Credit Application

Credit Application – Use for Collection

BY JAY WINSTON, WINSTON & WINSTON, P.C.

 

One goal of the business owner is profitability and profitability usually is a direct result of sales and sales are a direct result of marketing a viable product. Unfortunately, too often the issue of credit and collection is sometimes omitted and some businesses are remiss in acknowledging the fact that not all purchasers of the product or service will pay within 10 or 30 days. Two major concerns of the businessman should be the extension of credit and the collection of the account receivable.

When the sale is first made or the service first requested, the main priority is whether or not to extend credit and how much credit to extend. The credit application is probably the most important document to determine whether or not to extend credit. In addition to the credit application, a credit report, verification with the bank, verification with other references furnished by the customer, the use of credit databases and a wide variety of other channels including financial statements are utilized to verify the financial responsibility of the customer. Many books have been written upon the extension of credit and we will not attempt to improve upon the procedures and methods used to conduct a proper credit department.

Notwithstanding same, we would like to address the collection end of a debt and what the owner of the business can do to assist the attorney in the collection of a debt. We begin with the credit application.

Identification of Borrower

When the client wishes to institute suit against the debtor, identify the nature of the entity which is being sued. We have identified the various entities in the Second Edition on Pages 33 et seq. It is incumbent to place on the credit application a field where the customer can designate whether the customer is a corporation, partnership or an individual doing business under a trade name. Without this information the attorney must conduct searches either with the Secretary of State, the County Clerk’s Office or other state office to determine exactly how the debtor is conducting business. The attorney must be certain the correct entity is being prosecuted.

While this information is generally available in a public database, searches cost money and often delays run from weeks to a month before replies are obtained. Delay works in favor of the debtor. We recommend that the credit application contain the name of the principal officers of the corporation, the partners of the partnership and the principal owner of the individual who is doing business. Provide a space to obtain the home address and the home telephone number of the individual. If the debtor is out of business, we know where the principal officers reside. If we have a telephone number, we are able to contact them. This contact prior to suit sometimes saves the money of instituting suit.

With the address of the officers, service of the summons can be made on the corporation. A corporation also may be sued by service upon a Secretary of State, but this is more expensive than by serving the principal officer at the residence and delays the collection effort. To serve partnerships or individuals d/b/a, you must serve partners — you cannot serve the Secretary of State.

As to the address of the customer, consumer applications request that the borrower check whether the property is rented or owned. The same question should be addressed to a business in a credit application to indicate whether the corporation, partnership or individual, rents or owns the property located at that address. Property owned provides significant information if the customer is out of business or filed a petition in bankruptcy. If it is a rental, seeking the suite number may be helpful when the time comes to serve a summons of complaint.

The lender or owner of the business might query whether they have the right to ask these questions and whether some of the questions would constitute an invasion of privacy. When a lender or owner of a business is extending credit, the owner is entitled to ask whatever questions are appropriate providing the questions do not discriminate against race, sex, nationality, age, etc. These questions are proper and do not constitute any encroachment on the privacy of the party. The home address of the owner is important if it is a small business and even if it is a large business, the home address is helpful as is the telephone number.

References

Contacting the business references to obtain information about the customer will certainly assist in a credit decision. From a collection standpoint, businesses references are sometimes helpful, because we sometimes learn from the references that the particular borrower has organized a new business at another location under a different name.

Obtaining the name of the bank where the borrower or purchaser maintains bank accounts may be helpful with regard to extending credit. It is also helpful after a judgment has been obtained, for the judgment creditor may attach the bank account.

Sometimes the customer or borrower is a wholly-owned subsidiary of another corporation and some credit applications ask the question whether the customer is a subsidiary of another company or the parent of another company and request the name and address of the other company. This information helps determine the name of the affiliated company. In certain circumstances affiliated corporations may be joined in lawsuits and be held jointly liable. If we do not know about them, the information never surfaces and the affiliated corporation is never joined in the lawsuit.

Financial Information

Some lenders or companies request financial statements or balance sheets, depending upon the nature of the credit and the amount of the credit. This information provides additional information as to the assets and liabilities of the business. When the debtor has gone into a new business, these assets may be traced to the new business and the new business may not have paid the old firm that is out of business. A suit may be started for fraud against the new business, especially when equipment vehicles and trucks are registered into the new name without appropriate payment.

Some credit applications request the listing of all vehicles owned by the business as well as vehicle identification numbers. From a collection point of view, the vehicles may be traced after the customer is out of business. This trail often leads to fraudulent sales to family or friends where the proper amount has not been paid to the company that is out of business.

A search for Uniform Commercial Code financing statements will often be conducted by the extender of credit to determine whether the debtor’s assets are free and clear or whether they are encumbered by liens. While most think of UCC financing statements as liens on vehicles and heavy equipment, UCC financing statements today are filed on computer systems, copy machines, fax machines and printers. When a company is out of business, tracing these assets may reveal the company has paid the lien, is now the owner and the asset is located in the hands of businesses, friends and relatives who never paid the defunct company.

Where partnerships and individuals are concerned, the assets of the individual partners may be reached. Home addresses become important since most of the time the individuals and partners own their own residences. Sometimes the credit applications require the debtor to list whether the vehicle is owned personally, is leased and whether it has a lien. Some applications provide a form balance financial statement for the individual owner (or guarantor) listing all assets, liabilities and net worth with emphasis on real estate.

Use in Bankruptcy

We encounter the defense that the debtor did not fill out the credit application, and the information set forth is totally inaccurate. In adversary proceedings in bankruptcy, comparison of the financial statement with the information in the bankruptcy schedules is fatal when a creditor, and not the bankrupt, filled out the statement in the handwriting of the creditor. Credit applications should be completed by the individual and not by the creditor. When creditors fill-out credit applications, names are misspelled and addresses are incorrect. The customer will write the name and address accurately. The important thing to remember is that the application should be legible, for many times we encounter applications which are illegible and no one requests the customer to rewrite or print the information requested. A post office box is inadequate as an address of either a corporation, an individual or a partnership. A summons cannot be served upon a post office box.

Invasion of Privacy

The response of many lenders or owners of businesses is that the customers will not complete the credit application containing these questions. To some extent that is probably true. Nevertheless, most will complete the credit application and furnish the information. Failing to complete the credit application is a factor in determining whether to extend the credit being requested. Information is power and information is money and the more information that you obtain about your customer, the more knowledge acquired with regard to credit and the more power acquired to collect a delinquent account.

Copyright © 2001, 2002 Winston & Winston P.C. All rights reserved.
Revised: July 29, 2003

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