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BEYOND THEIR CONTROL: When most debtors fall behind in payments, it is a result of circumstances beyond their control.

Creditors, debtors should try to work together

Legal Matters: Debtors can fall behind in payments to creditors when cash flow gets tight.

Too often, clients contact me because they have a customer who is not paying them, or alternatively, a client contacts me because he cannot pay his bills. Having seen both sides of these situations, there are a few things I have learned over the years.

First, business transactions are often done over the phone or on a handshake. That works fine until something happens, such as when the customer does not pay. From the creditor’s standpoint, it is always better to get agreements in writing. The contract should expressly state the agreed-upon price and what services and products are being purchased. Often this contract will contain credit terms and a default interest rate, and will require personal guarantees of one or more individual owners if the debtor is a limited liability company or a corporation.

Second, if a debtor knows he or she won’t be able to pay a bill when it’s due, the wisest option is to contact the creditor ahead of time. It is almost always better to confront these problems rather than ignore them, because ignoring them is likely to exacerbate the problem. Most creditors are willing to agree to a reduction in outstanding interest and/or the interest rate being charged and a reasonable payment plan — especially if the debtor is able to provide a milk assignment or collateral for the amount due, or is willing to enter into a written agreement about the current amount outstanding with a plan to make the payments due. Moving forward, many creditors are willing to continue working with the debtor so long as payments are received as the new work is provided.

Third, if there is no communication between the debtor and creditor, then a creditor may consider hiring an attorney or collection agency to collect the debt. Often, an attorney will first write a letter to the debtor; if there is no response, the creditor has the option of filing a lawsuit to collect the debt. Filing a lawsuit to collect a debt should always be an option of last resort, because lawsuits are costly, time-consuming, unpredictable and sometimes unsuccessful. 

Small claims
If the amount owed is $10,000 or less, the lawsuit can be filed in small claims court. Small claims are designed for parties to represent themselves, but either or both parties can have an attorney represent them.  If the amount owed is more than $10,000, it is highly recommended that each party have their own attorney, as the court system is more complex. 

In either case, if the creditor can get a judgment against the debtor, the creditor is on his or her own to collect the money. Judgments should be docketed in any county that the debtor owns real estate, as that judgment will serve as a lien on most real estate the debtor owns for 10 years. If and when the debtor sells any real estate in such county, and there is equity in that real estate, the creditor can get paid. Otherwise, creditors must rely on filing garnishment lawsuits where they upfront more costs and attempt to garnish wages, bank accounts or other payments owed to a debtor, such as a milk check.

Of course, a lawsuit is not worth the creditor’s time and money if the debtor is just going to file for bankruptcy. When filing for bankruptcy, a debtor has two choices: liquidation or reorganization. In a liquidation, most of the debtor’s assets are sold to pay first-priority creditors, then secured creditors, and then, if there is any money left (usually there isn’t), to unsecured creditors. Under a reorganization, a creditor can be forced to accept a payment plan, but again, it is not uncommon for there to be no money left to pay unsecured creditors. If there is not enough money, then the debt is discharged, meaning the debtor is no longer legally obligated to pay it.

When most debtors fall behind in payments to creditors, it is a result of circumstances beyond their control, such as low milk prices, which have minimized their cash flow. If creditors and debtors work together during such times, usually a fair solution can be found.

Halbach is a partner in the Chilton, Wis., ag law firm Twohig, Reitbrock, Schneider and Halbach S.C. Call him at 920-849-4999.

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