By Jerry Silberman

With the changes in the bankruptcy laws, it has become more difficult for individuals to file. Many of those individuals are sole proprietors and business partners that have accumulated business debts as well. Combined with advances in technology and the abundance of information available through the internet, collecting from a commercial debtor "should" technically be easier.

According to the SBA, 576,200 businesses closed their doors in 2005 alone. Many of those businesses closed due to overwhelming debt. Most of that debt went uncollected.

The majority of small business start-ups will not make it to 5 years.  When they close, most of their debt will not be collected and it won't be for a lack of collection calls. Today there are more collectors than ever. Unfortunately, those who have only one approach to deal with commercial debtors will not be able to maximize their return.

When a delinquent business customer is really on the verge of closing its doors, does it make sense to go in for the kill? You may be the proverbial "last straw" that pushes the business to close its doors or file for bankruptcy where you'd be paid pennies on the dollar if you were lucky.

You could sue and obtain a judgment. However, if the debtor is not in business or has no assets, the judgment has little to no value.

If you give them a moratorium or extend terms, you create a greater risk than you had before and realistically, most payment plans break anyway.

What should you do when a debtor has a serious financial problem and is on the verge of closing its doors?

Traditional collection practices tend to view all debtors as "Deadbeats". The assumption is that the debtor has the money to pay and has to be enticed, cajoled or pounded into giving the money up. Taking a "one size fits all" approach leaves too much money on the table.

The most effective collection strategy is comprised of different collection methods - methods that maximize recovery because they capitalize on each debtor's unique situation.

In order to do this, you should understand what type of debtor you are trying to collect from. The four types of debtors are determined by asking the two most fundamental questions about the matter:

1. Is the debtor able to pay?
2. Is the debtor willing to pay?

The answers to these questions dictate what type of debtor they are.

See chart below:

How to tell the difference between a Deadbeat and an Honorable Debtor.
Deadbeats and Honorable Debtors can both claim to have financial difficulties. How can you determine who really has a serious financial problem and who doesn't?

An Honorable Debtor should be more than willing to provide documentation substantiating their hardship. Deadbeats, those that could afford to pay and really do not have a hardship, will either delay or refuse to reveal their financial condition.

Require the debtor to prove their hardship.
The debtor should begin with a hardship letter. This letter should explain, in detail, their inability to pay. Common reasons are: the economy, competition, divorce, natural disasters and personal illness, but you should require them to be specific as to their unique circumstances.

Additional documentation should include:

• Income Statement
• Balance Sheet
• Recent Bank Statements
• Corporate Tax Returns
• Personal Tax Returns
• Tax Lien Documents 
• Evidence of existing liens
• Evidence of existing lawsuits or judgments
• A letter denying them financing or new credit
• Business credit report
• Personal credit report
• Aged receivables
• Aged payables

Documenting the debtor's hardship will not only help you sort Honorable Debtors from Deadbeats, it will also show you the best way to collect.

A word of caution
None of the above documentation alone can establish their hardship. For example, some businesses may have a second set of books, their books may not be accurate, or they may be purposely deceptive. Require as much of the above documentation as you feel is necessary to validate their dilemma.

Help the debtor find the money to pay you
Even though an Honorable Debtor may be unable to pay you, you can help them find the money to pay you by getting them to implement any of these tactics:

• Liquidate excess equipment or inventory
• Reduce their salary
• Reduce their employees' salaries
• Cut benefits
• Lay off employees
• Relocate the business to reduce costs

Collect for the debtor
One of the reasons companies cannot pay is because they cannot collect their own money. One solution is to collect for them so you can keep the proceeds and deduct what you collect from what is actually owed. We are not suggesting trading the face value of the receivable for the debt owed to you. The debtor can simply ask you to collect their money and must agree that any money collected on that account goes toward what you are owed. If the money is not collected, the money is still owed. A big pitfall of this is if the money goes directly to the debtor.

Help the debtor find financing
Before we discuss financing for commercial debtors, let's establish three points: 1) Most debtors are smaller businesses and it's harder for them to find financing 2) A smaller amount of financing is harder to obtain than a larger amount 3) the debtor's credit and credibility has already been damaged at this point. With that in mind, the types of financing available to debtors are greatly limited. There are however, certain types of non-traditional financing that are appropriate under these circumstances. Here are just a few:

Financing for Credit Card Merchants
If the company takes credit cards, they may be able to borrow money based against their future credit card receipts.

Factoring or A/R financing
If the debtor has receivables, they may be able to sell or borrow against those receivables. This type of financing is feasible because the lender is relying on the credit and credibility of the debtor's customer rather than the debtor. It is also available in smaller amounts.

Refinancing their real estate
If the debtor owns and/or has equity in residential or commercial property, they may be able borrow a portion of that equity using the real estate as collateral.

WARNING: Before leading them in this direction, get them to sign a document stating that the amount owed to you will be paid at the closing of any type of financing. If they won't, you can classify them as a Deadbeat.

Require the debtor to restructure their debt
If financing is not available or not feasible, there is another type of financial assistance that can enable you to be paid. Debt Restructuring, a process by which new, affordable terms are negotiated with the debtor's creditors, can help keep a company in business and subsequently get you paid. In virtually all cases, Debt Restructuring is a better alternative than the debtor filing for bankruptcy.

A good DR firm establishes a monthly budget that the debtor can afford, and uses that budget as the basis for it's negotiations with the creditors.

How to capitalize on this strategy
By being the creditor that is shrewd enough to recognize the debtor's unique situation and referring them to a reputable DR firm, you should be given some type of advantage - either a quicker payment plan or a higher settlement than other creditors. Another advantage of referring your customer to a DR firm is that the customer pays the Debt Restructuring fees instead of you.

Don't confuse consumer credit counseling with commercial Debt Restructuring
Consumer credit counselors are basically not-for-profit entities that simply take a budget and divide it up amongst the creditors. They reduce interest rates but not the actual debts. The creditors they deal with are all credit card companies and basically take what they are given. Consumer credit counseling is not available for commercial debts.

What to look for in a Debt Restructuring firm

1. A legally binding, non-cancelable written contract between the debtor and the DR firm. A legitimate DR firm requires the debtor to make a firm commitment to pay their creditors. Without this commitment, there is no credibility on behalf of the DR firm or the debtor.

2. Authorization to electronically withdraw funds from the debtor's bank account. Otherwise, the DR firm and the creditors are subjected to the day-to-day whims of the debtor. Also, it gives the debtor credibility by allowing this access.

3. A consistently affordable budget must be established. Without the existence of a budget, the DR firm has no basis for negotiations and therefore has no idea what the debtor can afford.

4. The debtor must pledge all their business assets, assuming they are not already pledged, as part of the restructuring terms. That way, if the debtor defaults on their agreement, they have everything to lose. This protects the DR firm as well as the cooperating creditors. Without this type of commitment, there is a lack of credibility and less of a chance of a being paid.

5. Authority to bind the debtor to a settlement. If a debtor has the option of rejecting a settlement that was negotiated by the DR firm, what's the point of negotiating? If the debtor refuses or can't afford the settlement, you have wasted valuable time in negotiations and concessions. The DR firm must be able to commit to a settlement without the involvement of the debtor unless the settlement requires funding that exceeds their budget.

6. Proof of Hardship. As discussed earlier, a debtor that can't or won't prove their hardship is a Deadbeat and a reputable DR firm requires that a certain amount of proof before they will represent a debtor. A reputable DR firm will require certain hurdles that distinguish their clients from Deadbeats. Any DR firm that negotiates on behalf of debtors without establishing their hardship is trying to reduce the debt for their own personal gain.

7. Creditors must be given a vast array of settlement options including payment in full. A good DR firm understands that creditors have different needs and is prepared to work with those parameters. Creditors should be able to choose how much they are willing to settle for or over what time period they would like to be paid. Absent this option, the DR firm is essentially trying to shove an offer down your throat. This is also a reason many restructuring plans fail.

8. Financial Alternatives. A good DR firm offers different types of financing that are appropriate for these types of debtors. (see Help the debtor find financing above)

The collection industry is more competitive than ever Creditors, agencies and attorneys all compete for a debtor's scarce resources. In order to collect more, you simply have to build more pathways to the debtor's assets. Some collection agencies, such as NCO, offer Debt Restructuring as part of their portfolio of services.

When a commercial debtor is on the verge of bankruptcy, you can collect what you are owed. It just takes some patience and the right strategy.

Jerry Silberman (Paramus, NJ) has pioneered the Debt Restructuring industry for small businesses as well as revolutionized the collection industry. In 1990, he started Interstate Department Services, a nationwide collection agency.

He went on to create Commercial Credit Counseling Services, now Corporate Turnaround (www.BusinessFreshStart.com), in 1998. For over 15 years, he has helped thousands of small businesses to:

• Get hard to find financing
• Resolve tax problems
• Collect from delinquent customers
• Renegotiate affordable terms on past due debts
• Avoid bankruptcy

He is a leading expert on helping small businesses emerge from overwhelming debt within their means. He co-authored "Small Business Survival Book", which has been endorsed by Steve Forbes. Silberman has lectured across the country and has been a featured expert on Bloomberg TV, WABC-TV, News 12 New Jersey and on numerous radio shows.