Debt Collection in the USA

• Domestic companies' payment culture is becoming highly unpredictable and, in the absence of a harmonized late payment system, payment terms remain a pure contractual problem.

• The scheme of trial is compounded by a district, state and federal environment in which security procedures are not accepted and where there is no standardized method for resolving the easiest cases. Significant complications and expenses will also be anticipated as compliance can be difficult.

• When the investor is insolvent it becomes a complex task to collect the debt. The structure in bankruptcy is pro-debtor, so rendering a business insolvent isn't a significant way to get money. Reorganization in debt is in fact a resource-draining process that never ends in general unsecured creditors earning any dividend.

1. Summary

1.1. General financial information

1.1.1. It is rather a difficult and expensive process in the US to collect financial information on private companies. Financial information can be obtained from approved suppliers, but it is also advised to provide a comprehensive credit application and, if possible, a personal commitment before credit is issued in the United States.

1.2. Key legal structures

1.2.1. Corporate debt obligation is defined by legal structures that are listed as follows:

• Single ownership is possible for privately operated small businesses for which no contractual arrangement is needed. In this scenario, the claimant shall be held responsible for all contractual debts. Two or more individuals may also decide to share ownership and responsibility through Partnerships, in which case the partners may jointly and individually be liable for the other partners ' actions. Alternatively, limited liability partnerships offer the partners limited liability.

• Limited Liability Companies (LLCs), S Corporations and C Corporations represent the vast majority of companies, since these structures limit the liability of shareholders to the value of their contribution. For companies, a board of directors chosen by the owners manage the company. In any event, a corporate shield prevents the owners from any personal liability unless one can show wrongdoing, although specific capital requirements can apply depending on the state chosen to register.

• Alternatively, foreign companies may settle in the U.S. through branch offices that do not impose liability limitations on the foreign parent company or through the establishment of a subsidiary company in one of the forms mentioned above. Joint ventures could also take the form of a partnership agreement.

‍

1.3. Regulatory framework

1.3.1. The U.S. has a federal structure consisting of fifty states and one federal district (Washington, D.C.), each defined by specific rules and tribunals. Disputes are usually decided at the state level by state and county courts with general jurisdiction, but federal district and provincial courts would have special authority over cases arising within the framework of federal law (international trade, civil claims) or where the case includes parties located in different states and with a debt of more than USD 50,000.

2. Receiving payments

2.1. DSO - Days Sales Outstanding

2.1.1. Transactions usually take place in the US within a period of 28 days, but penalties between five or ten days continue to be progressively enforced by big business. In some situations, for example with large purchases or unique clients, contracts may last up to 90 days or even 120 days.

2.1.2. Some companies have embarked on a more relaxed approach to invoices. Now it's not uncommon to hear of companies routinely expanding contracts without further negotiation with their vendors, and this is definitely a worrying trend. Businesses are less prone to the idea that invoices are due now,' failing to appreciate the 30-day duration or indeed any repayment cycle is rather a luxury than a right. Perhaps surprisingly, it is the larger firms that are far more likely to take advantage of the good nature of their suppliers and their dependence on larger customers for trade.

2.2. Late interests

2.2.1. The terms of payment are not regulated by law and may be agreed freely as part of a contractual relationship. The debtor may be charged interest on late payment. Interest may be charged up to the legal interest rate permitted by the state the debtor resides in. If there is no such agreement, the creditor may charge the legal interest rate permitted by law in that State.

2.3. Costs of debt collection

2.3.1. Without a prior agreement executed by the trustee approving these payments one can not legally charge the collection costs. However if such an arrangement occurs, it is not always upheld by the courts; thus, in trying to collect a loan, it is better used as a bargaining tool.

2.4. Protecting ownership

2.4.1. Copyright ownership is very rare in the US, so it wouldn't stand up in court since the interests of insured borrowers take precedence over the products. UCC financing statements, being a legal form filed by a creditor to notify other creditors of its interest in the debtor's personal property, are considered a better alternative, although they are also rarely used as debtors can normally choose another supplier that has no such requirement.

2.5. Payments

2.5.1. The most common methods of payment are as follows: the check is the most popular payment mechanism in the United States, but as many banks' clearing procedures for international transactions are lengthy, businesses progressively tend to rely on ACH and wire transfers that are quick, safe and sponsored by a growing international and domestic banking network.

2.5.2. Transfers can be assured for export transactions through an Export Credit Insurance policy which helps to minimize the risk of sudden or unforeseen insolvency of customers. Credit letters are very widely used now, due to the time it takes to receive them and their costly existence. The loan compensation or visibility rewards are better given the current economic difficulties.

‍

‍

3. Collecting payments

3.1. Amicable action

3.1.1. Negotiating. While American courts are efficient, resolving conflicts is a time-consuming and costly process. It is therefore important to always find polite mediation options as a serious alternative to formal legal proceedings.

3.1.2. Before initiating legal proceedings against a debtor, it is important to assess his assets as it allows verification as to whether the company is still active and whether the chances of recovery are at best. Therefore, it is important to be mindful of the solvency condition of the debtor: once insolvency proceedings are launched, the execution of a loan is difficult (see below).

3.1.3. Judicial dunning then should continue with a recorded Demand Letter reminding the debtor's obligation to pay the principal along with interest on late payment. In fact, the courts often allow the parties to a conflict to partake through alternate dispute resolution procedures to their burden of lawsuits. As a consequence, most conflicts are settled amicably and never reach the stage of litigation.

3.2. Legal proceedings

3.2.1. Ordinary proceedings. Provided the debt is certain and unquestioned, the creditor may first file a summary judgment application. Having said that, while securing a summary judgment should in principle take nine months to one year, in reality this is not always the case. Also, the debtor's counsel would indeed apply for extensions (six months or one year) to prolong the trial date to place their client in a stronger position to negotiate deals.

3.2.2. Ordinary legal action usually begins after polite efforts at gathering have ended. Until issuing summons to the claimant the borrower must file a claim with the trial. The latter would then be granted 30 days (in most jurisdictions) to present an appeal but, if not, it could take up to one year to achieve a default judgment based on the jurisdiction and the required personnel.

3.2.3. As the US depends on deposition to perform legal proceedings, the plaintiffs are usually required to submit their arguments and evidence to the defendant before the hearings begin. The courts will usually grant relief in the form of penalties, injunctions or actual results, at the state and federal levels respectively. Punitive damages in debt collection cases are available but remain rare.

3.2.4. Required documents. The court at least includes an account statement detailing the amount owed to cover the debt for which it is being sued. Should the situation be contested, the invoices, signed shipping certificates, purchase orders or any other supporting documentation for the transaction would need to be created. We also need to provide an affidavit.

3.2.5. Time limitations. Business claims in the U.S. must normally be brought before the court between two and ten years, depending on the state where the lawsuit is being brought. Also, it may be added that the timeframe for debts sold on an open account is usually shorter than when a contract is in place.

3.2.6. Precautionary measures. Pending a final decision, precautionary measures that help to protect the interests of the creditor. Upon application, courts would typically issue temporary restraining orders, preliminary injunctions, or attachment orders (freezing orders are not available) as a means of preserving the status quo and avoiding irreparable damage.

3.2.7. However, the claimant would be required to prove that the claim has a good chance of succeeding and that in the absence of precautionary measures damages alone would not suffice. The court may take its decision ex parte (i.e. without the debtor being present) on the same day in emergency situations, but the court would usually request that the claimant provide security on costs to protect the respondent from irresponsible action. In fact, these temporary injunctions are very seldom given by courts unless there is clear evidence of fraud.

3.2.8. Appeal lodging. The parties may initiate appeal proceedings before the competent appeal tribunals, which would normally decline to hear the claim, uphold the judgment or request a lower court to review it. The appeal process can therefore be time consuming. Therefore, options to have a decision checked are restricted insofar that, compared to most nations, there is only legal recourse accessible. At the federal level, putting a petition before the Supreme Court includes seeking a court leave (writing certiorari) that is seldom given. That said, debt collection cases are rare to appeal.

3.2.9. Enforcing court decisions. A verdict does not warrant reimbursement but rather confers additional rights on the borrower, such as possession and disposal of the debtor's estate or garnishment of their bank account. In the United States, many judgments remain unsatisfied when the debtor is proof of judgment (i.e. when there are no assets left by the company to satisfy the judgment).

3.2.10. Duration of a legal action. Legal action is typically a time-consuming procedure and, depending on the complexity of the situation, can last two to three years. Cases involving international parties would not be treated differently from domestic claims by the courts; however the costs and delays for bringing foreign witnesses may be greater.

3.2.11. Costs of a legal action.  Apart from being time consuming, court trials are also expensive insofar as attorney fees are large and sometimes unfair (to say the least). Cost recovery laws will rely largely on state regulations and contractual arrangements. Contingent no-win-no-fee contracts are permitted and common, aimed at covering attorney fees through a portion of the reward in case of achievement.

‍

‍

3.3. Alternatives to legal action

3.3.1. Alternative Dispute Resolution Techniques (ADR). Despite the lengthy and expensive existence of US courts, alternative dispute resolution techniques (such as arbitration or mediation) are very popular. Second, the statute (under the Alternative Dispute Resolution Act, 28 U.S.C. § 651 et seq.) places on federal courts a duty to provide mechanisms for the resolution of conflicts by ADR.

3.3.2. Second and as mentioned earlier, most situations in the US conclude with a mediated settlement and ADR is therefore a necessary avenue to do so. Eventually, the courts have an increasing propensity to require the parties to partake in pre-trial settlement sessions before prosecutions begin. Many jurisdictions still deem this step to be a pre-legal requirement that would restrict entry to trial if not met.

3.3.3. Foreign forums. While doubtful as many lawsuits continue to be obtained by proceedings in domestic courts, the parties may also choose to put their contractual relationship under the auspices of another state, or a global statute.

3.3.4. Nonetheless, in fact, state and federal courts appear to maintain rules of international authority as long as the law preferred is fairly relevant to the arrangement and does not violate national or federal policy. In turn, domestic courts will generally hold sole authority over particular areas of law (such as consumer protection, insurance, jobs, antitrust laws) and would guarantee that an international venue does not rob a group of their right to take advantage of a proper legal procedure.

3.3.5. Nevertheless, it is important that the arrangement be distinguished by a foreign relation (e.g. one party has chosen domicile in another country, or the place of execution is situated abroad), and that a jurisdiction provision be drawn up specifically for this purpose.

3.3.6. Enforcing international awards. The first move in imposing a decision is to have it domesticated in the state where the debtor lives, provided that each State has its own laws. Decisions made in one state may be enforced in another state provided that the compliance court finds itself qualified to prosecute, or has authority in the first place to deal with the argument (forum non conveniens). Consequently, it is always prudent to consider carefully where legal action can take place, and how compliance will take place.

3.3.7. Where mutual acknowledgment and compliance arrangements are bilateral or multilateral, this provision is usually a formality. Nevertheless, in the absence of such arrangements, the purpose of exequatur litigation would be to guarantee that the implementing court did not have sole authority to rule on the dispute, to check that the judgment was made by a reasonable judge, that it is conclusive and enforceable in the issuing region, and that both parties benefited from a proper legal procedure. Ultimately, the courts would also guarantee that the international decision does not contradict prior US court rulings, and that compliance does not violate US public morality and public order.

3.3.8. The United States is a signatory of the 1958 New York Convention on the Recognition and Compliance of International Arbitral Awards, thus international arbitration awards should be applied fairly quickly, given they are definitive and binding in the awarding region.

‍

‍

4. Managing insolvent debtors

4.1. Insolvency in USA

4.1.1. The Uniform Commercial Code (§ 1-201) describes insolvent debtors as having usually failed to pay debts in the usual course of business, other than as a result of a bona fide disagreement, or as being unable to pay debts as they become due.

4.1.2. Before 2005, when the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) required numerous amendments to the Bankruptcy Code, insolvency legislation in the US had been deemed very beneficial to the debtor. Nonetheless, Chapter 11 lawsuits have been initiated (and ultimately prompted countless pieces of legislation worldwide) as a way of creating a system of rescue that would save healthy companies from immediate economic turmoil.

4.1.3. The bankruptcy system remains very pro-debtor despite the changes, and mostly honors the managers and lawyers who manage the proceedings. In general, it is often said that rendering a corporation insolvent is an effective way of getting money, but in reality reorganization in bankruptcy is resource-draining and should only be regarded as the last option after all options have been exhausted.

4.2. Insolvency proceedings

4.2.1. Out-of-Court proceedings. Although the object of Chapter 11 litigation is to seek debt repayment by settlement, the expense and complexities tend to make out - of-court remedies preferred before any further action is taken. The primary out-of-court case is an Award for the Profit of Shareholders, where a corporation hands all its properties over to an independent third party that liquidates and distributes them equitably to all shareholders.

4.2.2. Chapter 11 (Corporations) debt restructuring schemes are designed to enable debtors and shareholders to reorganize debt as a means of avoiding liquidation. After 2005, investors have been given an opportunity to play a greater role in avoiding the reorganization of a debtor: debtors have a period of 18 months to request a reorganization and debt rescheduling schedule. After this time, creditors are allowed to present their own proposal and send it to the court for approval by the creditors' committee.

4.2.3. A restraining order prevents financial and trade creditors from collecting debt or enforcing decisions during the reorganization procedure in order to preserve cash flows. The board of the delinquent firm stays' in charge' and continues to run the day-to-day business operations, though the management team often has a turnaround officer attached. Nevertheless, it is very unusual to see a payout from a Chapter 11 filing in recent years, considering that a general unsecured creditor is very far down on the list of goals. Chapter 12 (Family, Farmers or Fisherman) and Chapter 13 (Individual pay earnings) offer additional options for reorganization, but more complicated.

4.2.4. Winding up proceedings.  Chapter 7 provides an opportunity to liquidate the properties of the delinquent corporation when the debtor business can not be saved. In such cases, the hearings are monitored by a court-appointed judge. Both investors must then submit their cases to the trustee within 10 days of the bankruptcy decision being issued.

4.2.5. Once the list of creditors is drawn up, the properties can be auctioned and the profits allocated among the creditors according to their priority level. In practice, most states protect the personal assets of the debtors and thus there is a possibility that a corporate bankruptcy could be listed as a' no asset' case. That means that the likelihood of any distribution to creditors is zero after the debts have been liquidated. When any assets were to be found, investors would be informed and granted time to submit a claim verification.

4.2.6. Priority rules. Complex priority rules normally apply while the proceeds are distributed to the creditors. Administrative and attorney fees will normally be considered first, accompanied by federal and state taxes on workplace salaries and benefits. Next would come secured creditors followed by priority creditors, unsecured creditors and shareholders.

4.2.7 Cancelation of suspicious transactions. Administrators can order that the courts cancel those transactions conducted previous to the insolvency proceedings. In fact, any action taken by the debtor will usually be invalid, considered dishonest or adverse to the creditors. Diverse intervals of offenders varying from 90 days to six years can apply. Most of the time when faced with a favorable move, one can bargain and resolve the sum claimed.

4.2.8. Duration of an insolvency process. Sometimes unsecured creditors may wait two or five years or longer until they learn whether or not they will be entitled to receive part of the proceeds of the liquidation. Many instances took as long as ten years to complete.

4.2.9. Required documents. Evidence of claim form, account statements, invoices and any other documentation which show the debt.

‍