection agency that specializes in delinquent accounts.
Law Firm vs. Collection Agency
Collection agencies frequently charge less than a lawyer or law firm for their services. However, the main problem with an agency is they are geared to collect consumer accounts. Such obligations are governed by strict regulations and, consequently, collection firms will use cookie-cutter tactics.
On the other hand, lawyers are accustomed to providing individualized services to meet the unique needs of their clients. The nature of law practice makes legal professionals well-suited to minimize the impact of collection efforts on your personal and family relationships. How you handle this delicate situation can affect your home life for years to come.
If you need help collecting a personal debt or have further questions about this area of law, Boston, Massachusetts firm Goldberg & Oriel have over 40 years of experience collecting personal obligations. Please contact us for a free consultation as soon as possible.