Commercial Debt Collection: 6 Ways It Differs From Consumer Collection

Fair Debt Collection Practices Act

You’re probably not protected by the federal Fair Debt Collection Practices Act. The FDCPA covers collection of consumer debts, which are for personal, family or household purposes. Unpaid debts that you incurred while operating your business are not considered consumer debts. So collecting that debt is not covered by the FDCPA. The FDCPA won’t protect you if a debt collector is trying to collect on a debt that you owed to a commercial lender for your business expenses.

Let’s say you owe a consumer debt. According to the FDCPA, debt collectors can’t call you before 8:00 AM or after 9:00 PM. They can’t call your personal phone number more than seven times within seven days. It’s not the only advantage you get from the FDCPA when you’re a consumer debtor. If you hire an attorney, the FDCPA requires the debt collector to stop contacting you and go through your lawyer instead. It also prohibits the collector from engaging in behavior that qualifies as harassment. But these restrictions do not apply to a debt collector who is attempting to collect on your business debt. The Federal Consumer Financial Protection Bureau confirmed that no part of the FDCPA applies to the attempts of collectors to collect on business debt.

As a business debtor, the FDCPA’s other protections also don’t apply. These include the right to receive written notice of the debt from the debt collector, and the right to send the debt collector a written notice disputing the debt within 30 days of receiving that notice. When you send a letter disputing a consumer debt, federal law requires the debt collector to stop collecting until the debt collector verifies the debt’s legitimacy. But this is not the case when it comes to business debt.

Pursue You Personally

If you’re delinquent on a business debt, a debt collector may be able to pursue you personally. Your business loan might require you to personally guarantee repayment. In the case of SBA-guaranteed loans, for example, owners with 20% or more of the company are generally required to personally guarantee the loan. If you personally guaranteed your business loan, the lender can come after you personally if the business defaults.

Some loan agreements or business contracts include a confession of judgment clause (COJ). A confession of judgment clause in a business loan contract gives the lender the right to go straight to court and obtain a judgment against you in the event of a default. This differs from consumer lending, where lenders generally cannot ask borrowers to agree in advance to be liable on a judgment for the amount owed. In New York a bank cannot file a confession of judgment in a court anywhere except one in a county where you “reside.” In New York a business is treated as residing in any place where it does business.

If you operate a retail business with significant inventory or use specialized equipment to conduct your business, a secured lender may take the equipment or inventory without a court order if you fail to make loan payments. Even if the language of your business loan gives the lender a right to “take possession” of collateral without a court order, the lender may not seize the collateral if doing so would breach the peace.

Statute of Limitations in New York

Generally speaking, the statute of limitations in New York for business debts is much longer than for consumer debts. In New York, the deadline to sue you on a business loan or business contract dispute is generally six years. That’s not the case with consumer debts. In New York, a consumer debt generally must be sued on within three years. Once the statute of limitations has expired, the debt is considered ”time-barred,” meaning that a debt collector may not sue you to collect it. Contrary to what some people believe, making a payment on an old debt does not automatically give a creditor the right to sue you.

In New York, the interest rate for a money judgment rendered in an action is 9%. If the debtor is a private individual and the debt is consumer debt, the rate is something less. For non-consumer debt, however, it’s 9%.

Unlike the FDCPA, some state laws that regulate debt collectors may cover collection of non-consumer debts. California, for example, has a debt collection act which applies to commercial credit owed by a natural person to a lender, commercial financing provider or debt buyer, but only where the total amount owed to that creditor is no more than $500,000. If you owned the business and personally guaranteed the credit for that business, that law may protect you. However, trade credit (a supplier to whom you owe money for goods or services) does not count as “credit” under this act.

As a business owner, it’s crucial to understand the distinction between consumer and commercial debt. A court can enter a judgment against you in New York on a business debt without a trial if you agreed to a confession of judgment provision when you took the loan. Get all the paperwork (the note, guarantee, mortgage/lien instrument, the contracts underlying any dispute) on this together. Study them carefully. And check them against what you now understand of the law. The terms and details of your contract will determine your rights and obligations. It’s crucial for you to understand what’s in these documents.