Whether Bob Businessman is facing a business or personal divorce, employment issues or other issues discussed in this series of articles, of paramount importance is his ability to track and manage accounts receivable. The failure to collect monies owed will quickly sink Bob’s business. Whether dealing with an existing or new customer, there are several steps that Bob can take to make it easier to collect receivables.
First, Bob should determine who or what he is dealing with. At the outset, owners need to determine the correct legal entity they are dealing with and make sure to name the correct legal entity in the written contract. The most common legal entities are individuals, partnerships, corporations, and limited liability companies.
Second, litigation to collect on an account can be expensive and adequate legal steps need to be taken ahead of time to be able to recover both interest and attorney fees.
Interest is properly charged to an account only so long as it is agreed to in advance in a written agreement signed by the parties. Keep the interest language in the agreement simple and reasonable. Many contracts specify an interest rate of 18 percent per annum which the courts have found acceptable.
Not only should an owner such as Bob agree with the customer to an interest charge, but an owner should also insert a provision in the written agreement entitling the recovery of “reasonable attorney fees” in the event of non-payment. North Carolina law in this regard is spelled out in N.C.G.S. §6-21.2. Attorney fees are not recoverable unless expressly provided for in a signed agreement which contains an obligation to pay money or creates an agreement regarding debt. If expressly provided for, attorney fees are recoverable at the agreed upon rate up to a maximum of 15 percent of the amount of the outstanding balance.
In 2011, the General Assembly passed a new law—N.C.G.S. §6-21.6—titled Reciprocal Attorneys’ Fees Provisions in Business Contracts which became effective October 1, 2011. This statute provides that reciprocal attorneys’ fees provisions in business contracts in which each party to the contract agrees to pay and reimburse the other parties for attorneys’ fees and expenses incurred by reason of any suit, action, proceeding or arbitration involving the business contract are valid and enforceable.
A business contract is defined as a contract entered into primarily for business or commercial purposes and specifically does not include a consumer contract, an employment contract or a contract in which a government or a government agency of North Carolina is a party. In order to be enforceable, the attorneys’ fees provision must be made applicable to all parties who sign the contract and the contract must be signed by hand by all the parties.
This new law does not invalidate attorneys’ fees provisions in consumer contracts or in any note, conditional sale contract or other evidence of indebtedness that is otherwise governed by N.C.G.S. §6-21.2 referred to above. In fact, if a business contract is also a note, conditional sale contract or other evidence of indebtedness otherwise governed by N.C.G.S. §6-21.2, then the parties entitled to recover attorneys’ fees and expenses may elect to recover attorneys’ fees and expenses either under N.C.G.S. §6-21.6 or N.C.G.S. §6-21.2, but may only recover once for the same attorneys’ fees and expenses.
What if Bob doesn’t want to file suit right away? Unless a company is on a purely cash basis, the conduct of a business like Bob’s requires one to make decisions regarding the extension of credit and collection of accounts on a regular basis. Litigation may be able to be avoided with some alternative methods used in the early stages of a deteriorating account. Here is a brief explanation of some options:
1. A business such as Bob’s can require that the assurances of payment be more than empty promises. One of the options that exist is an individual guaranty of the debt by the principals of a corporation or by the spouse of an individual debtor.
2. The debtor can also be requested to execute a promissory note, with individual guaranties if appropriate, which provides for interest, recovery of attorney fees and other remedies not earlier provided for. An additional advantage of the promissory note is to eliminate any defenses which the other party may claim, such as defective merchandise.
3. In addition, a debtor can be required to pledge some property as security for the otherwise unsecured account.
Early contact with an attorney is even more crucial if litigation is inevitable. Although a judgment against a debtor is valid for 10 years (and this can be extended another 10 years), a judgment is worthless without property available to pay the judgment. The adage that “You can't get blood out of a turnip,” is the harsh reality of many unsuccessful collection actions.