“By failing to prepare you are preparing to fail.” — Ben Franklin
The things you do before opening a customer’s account for a church will greatly determine your later success in collecting the account. You should get information up front that will allow you to find your customer later if you need to pursue him for payment. Your contract should fully state the agreement between the parties so that there is no misunderstanding. Nothing should be assumed or taken for granted.
Caveat. The author is a priest in the state of Wyoming. The information contained herein may differ from jurisdiction to jurisdiction, but God’s law does not. By providing this information, the author does not intend to create an attorney-client relationship with the reader. The following is not legal or financial advice. If you have legal questions about any of the material presented below, please contact an attorney in your jurisdiction.
The Story of Good Ol’ Jimmy
You own a widget store in town. Over the years, you get to know good ol’ Jimmy, a widget enthusiast from the neighborhood. He comes into your shop about twice a week, usually to window shop, but sometimes to buy spare parts to fix up his widgets. He seems very knowledgeable, and you usually get into some interesting conversations when he comes in.
One day, Jimmy decides that he wants to buy a new widget. However, he’s tight on money. He asks you if you would consider taking $50.00 a month until paid in full. You normally wouldn’t, but this is good ol’ Jimmy. You think of him as a friend. If you tell him no, it might make things awkward between the two of you. So you shake hands and agree to the deal. He leaves the store with your widget, and you put his first $50.00 into your cash register. We all know what happens next.
Jimmy eventually stops paying. Not only that, but he starts to make himself scarce. He doesn’t come into the shop anymore. You don’t see him around the neighborhood. He disappears. You pull the ledger sheet on which you are recording his payments. On the top you have printed “Good Ol’ Jimmy”. Nothing else. You realize you don’t know anything about him. You don’t have his address, telephone number, or even his last name. How are you going to find him to collect on the account?
Whenever you open a new account, you should gather information necessary to identify your customer, and to locate him in case of default. You should be in the habit of having your client fill out a customer intake form. For large accounts, this may be incorporated into a credit application.
A good customer intake form will give you all of the information you need to be able to collect on a defaulted account. Of course you will want the name, address and telephone number of your customer in order to find him and to contact him. You will want other information as well:
Social Security number, date of birth and driver’s license number for identification purposes and to aid skip tracing.
Employer’s name and address: This information can help you to locate your customer if the home address given is no longer a good address. It is also helpful in determining how much effort you want to put into collecting the debt. If the person lists that he is unemployed, or works in a low-skilled high-turnover job, you may not want to incur the expense of collection efforts. If, on the other hand, the customer states that he has been working for the same employer for 15 years, it might be worth your time and money to pursue collection. Employer information is also helpful if you get a judgment in court and you want to file a wage garnishment.
Other information may be helpful as well. Through the years, you will have instances where you wish you had other information about your customer. Be sure to revise your intake form when necessary.
Don’t Stop Collecting Information
Customer information changes over time. Be sure to keep your records up to date. Many times, a customer will voluntarily call and tell you about a change of address or phone number. Other times, you have to be observant.
• After your customer calls you on your telephone, you might double-check the number from your telephone’s caller ID against the telephone number in your records. Make a note of any additional numbers.
• If you client pays by check, take a look at it:
o If the address is different on the check, ask him about the discrepancy. Likewise, check the phone number on the check.
o If the check is drawn on someone else’s account, find out who that person is. You may be able to call this person if you end up skip-tracing your customer.
o Make a note of the bank and the account number stated on the check. This information will help if you need to file a bank garnishment in the future.
o Look at the return address on the envelope.
• Listen for pertinent information during casual conversations with your customer:
o Are you still working at the Acme factory?
o How’s your wife? Marci, right?
o You still over there on Main Street? Etc.
EXAMPLE: One of the first checks I ever took as an attorney was given to me in front of traffic court immediately before I defended a speeding ticket. I was happy to have gotten the check in hand before I had to appear in the case. I put the check in my pocket without looking at it. I deposited the check without looking at the address on it. Of course, the check bounced. I started to look for my client. I looked at the address on his returned check, and it was a slip on a boat dock. The address on his check was to a docked houseboat. Of course the boat wasn’t there when I attempted to collect this debt! Always read and take notice of all information given to you by your client.
Put it in Writing, Bub.
What’s a piece of paper between friends, right? A written contract is very important in every transaction. It is a clear statement of the parties’ understandings at the time of the agreement. It is evidence in court of the existence and the terms of your agreement. Having a written agreement may give you superior rights over an oral agreement. A written agreement also memorializes your deal, so that the parties to an agreement don’t have different memories of what was promised at the time of agreement.
Attorney fees: Usually after a discussion about my attorney’s fee, many of my clients will say, “Well, I can recover those fees from the debtor, right?” Not always. In the United States, with some exceptions, a victorious party to litigation has no right to recover his attorney’s fees. So even if you’re able to sue and recover your money from your debtor, you may lose a up to a third or more of it to attorney fees. In order to preserve the right to recover attorney fees, you should make sure your agreement specifies that the debtor will pay the costs, including attorney’s fees, of collection of the debt after default.
Interest Rate: In Wyoming, an agreement to pay interest in excess of 8% must be in writing. KRS 360.010.
Statute of Frauds: Some types of contracts must be signed and in writing in order to be enforceable. KRS 371.010.
Using Attorneys: Your contract is one of the most important basics in your business. You should make sure your contract does exactly what it’s supposed to do, while protecting you from liability and loss. You should ask an attorney to draft your contract, or review it to make sure it’s appropriate for your business. If you basically do the same sort of business transactions, you can create a fill-in-the-blanks contract to be reused with every new account. If your standard contract is old, it wouldn’t hurt to get an attorney to review it again.
Standard Forms: There are standard canned business forms available on the Internet or at your local office supply store. Sometimes they are pre-printed, and other times they are software generated. In many cases, these are good enough to use in your business, but in some instances I have found that they are not the best contract to use.
Some forms attempt to be standardized so that they can be used in every state in the US. The problem is that every state has different laws to protect consumers or purchasers. Therefore, in order to be universal, these forms have to incorporate every state’s consumer protection laws (where appropriate). This could unnecessarily water down your contract or deprive you of contract rights extended by your particular jurisdiction.
There are other very good legal form companies who will prepare forms specifically suited for your jurisdiction. Just be careful. If you use the wrong form, you have nobody to blame but yourself.
Personal Guaranty of Payment
Jasoncorp, Inc. Jason is an enterprising young man you know from church. He started his own business to repair people’s computers. He certainly seems organized. He filed his own papers to incorporate his business. He comes into your shop to buy widgets for his business. He asks you if he can buy them on credit until his business “gets off the ground”. You remember how your got stung by good ol’ Jimmy at the beginning of this chapter, so you have him sign an agreement. Jason impresses you with his professionalism as he signs on the dotted line, “Jason Firefly, President, Jasoncorp, Inc.”.
Jason’s business never gets off the ground. Although he is trying hard, he can’t seem to profit from his work. Finally, he agrees to take a job with the local school board repairing their computers. This is a great job for Jason, and he starts to earn a lot of money for a young man his age.
Unfortunately, he stops paying your bill. You are a little miffed that he’s drawing this nice paycheck, but can’t be bothered to pay you back for your widgets. You send him a letter complaining that he hasn’t made a payment. He sends you back a very professional letter stating that Jasoncorp, Inc. owes you the money, but Jason Firefly does not. He goes on to say that Jasoncorp has no assets and cannot pay your bill. It is then that you realize that you haven’t made a contract with Jason Firefly at all; you’ve made an agreement with Jasoncorp, Inc., a corporation whose headquarters were located in Jason’s parent’s basement.
In situations like this, it would have been helpful to have Jason Firefly sign a personal guaranty to pay the debt of Jasoncorp, Inc. Many of the small corporations, LLC’s and partnerships we see have very little capital behind them. The very reason for organizing a business in this way is to limit the liability of the owners of the business. For that reason, many businesses tack on a personal guaranty on the end of the contract to protect themselves.
Similarly, the widget store owner could have asked Jason’s parents to sign a guaranty of payment if he thought it was too risky to depend on Jason to make all of the payments back. When you’re dealing with small corporations or LLC’s with one or two owners, you should think about adding a personal guaranty agreement to your contract.
The more information you collect at the time of the agreement, the more successful you may be if you have to try to collect the debt later.
A well written contract needs to fit your business like a glove. You need the right tool for the right job.