How Creditors Can Recover Debt During the COVID Pandemic: Advice for Businesses

By Andrew Neiman

The COVID-19 pandemic has hit businesses hard as forced closures of non-essential businesses, mass layoffs, stay-at-home orders and social distancing have caused an unprecedented economic slowdown across the country. A looming issue for businesses is collecting business debts during the pandemic. Specifically, the economic slowdown caused by the COVID-19 pandemic means that many debtors lack the cash to pay their debts on time or they may not be able to pay at all. Unpaid debts cause cash flow issues for businesses which effect profitability and can prevent businesses from meeting obligations, such as payroll or lease payments.

Approaching customers regarding their outstanding debt

What should a business owner do when faced with debt collection issues? To start, a business owner should make a brief phone call to the debtor informing them that an outstanding balance must be paid. Maintain a professional demeanor and recognize the widespread hardship caused by the COVID-19 pandemic. A debtor’s failure to pay may not be personal.

Remember that customers are facing unprecedented financial challenges during the COVID-19 pandemic and may request more time to pay the debt. Customers applying for federal loan assistance may need time to apply and wait to receive the funds. A business may want to allow the customer additional time to pay, but businesses deciding to do so must be sure to come to an agreement in writing. Establish a policy in advance regarding your willingness to defer payments and your willingness to settle the debt for a lesser amount.

If the debt is secured by collateral, inquire as to the condition of the collateral and whether it is properly maintained. A business should ask the debtor to provide proof of up-to-date casualty insurance or other applicable forms of insurance covering the collateral. If the collateral is in danger, an attorney can assist a creditor in seeking appointment of a receiver to protect it.

Sending a demand letter

A business can send a demand letter to the debtor addressing the outstanding debt and referencing specific contract provisions, invoices, and any past communications. A demand letter is also an opportunity to offer to settle a debt for a lesser amount. Even though the full balance may not be paid, a business may benefit from receiving payment faster and avoiding litigation. An attorney can assist a business in drafting an effective demand letter for a small fee. These letters will allude to legal consequences if the debtor fails to pay by a specified date.

Filing a lawsuit

If a customer refuses to pay its debt or has wrongfully liquidated its collateral, it may be time to pursue a lawsuit. An attorney may recover funds through a lawsuit.

A relevant claim may be fraudulent transfer. Fraudulent transfer allows a creditor to avoid transfers of property by an insolvent debtor. The Uniform Fraudulent Transfer Act applies in most states. The act states that a transfer made by a debtor may be avoided by a creditor whose claim arose before the transfer. The creditor must show that the transfer was made without receiving a reasonably equivalent value and that debtor was insolvent when the transfer was made (or the debtor became insolvent because of the transfer). A company that pays dividends to its shareholders, or redeems its stock in connection with a share buyback or leveraged buyout, does not receive “reasonably equivalent value” in most jurisdictions.

In bringing a lawsuit, attorneys and clients must keep in mind that courthouses in many states have closed because of COVID-19. Clients should remain flexible as COVID-19 might cause delays or proceedings may be held by electronic communications.

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