The Factor Guru

Tips on accounts receivable financing and business practices.

Archive for category Collections

Verification and Collection Tips

Sep 17

Posted by Gen Merritt in Collections | Comments off

I don’t have a lot to write for this month’s edition; however, there are a few points of interest that I did want to share. Happy reading!

Did you know that you can reverse search debtor websites or even debtor email addresses by looking up the owners of those domain names? These are helpful to be sure you are receiving an independent verification from the debtor. After all, who owns the website where you are verifying the receivables? Where did that confirmation email come from? Was it from the debtor, or could it be from the client? I typically use Go Daddy to research this information.

On their home page, there is a domain search field where you can enter domain names or even try email address extensions (i.e., factoring.org). The site will tell you if that name is already registered. Then, you can just click on the link that says “Get Info” to see details on who owns that domain.

Why do we use the term ‘rely’ when we send out those written verification letters or when we pre-verify receivables? If you tell the debtor you are relying on the information they are providing to fund an invoice, then they know you only funded based on their response. This helps when pre-verifying invoices to ensure that the proper message has been conveyed. And, as a side note, if you verify an invoice after the fact, then you would not be relying on their information. That is why these post-funding calls are typically considered confirmation calls only.

What are some early warning signs and red flags to watch for during the verification or collection process?

  • Credit memos, disputes, offsets start to increase
  • Quality issues arise more frequently (i.e., incorrect product, damages)
  • Debtor responses for verifications / collections decrease
  • Key personnel changes at the debtor or client
  • Clients picking up checks or changing factor remittance
  • Average days to pay increases
  • Payment patterns change
  • Invoice receipt delays by accounts payable
  • Billing errors increase
  • Invoice dates vary (invoice date on invoice versus the date on the debtor’s check)
  • Name changes on invoices or remittance (ABC Mfg Co now says ABC Company)
  • Skipped invoice payments

Until the next time… Wishing you continued success. The Factor Guru.

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Big Sanctions in Bankruptcy Court a guest blog by Scot Pierce

Feb 10

Posted by Gen Merritt in Collections | 1 Comment

With the current state of today’s economy, dealing with account debtors and clients who are in bankruptcy has become a way of life for factors.  As a result, many factors have become very proficient dealing with bankruptcies and know the basic rules.  But even some of the most sophisticated financial institutions can still run dreadfully afoul of one of the most basic tenets of the bankruptcy code–the discharge injunction.  And if you are caught, you can be in a for a very expensive lesson.

Last November, a bankruptcy judge in the Northern District of Texas issued an opinion in Danny and Kimberly McClure v. Bank of America, Creditors Financial Group LLC and Peter Rebelo, 2009 WL 4263365, (N.D. Tex. 2009) that reminds us of the consequences of violating the discharge injunction.  Danny and Kimberly McClure filed for bankruptcy protection in July 18, 2007 and received a discharge on November 15, 2007.  Among the debts discharged were personal guaranties on two Bank of America credit cards in the names of their business.

After the couple’s debts had been discharged, Bank of America referred the credit card debts to a collection agency.  Bank of America testified that they knew the debtors had filed for bankruptcy when they referred the case to the collection agency.  As an aside, this is not the kind of testimony that you want to have.  Bank of America essentially admitted that they willfully and intentionally violated the discharge injunction.

When the collection agency received the placements, they performed an initial bankruptcy scrub, but used the tax identification number from the business that Mr. McClure owned instead of Mr. McClure’s social security number to run the scrub.  Because of this, they failed to learn of the bankruptcy discharge.

The collection agency then assigned each credit card to a different collector.  The first collector performed an Accurint search and found Mr. McClure’s social security number.  In spite of this, he did not perform another bankruptcy scrub.  That collector then contacted the McClures for payment.  Mr. McClure testified that the collector told him that someone was likely headed to his house and that the collection agency would be filing a lawsuit shortly if he did not pay.  The very fact that the court mentioned this testimony in the opinion indicates that the court was disturbed by the collector’s tactics.  At that time, Mr. McClure informed the collector that he had received a bankruptcy discharge.

The first collector then entered the bankruptcy information into the collection agency’s system and apparently ceased his collection efforts.  But the second collector, who was assigned to collect the debt owed on the other credit card, did not have access to this same information so he sent a collection letter and attempted to contact the McClures for payment.

That triggered the debtors filing a motion for contempt for willfully and intentionally violating the discharge injunction.  The debtor requested attorney fees, damages and sanctions against Bank of America, the collection agency and the second collector.

After hearing the evidence presented, the court denied recovery and sanctions against the second collector.  The court, however, did find that both Bank of America and the collection agency willfully and intentionally violated the discharge injunction.

The court awarded the debtor $79,839.14 in attorney fees and $2,500 in actual damages both jointly payable by Bank of America and the collection agency.  The court also awarded a separate $100,000 sanction against Bank of America and $50,000 sanction against the collection agency.  Each party’s sanction would be suspended and need not be paid if the president or  general counsel of each company submitted an affidavit within 90 days detailing how their procedures had been changed to prevent this from happening again in the future.

A number of lessons can be learned.  Among them is to ensure that you have adequate procedures in place to protect against violating the discharge injunction or automatic stay.   Also, be careful who you refer delinquent accounts to for collection.  I believe there is at least a possibility that Bank of America would never have been sanctioned if the collection agency had not had faulty procedures that triggered the debtor to complain to the bankruptcy court.  I also believe the strong arm tactics that the collection agency used made the situation worse.  The bottom line is you should check your procedures to ensure that once your company becomes aware that a debtor is in bankruptcy or has a received a discharge–stop collection efforts immediately.

About the author:

Scot Pierce is a partner with the lawfirm of Bracket & Ellis, P.C. located in Fort Worth, Texas.  He has represented a number of factors with commercial litigation and bankruptcy issues.  He also regularly writes articles and presents speeches on creditor issues.  He can be reached at 817/339-2474 or spierce@belaw.com.

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Payment Application: Does it matter?

Sep 27

Posted by Gen Merritt in Collections, General Information, Operations | No Comments

Well, I am still new to this blogging concept… this week we did have some other topics on risk prevention, not just risk management. In some cases, this may not be the new deals you are looking at, but rather, those already on your books. The common theme among some of the questions: payment application on invoices. And, you ask, why does this even matter?

When invoices are funded from a schedule that has been submitted, several implications may be made. First, the factor is maintaining their books, the receivables, to monitor those invoices. Second, the company selling the invoices may rely on the factor (depending if the factor offers these services and if the company selling the invoices desires these services) to enter the invoices, call and collect on the invoices, and track payments accordingly. Overall, payment application should be a simple concept: When a payment comes in on an invoice that has been factored, the payment should be applied to that invoice.

Sometimes, however, companies will call and request that a factor use payments that come into a lockbox to close out other, older invoices in an effort to reduce accruing fees or for other reasons, even when such payment request would mean applying collections from one customer to another customer’s invoice(s), applying collections for one invoice to other invoices, etc. In other cases, no check remittance may be available and instructions for how to apply such funds are directed by the company (not the customer writing the check). And, although rare, potential frauds can grow over time should misapplied payment practices be in effect.

Logically, reducing fees makes sense if that is the reasoning behind such request. The majority of the time, however, other underlying factors exist. Applying payments to the wrong invoices can cause confusion among the parties involved, may result in invoices appearing to have been paid that in fact have not, or may show skewed account debtor payment history on the factor’s reporting system. More importantly, it may make it harder to reconcile both the company’s and the factor’s records at a later date, should the need arise.

By applying payments to proper invoices, or showing them as non-factored funds if they are truly non-factored, the paper and payment trail can be maintained. Should a company want to use those funds to reduce fees, they may be able to just use the available ‘cash’ reserves to close out invoices. This maintains the integrity of the payment history for all parties involved, including the account debtor (the company’s customer). This process also allows for collection calls to be placed on aging invoices that may still be open with the company.

So, how do you know if this is a problem? Just do a simple audit. Pull a few months of collections or even a sample of a few customers/debtors (meaning, actual check images/copies) and compare these checks to how those payments were actually applied. Do they match? Were they applied to the right account debtor and the correct invoice(s)?

Now, what do you do if this type of payment practice has already started on a client account? Sometimes, the best rule may just be to correct the problem going forward. And, sometimes, once caught, you may be able to identify a potential risk that may not have been known. You may be able to prevent misapplied payments that had been a cover for fraudulent activities on behalf of a company selling invoices to a factor.  Again, this would be an exception. However, good processes and practices cannot only help a factoring company but also the company selling the invoices. 

Wishing you success… the Factor Guru.

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Measuring Results

Sep 23

Posted by Gen Merritt in Collections, General Information, IRS Information, Sales and Marketing | No Comments

Yes, we had several questions this week on payroll tax monitoring, 8821 forms with the IRS and past due taxes, along with IRS tax liens. In all cases, we are happy to provide our experience; however, you should also consult your legal counsel or a CPA to insure you are protected. We’ll save this for another time. If you have questions in the interim, you can email us directly. (A link has been added for this form so you can use this now, if you are not already). Note this was updated in August 2008.

What I wanted to talk about in this entry was planning and measuring performance. Do you have the ability to measure productivity… performance… results? How do you know that the processes you thought you established are truly being followed? What tools and management do you have in place? (This works in any business – not just factoring).

Have you ever wondered why marketing/salespeople bring in a lot of leads but minimal results? Have you ever wondered why a collections staff can call on aging invoices all day but with limited success? Some would say it’s a numbers game in both cases. I respectfully would disagree.

Sales can be a numbers game, but wouldn’t it be better to identify who your salespeople are calling on, what they are saying, what they know about the product they are selling? Is it just the features? Or, do they know what the true benefits (and challenges) are for a prospective client? Can they outline those benefits to a prospective client to add value to any new customer? Can they breakdown a good lead from a ‘not a good fit’ lead?

Likewise, in collections, do your collectors just call to identify the status of a payment without understanding what they are calling on exactly? Do they follow up promptly? Is the reason they are calling because of an internal issue in either your company or your client’s company?

In both cases, you will notice, ‘understanding’ is required and needed to produce efficiency in efforts and to maximize the value of your organization.

Although I have lots of ideas about both — I more or less want to pose the question to readers for them to think about their operation, their company, and ultimately their success.

Wishing you success… the Factor Guru.

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