Collecting from customers that can’t or won’t pay you is one of the trickiest parts of running a small business. If you're too lenient, you could go bankrupt; if you're too strict, you could turn away good customers who just need a little flexibility; and if you're too aggressive, you could find yourself being sued by a federal agency or a state's attorney general. This last mistake—being too aggressive—could have dire consequences for your business.
Debt collection generates hundreds of thousands of consumer complaints annually, more than any other regulated activity, so both federal and state government agencies have made it their mission to crack down on aggressive and illegal debt-collection practices. Most of these government efforts are focused on fining or shutting down shady debt collection agencies that willfully run afoul of the law and use any means necessary to collect.
But whenever you have complicated legislation and multiple government agencies working together, innocent bystanders can accidentally get caught in the middle. This means you.
The Fair Debt Collection Practices Act (FDCPA) became law in 1977, and it governs how debts may be collected. The law mainly regulates companies that are engaged in the business of collecting debts on behalf of clients or that buy debt at a discount price with the goal of collecting on it.
From 1977 through 2010, the FDCPA was enforced primarily by the Federal Trade Commission (FTC), which investigates and sues companies that conduct “unfair and deceptive trade practices.” The Dodd-Frank Act of 2010 moved primary enforcement responsibility of the law from the FTC to the Consumer Financial Protection Bureau (CFPB), giving it the power to issues rules, guidance and regulations. As of January 2013, the CFPB began overseeing debt collection, focusing for the time being on debt collection agencies with more than $10 million in debt collection-related revenues.
Are You a Debt Collector?
If you fall beneath the $10 million line, does that mean you don’t have to worry about debt collection laws? Nope. Under certain scenarios, simply trying to collect what your business is owed could trigger provisions in the law that will make you subject to debt-collection laws. There are three such scenarios:
1. Acting like a debt-collection company. The FDCPA generally exempts companies that are collecting their own debts. But if your business uses certain collection tactics, then you're required to comply with the law. For instance, if you use any name other than your official company’s name when trying to collect on business debts, then you trigger the FDCPA. A simple example would be General Landscaping Solutions Inc. sending a debt collection letter to a delinquent customer under the heading “GLS Collections.”
If you use third parties for "dunning" management, then you'll also trigger the FDCPA. Dunning is the process of “methodically communicating with customers to ensure collections of accounts receivables.” Many small businesses outsource this service, which typically means sending letters or emails monthly until you've been paid. The letters start out as gentle reminders but they usually become more aggressive as time goes on.
2. Living in a state where you're considered a debt-collection company. The FDCPA is like the federal minimum wage law—state governments can’t go below it, but they're free to go above it. Because of that, some states have enacted laws that are enforced by their attorneys general that go far beyond the guidelines of the FDCPA. Many of these states specifically include “creditors collecting on their own behalf” within their regulations. Such states include California, Colorado, Connecticut, Florida, Iowa, Louisiana, Maryland, Massachusetts and New York. Since these laws can change at any time, it’s important to stay abreast of what’s happening in your state.
3. Being identified by the CFPB as a debt-collection company. The CFPB has tremendous power and flexibility in determining which types of companies are subject to its regulations. Any company deemed by the CFPB to be a “larger participant” in the finance sector can be regulated by it. Once this happens, the CFPB can define what it considers to be “unfair, deceptive or abusive acts or practices” and prohibit them. While it’s unlikely a small business will fall directly under CFPB regulations, the companies you hire—or that hire you—just might. Recently, the CFPB started cracking down on companies that process credit card payments on behalf of debt collectors that are non-compliant with debt-collection regulations.
Play it Safe
If you need to collect debts—and what small business doesn't?—what should you do? Toe the line to make sure you don’t fall under the jurisdiction of debt collectors? Comply with debt-collection laws even if you don’t have to? Hire someone else to worry about it?
Implementing both the second and third options together is probably your best defense. The FDCPA, FTC and CFPB all require behavior that could be considered common-sense decency when trying to collect a debt on your own behalf. Some of the things you can’t do are:
- Call at unreasonable hours
- Add additional fees or interest that weren’t part of the original agreement
- Purposely delay posting the payment to the customer’s account for the sake of adding more fees and interest
- Confiscate property despite not having the legal authority to do so
- Tell the debtor's employer or co-workers about the debt (if it’s a person and not a company)
- Lie about how much the debtor owes
- Pretend to be a lawyer to intimidate the debtor
- Pretend you represent the government
- Lie about whether or not you'll report the debt to the credit bureaus
- Make false threats about suing the debtor, having them arrested or sending them to prison for non-payment
For larger debts or if you have a significant volume of uncollected debts, hire a reputable third-party debt collector. Just make sure they take compliance with all applicable state and federal regulations very seriously. If you don't hire carefully, even if you don’t get sued for something your debt collector does, it’s likely you won’t ever see the money you hired them to collect.
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