Collecting from customers that can’t or won’t pay you is one of the trickiest parts of running a small business. If you are too lenient you could go bankrupt; if you are too strict you could turn away good customers that just need a little flexibility; if you are too aggressive you could find yourself being sued by a Federal Agency or a State Attorney General. This last mistake – being too aggressive – could have dire consequences for your business.
Both Federal and State government agencies have made it their mission to crack down on aggressive and illegal debt collection practices. Debt collection generates hundreds of thousands of consumer complaints annually, more than any other regulated activity. Most of these 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.
Who’s in charge of regulating debt collection?
The Fair Debt Collection Practices Act (FDCPA) became law in 1977 and it is the law that governs how debts may be collected. From 1977 through 2010 the law 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 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. To minimize potential confusion and overlap the CFPB and the FTC reached an agreement as to how to work together.
The FDCPA mainly governs 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. As of January 2013 the Consumer Financial Protection Bureau (CFPB) also began overseeing debt collection, focusing for the time being on debt collection agencies with over $10 million in debt collection-related revenues.
So does that mean you don’t have to worry about debt collection laws? No.
Are you a debt collector? Maybe…
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-related laws. These scenarios are:
Acting like a debt collection company
The FDCPA generally exempts credits collecting their own debts. But if your business uses certain tactics then you are required to comply with the law.
If you use any name other than your company’s name, then you trigger the FDCPA. A simple example would be General Landscaping Solutions, Inc. sending a letter to a delinquent customer under the heading “GLS COLLECTIONS”.
If you use third parties for dunning management then you 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 are paid. The letters start out as gentle reminders but gradually become more aggressive as time goes on.
Living in a state where you are considered a debt collection company
The FDCPA is like the Federal minimum wage law – state governments can’t go below it but they are free to go above it. Some states have enacted laws – enforced by Attorneys General – that go far beyond the FDCPA. Many of these states specifically include “creditors collecting on their own behalf” within the regulations. Some of these 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.
If the CFPB says you are 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 the CFPB. 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.
Playing it safe
If you need to collect debts what should you do? Toe the line to makes 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?
My opinion is that the second and third options together are best. The FDCPA, FTC and CFPB 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 and 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 debtors employer or co-workers about the debt (if it’s a persona and not a company)
- Lie about what they owe
- Pretend to be a lawyer to intimidate the debtor
- Pretend you represent the government
- Lie about whether or not you will report the debt to the credit bureaus
- Making false threats about suing them, having them arrested or sending them to prison for non-payment
For larger debts or if you have a significant volume of uncollected debts then hire a reputable third party third party debt collector or a dunning service provider. Just make sure that they take very seriously compliance with all applicable state and federal regulations. Even if you don’t get sued for something the debt collector does, it’s likely you won’t ever see the money you hired them to collect.
