Minimizing Bankruptcy Risks When Collecting Debt – Entry #2

In our last entry, we began the discussion of ways to minimize the risk of debtors filing bankruptcy following entering into a payment plan or structured settlement.  There, we focused on the importance of preserving all claims and elements of non-dischargeability (see Bankruptcy Code §523) in the settlement agreement.  Here, we focus on one way that creditors can deter debtors from attempting to wipe out legitimate debts by filing bankruptcy.  We have assisted many clients in Orange County, Los Angeles County, Riverside County and throughout California in collecting debt by using the following technique.

Maximize Upfront Money – When a debt is resolved via a structured settlement with payments over time, the creditor is at risk of losing any payments received within 90 days of the debtor’s bankruptcy filing via a preference action filed by the bankruptcy trustee.  For this reason, it is important to secure as much money right away as possible because it starts the 90-day clock running in the event that bankruptcy is filed.  Where default and/or bankruptcy is a serious risk, it may be prudent to incentivize the debtor to pay more up front by agreeing to accept a lesser total dollar amount if paid by a certain date.  In such situations, debtors will often borrow money in order to capitalize on the opportunity to reduce their total obligation.  However, if you do choose to insert such an option in the settlement agreement, be sure to make clear that the reduced amount is available to the debtor only if all payment obligations are timely made (i.e., if the debtor defaults on any monthly payment, the entire amount of the debt remains owing rather than the reduced amount).

Collecting debt is largely about incentives.  The creditor must give the debtor a strong incentive to pay, either by accepting less than the full amount owed by the debtor, or better yet, making the debtor understand what he stands to lose if no resolution is reached.  In a structured debt collection settlement in which the debtor will pay over time, the more the debtor pays at the outset, the higher the likelihood the debtor will continue to make payments.

Please contact us if you’d like to discuss your business debt collection matter in Orange County or elsewhere in California.



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