News & Events
Site tools
Pre and Post Debt Collection Strategies
Prior to entering into any kind of financial relationship with a debtor, creditors should take precautionary steps to protect their pecuniary position. Especially in these hard economic times, it is prudent to have a strategy to pursue a debtor if the debtor defaults. As a creditor, it is easier to protect yourself before the loan is made rather than after the debtor defaults. The following guide will help any creditor avoid wasting unnecessary money, time and effort trying to recover from a debtor that is insolvent or more likely now more than ever, becomes insolvent.
Before Default Tips
First and foremost, treat the debtor like a bank would treat you. Ask the debtor to provide a credit application, copy of a tax return, list of references, a cost deposit to cover a credit check as well as provide security and a personal guarantee. The credit application will safeguard you in the event the debtor files for bankruptcy. If a debtor fails to provide a truthful statement, this may provide grounds to exempt your claim from discharge. (See 11 U.S.C. section 523(a)(2)). The tax return will help aid in locating assets and the references will help if you need to locate the debtor. Run the credit report (typically costs about $30) to see if the debtor has a good or bad credit rating. Finally, consider some sort of security in exchange for the credit like a trust deed, a mortgage, a UCC-1 lien or possession of the security. Remember to always record the lien and put it in writing!
Next, look to see if any information does not add up. One such discrepancy is if the debtor’s expenses greatly exceed his income. Another concern is if the debtor has a new company with no credit history. Also, watch out if the debtor has several trusts and/or out of state corporations. In particular, you should be on alert if the debtor has corporations in Nevada. Nevada is notoriously bad for trying to collect from a debtor in the event they default.
If the debtor is a corporation, you can check public credit reports like Dunn & Bradstreet (online at www.dnb.com) or Experian (online at www.experian.com) to verify the information provided. If the debtor is an individual, then you are precluded from obtaining a credit report unless you get the debtor’s written consent. A debtor whose credit report is obtained for reasons other than determining the debtor’s eligibility for credit, insurance, licenses or employment, violates the Federal Fair Credit Reporting Act and can subject you to actual and punitive damages as well as attorneys fees and costs. (See 15 USC section 1681n).
After Default Tips
In the event the debtor defaults on your loan, there are numerous ways to locate the debtor as well as the debtor’s assets. Locating the debtor’s whereabouts is the first step and will help you to determine the debtor’s assets. It will not be hard to locate a business debtor as the creditor will most likely have the businesses current address and telephone number. If not, the status of a business debtor can be determined by contacting the Secretary of State through their web site www.ss.ca.gov. Locating an individual debtor may be a bit more of a hurdle, especially if the debtor has “skipped” (moved without leaving a forwarding address).
One method to locate a debtor is through the post office. Attorneys (as well as process servers and pro se creditors) may obtain the forwarding address and/or street address and telephone number of a box holder by completing an information form. The form requires certification that the address is needed and will be used solely for service of legal process in connection with actual or prospective litigation (39 CFR section 265.6(d)). Another way to locate a debtor, as well as potential assets, is through the DMV. Unfortunately, unless your case involves motor vehicle litigation, insurers, financial institutions, or government agencies, the DMV will not provide you with records of the debtor’s home address. The DMV will provide you with information about a debtor’s driving record and whether any cars, trucks, boats or recreational vehicles are registered under the debtor’s name (including whether there are any liens against such vehicles). (See Veh. C. Section 1810). You can fill out a DMV request form (online at www.dmv.ca.gov/forms/forms.htm). Caveat: the DMV will automatically notify the debtor of any requests. (See Veh.C. Section 1810(b). If these means prove unsuccessful, you can contact a firm that specializes in locating debtor’s as well as debtor’s assets. The National Association of Retail Collection Attorneys (online at www.narca.org) contains skip tracer listings as well as listings of firms that specialize in locating debtors.
Locating a debtor’s assets is the second step. However, you may want to incorporate this step into you pre-default strategy as this information will help you in determining whether to enter into a creditor relationship with your debtor in the first place. This step is also important in determining whether to bring suit against an unincorporated debtor. You can locate a debtor’s real property by checking with the county recorders office. The recorder’s office will let you know whether there are any liens, encumbrances or trust deeds that have been recorded against the debtor’s property and whether the debtor has recorded a homestead declaration. Once you know the debtor’s correct street address, real estate records may be obtained through a title company for approximately $100 or a litigation guarantee for several hundred more. Also, the Secretary of State will conduct a security interest and lien search upon filing a UCC-3 Request for Information form. The county tax assessor, court records, or fictitious business names records are also helpful in locating a debtor’s assets. However, requesting a consumer debtor’s credit report to determine whether the debtor has sufficient assets to satisfy a debt for which there is no judgment or is transferring assets generally violates the Federal Fair Credit Reporting Act. Credit reports may be obtained only for certain enumerated purposes. (See 15 U.S.C. section 168(1)(b)). A consumer whose credit report is obtained for reasons other than those listed in the statute may recover actual and punitive damages, as well as attorney fees. One last resort is to hire a private firm that specializes in locating a debtor’s assets. Firms specializing in locating debtors (listed on NARCA’s Web site) are also good at locating debtor’s assets.
Molly L. Fletcher is an associate at Neil Dymott and concentrates her practice on professional liability and civil litigation. Ms. Fletcher may be reached at (619) 238-1712 or mfletcher@neildymott.com.