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Anatomy Of The Collections Process:  An Overview With Efficiency Tips From A Seasoned Collections Lawyer

The client’s file will provide the answer to the first question one should ask when commencing collection action:  Is it a consumer or a commercial debt?  See part IV below.  The client’s file will also provide invaluable information which will allow the attorney to do the best job possible to collect the debt.

Some collection clients will want to be as lean as possible when referring claims for collection i.e. a statement of account showing the balance due.

The preferred collection package would include:

(a)

The credit application and any guaranties;

(b)

A copy of the summary statement of account, as well as copies of the unpaid invoices;

(c)

The debtor’s current address, phone number and accounts payable contact;

(d)

Copies of any agreements or correspondence between the creditor and the debtor relating to payment of the account and relating to any complaints by the debtor regarding the creditor’s services or products furnished;

(e)

Copies of all financial statements and credit reports obtained on the debtor and, if credit was not recently approved, new credit reports on the liable individuals.

IV. Consumer or Commercial?

Tip:Always ask the client:  Did the debt arise out of a commercial transaction or a transaction primarily for “personal, family or household purposes”?  In my firm, collection matters involving consumer debts are put in red file folders and an additional label on the front of the file reminds us that it is subject to the FDCPA.

A. Federal and State Statutes.  

The first question to be answered when presented with a debt to collect is whether it is a consumer debt or a commercial debt.  The answer to this question triggers the manner of collecting the debt as defined by federal and state law.  A full discussion of the statutes and case law regarding collection practices is beyond the scope of this paper.  However, the two statutes most usually addressed are the Federal Fair Debt Collection Practices Act, 15 U.S.C.A. §§1692 et seq. (hereinafter “Federal Act”) and the Texas Debt Collection Act, now included in Chapter 392 of the Finance Code (Vernon 1998) (hereinafter “Texas Act”). These apply to the collection of consumer debts and each has its own definition of consumer debt.  Basically, it is a debt arising out of a transaction wherein the

subject of the transaction is primarily for “personal, family or household purposes.”  Collection of commercial or business debt is not governed by these statutes; however, the statutes provide good standards to comply with even in collection of commercial accounts. unless the creditor is collecting its own debt using a name other than its own that would indicate that a third party is attempting to collect a debt.  For an extensive treatise on the Federal Act and on the debt collection statutes of each state see Newburger and Barron, Fair Debt Collection Practices:  Federal and State Law Regulation (Sheshunoff & Pratt 2002).

B. Demands.  

The notice language from the Federal Act should be included in the initial demand letter.  A form consumer demand letter is included as Attachment 3.  All subsequent contacts with the debtor, whether oral or in writing, should contain the “Miranda Warning”, which is also found in the initial demand:  “This office is attempting to collect a debt and any information will be used for that purpose.”

C. Venue.  

The determination of consumer v. commercial debt also has impact on proper venue.  Caution:  If it is a consumer debt, the action must be brought either in the county in which the defendant signed the contract or in the county where the defendant resides at the time the suit is filed.  Civ.Prac.&Rem.Code§15.035 (Vernon 1986).  It is a violation of the Texas Deceptive Trade Practices Act to file suit on a consumer debt in any other county than where the defendant resides at the time of commencement of the action or in which the defendant in fact signed the contract.  Tex.Bus.&Com.Code §17.46(22) (Vernon Supp. 1998).  It is also a violation of the Federal Act 15 U.S.C.A§1691i; (a) (West 1998).

V. Debtor Location.  

Tip:I spend more time locating debtors and their assets than I do in heated court hearings.  When the traditional methods don’t lead to debtor, a good investigator may be a wise investment on the file.

Locating the debtor is sometimes the biggest hurdle in debt collection.  The client’s file will hopefully provide the best leads for locating the debtor: the debtor’s full legal name, date of birth, driver’s license number, social security number, last known business and home addresses and form of entity information, if not an individual debtor.  Common location tools include:

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