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Ahh, it’s the Friday before Christmas and I am sure you all are shopping rather than thinking about legal issues OR if you are a small business owner, you are manning your shop to get those extra sales in.
Well, if you have time, this is still an interesting topic for you all. When the dust settles and the after Christmas sales settle, a month or two for now when payments are due for your new tv or that enthusiastic customer is trying to ask for more time try to remember this post!

Who are You Gonna Call? DEBT COLLECTING AGENCY!

Today is all about when you extend credit and that person kind of disappears. How do you get your money? Generally, for most businesses they have a debt collection agency handle this type of situation. Here are some signs to look for when you think it might be time to contact a collection agency:

  • No response from the customer via e-mail/phone;
  • Debtor did not meet payment terms and has made no excuse or reason;
  • Debtor is making unfound complaints to avoid payment or is in denial;
  • Debtor keeps changing their information (workplace/home address) and is consistently late with payment;
  • And similar to the prior one, debtor disappears, but does not notify you.

Fair Debt Collection Practices Act

Now, those are situations for you to call a third-party collection agency, but say you want to handle your own debt collection? Well, you have to watch out for the Fair Debt Collection Practices Act (FDCPA), and any other relevant state laws that regulate debt collection practices. Now, FDCPA is meant for collection agencies; the majority of rules and regulations apply to them. However, there are several rules as a small business owner-creditor that you need to be aware of if you are going to collect on your customer’s debt:

  • Contact: mail, in-person, or telephone AND unless in writing you may not contact them at inconvenient places or times (i.e. after midnight);
  • Workplace: if employer forbids employees from being collected, you don’t contact them there, a debtor can specify what times/places are inconvenient;
  • Representation: if the debtor has a lawyer for this matter, you speak only to the lawyer;
  • Leave Me Alone: if the debtor writes to the collector that they wish to be left alone, the collector can confirm they will no longer contact them and that some legal action may or will be taken;
  • Leave Me Alone pt. 2: if debtor states within 30 days they are disputing the debt they must leave them alone, unless collector provides proof;
  • Who/What/When/Where/How: must send written notice within 5 days of first contact – stating the following: (1) name of creditor; (2) what is owed; (3) debtor has 30 days to challenge if the debt is genuine; (4) how the debtor must proceed to clear the debt if they do not believe they owe it; and (5) the name and address of the original creditor if the creditor has changed;
  • Locating: a debt collector may contact ANYONE to locate the debtor BUT cannot speak to the more than once, nor mention the debt;
  • Mean-Spirited: No, harassing, oppressing, or abusing anyone OR specifically, no doing or mentioning violence, defamatory or profane language use, no irritating or annoying behavior, no making them pay for contacting them, no lying or cheating. Basically, don’t be an a**.

As you can see a long laundry list of things that you cannot do in pursuit of money owed to you, which is generally why most businesses prefer to use collection agencies.  Despite the headaches associated with granting credit, remember that most people will pay and that you have expanded your customer base. The goal is to manage acceptable levels of loss versus that of growth of sales.

Anyway, I hope you have a Happy Holidays and see you in the New Year for Draw the Law. Draw the Law will be going under some changes next year, and actually I will be accepting questions for Draw the Law from you startup and small business owners that have questions. So start thinking (after the presents are open) and consider giving me the gift of your questions!

If you enjoyed this post or any of my others please “Subscribe” to this blawg!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Hey everyone before I get to today’s Draw the Law, let me remind anyone in the Honolulu area that I will be having two talks next week.

Events

First, on Monday (12/19), come join me at The Green House Innovation Hub, a center of creativity, innovation, and coworking down in Kaka’ako. I will be talking about CAN-SPAM Act, primarily for small business and marketing points of view. I covered a little bit about it back in this post for Draw the Law. This Law Lunch will be more in-depth and starts at 12PM. Click on the links to find out.

Then the following evening, Tuesday (12/20), starting at 7PM at The Box Jelly, I will be conducting a talk about Succession Planning with fellow attorney and Estate Planner Scott Suzuki. We will primarily focus on what happens to your business and personal assets of when you are gone, and the need to plan for the future. For more information, click here.

If you are a business owner, marketer, curious about advertising or tax planning come join us down in Kaka’ako the place to be for work and play!

Draw the Law: Equal Credit Opportunity Act

So last week I talked about thinking about extending credit, and that you would need a policy and application. Moreover, when you advertised about this credit application process you would be regulated by the Truth in Lending Act (TILA). Today I turn how you must treat a consumer’s  credit application under the Equal Credit Opportunity Act (ECOA).

What is ECOA?

ECOA is a law that prohibits entities that extend credit from discriminating against certain aspects of the applicant.

What are those Factors?

If you are familiar with human resource management or remember the prior discussion on Employee Protection laws, then you can kind of guess what factors ECOA protects.

The factors you are prohibited from considering when deciding whether to extend credit or not are as follows:

  • Race
  • Color
  • National Origin
  • Sex
  • Marital Status
  • Age
  • Receipt of Public Aid
  • Exercise of the Person’s Legal Rights as a Credit-Seeker

Age? Does that mean I have to Give Credit to a 14-year old?

No, age as a factor is not a straight-forward analysis; first, the person has to have reached the age of majority (which is 18 in most states) to be protected by ECOA. With that being said, from the age of majority and up, you as the credit grantor cannot discriminate based on the applicant’s age, whether young or old. However, you may be favorable toward older people and may consider their future income stream. Furthermore, retirement complicates matters and generally you should consult an attorney if you are going to have a highly nuanced credit policy with regard to age.

Are there Factors I can Consider?

Yes, there are factors you can consider for granting credit, and they do get to the heart of the matter, which is why did you want extend credit in the first place? To make money, thus here are factors to look at:

  • Assets – what do they have as collateral? If they are asking for a huge extension and have very little to their name, where are you going to get your money if they default? Leads to the next factor –
  • Ability to Repay – what is the applicant’s current job or income source?  (usually, a mortgage lending practice and not consumer credit)
  • Credit History – how much money does the applicant owe? Do they pay bills on time? Have they ever declared bankruptcy?
  • Credit Foundation – do they own a home? How long have they been there? The ability to maintain a home and long residence there usually indicates sound money management by the applicant.


See you next week and look out for announcements for changes to this blog for 2012. If you enjoyed this post or any of my others please “Subscribe” to this blawg!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

So on last week’s post I discussed the process of extending credit, the concerns of doing so, and the legal requirement that interest on the extension of credit be capped, depending on State law. Today’s Draw the Law, is all about the policy (what can and can you not do), the application that customers will fill out to get credit from you, and the federal law Truth in Lending Act (TILA).

Your Policy and Application for Extending Credit to Customers

Credit Policy

First, having a credit policy forces you to sit down and think of what potential customers you want to go after because you are creating customers where you had none before. Consider, that with their cash on hand plus whatever amount you decide to give on credit creates a customer that can buy bigger ticket items.

Second, the details of the policy should take into account administrative costs, how much risk can you tolerate (or how much credit are you willing to extend), for how long, interest rate, what happens if things go if there is missed payment or you have to try and collect on the debt, and the procedures you are going to follow. There is no point in creating a credit policy if a) you do not reduce it to writing, as you have no record to follow and b) why go through all that effort if you aren’t going to follow your own rules.

Some legal things to note: take a peek at Boilerplate Blurb for forum selection, governing law, and arbitration clauses that you might want apart of your policy. Secondly, putting things in writing (so long as everything is legal) provides a good recordkeeping and evidence function for disputes.

The Application Process

Once you got your credit policy in place, and before you start extending credit, you need to gather information on the creditworthiness of applicants. There are two ways to do it, and depends on the situation, you can try to gather it on your own by requesting reports and contacting other known creditors of the applicant. After you have collected enough creditworthy-type of information, make an assessment if this applicant is good for the credit.

Some things that you want to ask, if you do ask the applicant to fill out a form:

  1. customer’s name
  2. if a business, the entity’s form and name
  3. personal and business addresses
  4. personal and business telephone numbers
  5. their bank(s) name(s)
  6. type of account(s)
  7. account number(s)
  8. credit card account(s)
  9. and if a business, contact information to other trade creditors
  10. social security number*

Be aware as you collect information you cannot discriminate the granting of credit on certain bases, such as race. I will cover this more next week, when I go over the Equal Credit Opportunity Act (ECOA). *Especially, the act of obtaining and recording SSNs is regulated by various other state and federal laws.

Truth in Lending Act (TILA)

What is the Truth in Lending Act?

This law is an effort to help inform consumers whether to buy on credit or borrow, and to shop around for the best credit rate for them. Thus it is a disclosure requirement on your part.

What do I have to Disclose?

Basically, before the signing of a credit contract you have to disclose (in writing) the following:

  1. Amount of money being financed (how much credit are you extending);
  2. What are the number of monthly payments that are to be made;
  3. What is the APR or the annual percentage rate.


Is that it?

No, TILA also regulates your advertising of credit programs, therefore it makes it easy for consumers to shop around. Therefore, content-wise, if you made the pitch that buying a television would only cost the consumer “a low monthly payment” you should be giving a dollar figure and relevant information like the APR.  These are not the only requirements, and the application of TILA’s regulation depends on the structure of the credit extension. So therefore, have an attorney review your policies and papers to make sure you are doing things legitimately.

For another helpful starting point guide out this great write-up on Inc., it lays out from a more business standpoint the setting of credit policy.

Some Insight: Administrative Costs

I cannot emphasize this enough from a business background, while you can setup everything perfectly some people are caught unaware by the intake and processing of large volumes of data, then tracking, and then organizing it. Be aware the extension of credit, especially on a B2B level, is really a relationship building tool. You extend credit to your customer because you think it will be good for them, which in turn keeps them in business and constantly buying from you. However, like all relationship-building exercises you need to monitor and respond, while still looking at the numbers.

If you enjoyed this post or any of my others please “Subscribe” to this blawg!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

So it’s holiday time, and we have survived Black Friday and Cyber Monday, but we still want to generate more sales. Even though cash is king, you still want as any customers buying your stuff, so you accept checks and credit cards.

Direct Credit Extension to Consumers

However, what about those big-ticket items? Do you limit your market size by saying cash only ? Or do you try and expand by offering direct credit to customers? While, this does increase sales, and the financing charges can actually be a source of health income this is not a process you do overnight and it is not without consequence.

Consider Some of the Following Issues:

  1. regulations (cap on interest rate, Truth in Lending Act, Equal Credit Opportunity Act);
  2. time and costs for developing a credit policy and the review process of your questionnaires and forms you plan to use on customers;
  3. length of time to collect, which means need for great reserve funds to cover the goods and services sold on credit;
  4. you will have to consider debt collection when customers can’t pay;
  5. and finally, related to the prior point, some of the bad debt will never be collected and be written off.

That being said the major benefit is we do a lot of transactions nowadays on line of credit, so it makes sense for a growing business to offer alternate payment methods to tap new markets. So for the average customer it looks like this:

  1. they go to your store;
  2. they see something in your store they cannot pay for in total right now;
  3. your salesperson understands this and says we have a direct credit plan;
  4. customer is interested;
  5. salesperson gives them the credit application;
  6. internally or externally you run a credit check based on the information given; and
  7. you decided, based on results, whether to extend credit or not.

However, even before that all happens, you the business owner engage in a calculated risk to figure out if this is worthwhile to even offer credit and at what interest rate?

Interest Rate Caps and Federal Laws

So most states regulate the interest rate a business can charge for credit for consumers. However, in many states, the B2B interest rate is unregulated for the granting of credit. Basically, it is up to your negotiating skills when it comes to extending credit to your business customer. The interest rate is generally capped in most states in consumer credit situations in an effort to protect consumers from high interest fees. So it is best to consult with an attorney about local rules. Once you consider the state laws, you will then have to comply with federal law, the two being: (1) Truth in Lending Act (TILA), which is aimed at helping consumers find the best rate and credit provisions; and (2) the Equal Credit Opportunity Act (ECOA), which has the goal of preventing discrimination in credit extensions.

Next week I’ll talk about setting up the credit policy and application, and then cover the federal law TILA.

The following week, I will discuss ECOA and as a Christmas bonus, I will also do a brief rundown on you business owners that max your own personal credit cards to run your business and where you stand in the land of credit.

If you enjoyed this post or any of my others please “Subscribe” to this blawg.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Following in the vein of making agreements with customers or clients, and then warranting or disclaiming your products and/or services we come upon one the most important parts to your business, how do I get paid?
Obviously, in a tight economy cash is king, and having cash today as opposed tomorrow is princely. However, nowadays in the world of plastic and convenience many businesses accept some sort of credit payment.

Today I am going to focus on just the idea of accepting credit, but before we get to that let’s set-up a general framework for thinking about credit.

What is it Credit?

Credit is a payment option other than cash upfront. It includes like I said credit cards, promissory notes, and checks.

Who would I Accept Credit Payment From?

This is really up to you, and you should consider some sort of internal payment policy that handles cash payments, credit payments, extension of credit and debt collection, etc . . . based on the trade or industry you are in. That being said there are two groups of people to think about in the credit situation, your consumers and then your commercial clients.

Clearly, the former has a variety of payment options and their transactions tend to be smaller and quicker with you whereas the latter, due to their involvement with you may require a more formal type of payment system. In the commercial case, consider the size of payment owed to you and frequency of good and/or services flowing from you to them. They may not have cash on hand to pay on receipt of the goods and/or services from you because they in turn need to finalize it to someone else further down stream.

What are the Types of Credit and Some Concerns Accepting Them?

  • Indirect Credit – is you will receive payment indirectly from the customer/client through a 3rd party, such as a bank with checks or an issuing credit card company through its cards.
    • Checks – you will have worry about fraud and insufficient funds situation, in addition be wary of “Paid in full” on the check, as that may be legally binding.
    • Credit Cards – you are playing on the terms of the credit card service, so always check what the fees and policies are, as you might have to past those cost onto your customers if they eat too into your profit. PayPal operates similarly, as it deducts fees when you take the money from your PayPal account and get a check or deposit into your tied in bank account.

  • Direct Credit – this is where you would extend credit directly from yourself to the customer, and is easily seen in the situation of appliance or electronic stores for big-ticket items. This can certainly increase sales, and the financing charges can become and additional source of revenue. However, realize you expose your business to several laws, namely the Truth in Lending Act, the Equal Credit Opportunity Act, FTC Credit Practices Rule, and the Fair Credit Reporting Act (as well as any other applicable state laws).
  • Other Credit Types – commercial credit (B2B situations), contracts, and promissory notes all provide more formal and long term arranges to accept payment. However, more formal means longer processing times, review processes, and even the help of legal counsel to negotiate and reduce the terms in writing. However, having a formally pay system in place probably means a sustainable cash flow and good business relations with the other business for the long term.

Policy and Planning

What does your financial plan call for? Do you want more sales? Then you might want to have a robust credit acceptance policy, but you should be aware you will not be able to get all that credit (and will need to go to debt collection), plus there are administrative costs and legal oversight to worry about.  While cash is the safest form of payment it sometimes is unlikely in this day and age to have it be your sole payment system for many types of businesses. The existence of many smartphone apps to accept credit cards and use of systems like Paypal may certainly provide ways for businesses to avoid the higher cost of merchant fees on traditional credit cards. The bottom line is that accepting credit does requiring some planning and foresight.

In the following weeks, I will take a look at some of the legal concerns with extending credit, contract law issues (also be covering Boilerplate Blurb), and debt collection.

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*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.