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When Hot Checks Aren’t So Hot
by James  Mitchell

When one of our tenured account reps came to see me, obviously upset, I thought to myself, “what now…?”  She had just been ‘beaten up’ by a client for an absurd reason. 

Let’s set up the scenario:

A client sold $12,000 worth of product to a debtor about fifteen months ago.  Terms were Net 30.  The debtor is a valid Missouri corporation.  The client had taken no credit application or personal guarantee.  Three months later the debtor mailed a check for $1,500 to the client as a partial payment.  Subsequently the check bounced.  The client had tried various internal methods to collect the balance but had failed to effect collection.

A Whitney & Richardson account executive received a call from the creditor as a referral from an A+ client.  The existing client had received a telephone call from the frantic creditor in search of assistance.  They explained that Whitney & Richardson could probably assist in resolving the problem.Our account executive accepted the collection file on a contingent basis and explained that she would update the creditor when information about progress was available.  Upon accepting the file she asked me to handle it personally in order to make a very positive impression on the new client. 

A full background investigation was ordered and then the initial contact made to the debtor by one of my private investigators.  It was established that the debtor company is a bankruptcy candidate potentially brought on by an impending bank foreclosure.  The principal indicated that he was fully aware of the debt to the client and asked for some sort of payment plan that he could actually afford.  After reviewing the facts, I explained that if he took care of the worthless check, that I would be agreeable to $1,000 per week payments.  He agreed.  Our account executive contacted the new client to provide a full status report.  This is where things went bad. 

The client hit the roof.  They could not believe that I had entered into a partial payment arrangement rather than threatening to have the principals thrown in jail for tendering a worthless check.Obviously this client has no concept of the mechanics of a check.  A worthless check that is issued simply as a payment on an open account is a mute issue. 

Why you ask? 

Because a worthless check is only a criminal matter when goods or services are tendered at the same time that the check is tendered. 

If it is simply a payment on account, then it is nothing more than a civil matter, specifically a contra accounting entry.  At no point should a credit manager or collector threaten prosecution of a worthless check when it is known that it was a payment on an open account.  Not only are you wasting your time, but you may very well get yourself in hot water with that local district attorney’s office.  The management at this client is one that is very emotionally attached to the money and hasn’t been able to separate themselves for it.  That is obviously the reason that they waited fifteen months to place this account for collection.  Their inaction has not only cost them our fee should we collect, but quite possibly has cost them the full balance. 

Their hang up was the hot check. 

They incorrectly assumed that the debtor would promptly take care of this for fear of jail time.  One month turned to three and so on.  They finally realized what had happened and hired us to come to the rescue. Well, we don’t collect everything.  Anyone who says that they do is a liar. 

In my opinion, a valid debtor corporation with no personal guarantee, credit app, UCC or anything of the sort who is known to be in default with their primary lending institution is a huge loss risk.  Therefore if the full balance is not realistically forthcoming, then it is better to get something for the client that leave empty handed.  “A Bird In Hand is Worth Two in the Bush” is how I believe is goes.  It is further my opinion that this client should review their credit granting policy, the effectiveness of its internal collection method, and the time at which accounts are placed for collection.  They should also remove this matter from their minds, go sell something else, and wait for a status report from our skilled account executive.  In my opinion, only two status’ matter:  We have collected money or we have not collected money.  That’s it.  This is not a soap opera or a Sunday night football game.  Play by play is not important.  As for the hot check…it was a potential payment; nothing more.  The good thing is that it did provide a possible bank account to monitor for funds.

Thomas Musser holds a Bachelors degree in Finance, with a minor in accounting, and a Masters Degree in Finance and has been Vice President of Collections at WAR  since 1993. He and his wife are real estate investors and redevelopers, specialized in acquiring financially distressed properties.  

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