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Bankruptcy and Debt Collection Laws Every Business Owner Should Know About

How to collect on outstanding invoices after a debtor files for bankruptcy.

Debt recovery is one of the most challenging aspects that a business owner can face. All the “business” in the world is of no use if you’re not actually getting paid for your services. 

Unfortunately, that’s a problem for many startups and SMBs. So much so that it has created an $18 billion industry built around the concept of trying to get business owners what they are rightfully owed. 

In this article, we’ll be examining the laws you need to know about to be kept from holding the bag. 

Fair Debt Collection Practices Act

The design of the Fair Debt Collection Practices Act is to guard consumers against unfair collection practices. These could include deception, abusive speech, and unfair terms. 

The FDCPA’s purpose is consumer-oriented. However, it also gives debt collectors and business owners a template for how to retrieve payment and protect their interests while working within the scope of the law. 

Congress enacted the law in 1978. Some of the actions that it prohibits include the following: 

  • Sets limits on who may be contacted
  • Restricts the frequency of contacts a debt collector may initiate
  • Restricts the times of day for collection attempts

Every business owner or debt collector should familiarize themselves with the FDCPA. You can find the full text here

Chapter 13 Bankruptcy

Chapter 13 bankruptcy law caters to “wage earners,” or individuals with a recurring form of income. This could include W-2 employees as well as sole proprietors and other self-employed individuals who can show a history of income and tax returns. It enables them to repay all or part of a debt during a period of no more than five years.

This is advantageous for businesses and debt collectors. That’s because it protects you from having the debt discharged and ensures at least partial debt recovery.

Chapter 11 Bankruptcy

Chapter 11 is comparable to Chapter 13 but only for incorporated bodies. It allows such an organization to follow a debt repayment plan while continuing to operate. This can be advantageous in a number of ways: 

  • Debt recovery for the collector
  • Job protection for employees
  • Continuation of business operations

As a debt collector or business owner, it’s important to note that Chapter 13 and Chapter 11 do not guarantee full repayment of any monies owed to you. Parts or all can still be discharged depending on the payor’s ability to afford it following the restructuring. 

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is an option that individuals, businesses, and other entities can use when they cannot afford repayment of any kind. As a result, they can lose certain assets, such as their car or home. The downside is that the debtor pretty much eats what they are owed. 

Unsecured debts in a Chapter 7 are at risk of being discharged without repayment. Examples of these include: 

  • Medical debts
  • Personal loans
  • Unsecured credit cards

In each of the above cases, there is nothing tangible to secure the debt. That’s important to consider before lending to someone without collateral. 

State-Sponsored Debt Collection Laws

Some states have their own debt collection and consumer protection laws. Texas law, for example, spells out more of the details of what might include threatening or prohibited behavior. 

In matters of contradiction, the federal law supersedes the state-sponsored law. That rarely happens, however.

The reason for this is that state law usually goes further with consumer protections. It does so while carefully affirming the federal language. 

How to Protect Your Interests

You have a business that’s trailing behind in account collections. You feel the law favors the consumer over your own interests. What do you do?

In this section, we examine three things you can do to improve your odds of debt collection against delinquent accounts. This is how you do it without running opposed to existing laws. 

1. Use the Law to Your Advantage

Knowledge of the FDCPA and any laws in your state that complement it will help you navigate the process. For example, knowing that you can’t call after a certain time means that you can schedule phone contacts within certain periods of time while automating pursuit of the outstanding debt through mail if the consumer asks you to stop calling. 

2. Do Not Neglect Your Business Over Uncollected Debt 

Weigh the worth of the accounts on which you’re attempting to collect. Are you throwing so many resources after an account that you’re still going to come out in the red even if they eventually repay you? 

Remember that you’ve still got a business to run. Notice the warning signs of bad payers as early as you can, and work to cut off the relationship while doubling down on profitable clients with good payment histories. 

3. Work With a Specialist

Understanding the ins and outs of debt collection law can be overwhelming. That’s especially true when it’s not your specialty and you’re trying to handle the administrative requirements of collecting on that debt. 

Consider working with a debt collection specialist or other third-party knowledgeable in the law and efficient in its workflow. From there, check-in to see how the collector is faring on reconciling those accounts.

Learn to Make Debt Collection and Bankruptcy Law Work For You

If learning debt collection and bankruptcy law isn’t what your business is, you could be trying to take on too much. Don’t let the money owed to you get lost in a bankruptcy proceeding. And don’t risk legal troubles trying to navigate the minefield on your own.
Contact Southwest Recovery Services today to learn more about how you can get what you are owed. With convenient locations in Florida, Georgia, Missouri, Oklahoma, and Texas, we’re here to get our clients the money they’ve earned.

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