May 11, 2020
The daily news reminds us of the growing grim economic toll wrought by the COVID-19 pandemic. As discussed in some of our prior Alerts, federal, state and local governments have adopted various measures to moderate some of these effects, including offering stimulus payments and loans, and restraining certain types of creditors’ collection activities. Despite the latter restraints, there still are some things creditors can do to try to enhance the collectability of past-due commercial payment obligations.
Communicate, communicate, communicate
Understanding the debtor’s reasons for nonpayment is key to formulating a realistic plan for repayment:
Steps to enhance collectability
If the creditor has security (collateral) for the debtor’s obligation, then:
If the creditor has no security for the debtor’s obligations, then the creditor should consider asking the debtor for security. If the debtor later files a bankruptcy petition for relief, a secured creditor has greater protections than an unsecured creditor. If you are an unsecured creditor, often you just are along for the ride in a bankruptcy case.
Where a review discloses “holes” in the creditor’s position, the creditor should consider seeking the debtor’s cooperation in fixing them. Note if the debtor later files bankruptcy, it is possible the debtor (or the debtor’s trustee in bankruptcy) may seek to avoid these fixes as constituting either preferential transfers and/or voidable transactions (the latter formerly known as fraudulent transfers). However, since a creditor cannot know when its debtor may seek bankruptcy relief, most creditors usually determine that pursuing such fixes is worth the risk.
Follow any applicable federal, state or local restraints on collection activities
Bear in mind that federal, state, and local rules now restrict certain collection activities during the pandemic:
Even where permitted to do so, repossessing or liquidating real or personal property of a delinquent debtor may not result in collection of a debt, given that potential buyers may be hard to find in the current pandemic-depressed market.
Takeaway: With some forethought and patience, a creditor may be able to reduce the pandemic’s potential negative effect on collections.
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