Third party company The Credit App offers a direct way for any business to report defaults directly to the credit bureaus.
Third Party Credit Reporter The Credit App is offering a unique service to its clients, the ability for small business owners to report credit "just like the big banks." One can see the appeal if you are struggling to collect late payments from your customers, but does it work? In this article I will be reviewing The Credit App's services to see how it compares to comparable collection methods.
Small business owners get hosed in more ways than one. One of the biggest disadvantages that small businesses have is when it comes to enforcing their contracts or collecting outstanding debts. When JP Morgan or Sears has an outstanding debt, they can send it over to their legal department and from there the sky is the limit on the ways that they can enforce collecting a debt. Since having a legal department and a contract to report debt with the credit bureaus is not a realistic option for 99% of all business owners, let's review what their options currently are.
Debt Collectors:
Debt collection services are an obvious and easy go to for most small businesses trying to collect debts. Letting the professionals deal with the headache can seem appealing, but let’s get into the details. Most collection contracts are contingency contracts meaning they only receive a per centage of any money they collect. Great, 70 cents on the dollar is better than 0 cents. But how are these collection companies convincing the debtors to pay up when multiple attempts by your company to collect have left you empty handed. Most collection companies are not lawyers, though I’m sure they threaten to sue, which you the company owner can do that without having to give away 30 percent. And if the collection company does take the debtor to court, then that expense will be tacked on top of the 30 percent. So why doesn’t the business owner go straight to the attorney’s office and skip the middleman. Further, no debt collector has a contract with a credit agency to report credit- so there is no value there. They also do not file liens or take any other legal action without an attorney involved. So where is the value?
The truth is that the go-to move for a debt collector is threaten and then settle in the middle. Let’s walk through an example: ABC roofing has a client that is refusing to pay their final balance of $10,000. They are a busy company and decide they do not have the time to mess around with this customer not wanting to pay. And after all the roof contract was for $15,000 so if they only lose 30% of the $10,000, they will break even on the job, not losing or making money. Using the go-to debt collector method the collector calls the debtor making grand threats maybe playing hardball for a week and then offers the debtor a settlement of $5,000. This is a great deal for the debtor, the collection company just offered a carrot and a stick. I can give you $5,000 off the price and you can avoid being dragged into court where the debtor knows they will lose. This is a win-win for the debtor and the debt collector who just made $1,500 for making a few phone calls. Who did not win is the business owner who thought they were only going to lose the $3,000 fee for the debt collector, but now they are down $5,000 for the settlement and $1,500 for the debt collector. Now they are underwater $3,500 on the job. They are probably asking themselves why they paid a company $1,500 to lose them $5,000. After all the business owners could have just called the debtor and settled the debt for $5,000 and paid nothing to lose the money. Debt collectors are very rarely a good deal for small businesses.
Attorneys
Attorneys at least have a little more power and authority than a debt collector. But is this a better deal than going with a debt collector? If the attorney is willing to take the debt on with a 30% contingency than for sure it is a better deal. You would be getting assumably a better service for the same price. If they are not willing to take the case on contingency, then you are going to have to weigh a few more things. For example, if the attorney charges $300 an hour and your client owes you $1,000 then this is probably a very bad deal for you. It is highly unlikely that you will be able to make a profit in this situation. Now if your client owes you $20,000 than this might be a much more profitable decision, especially if you think going to court is inevitable. Attorneys do play a valuable role especially when dealing with larger amounts of debt. You might ask why don’t I sue them myself and avoid having to pay an attorney. We will get into that, but in most states, you are only allowed to represent your company in small claims court. Most small claims courts only accept debt cases up to $10,000. Anything over that then you will have to go to real court and since your company is a separate entity then you would be practicing law without a license, which is a crime. An attorney would be required by law in this situation, thus making them a valuable option when dealing with larger debts.
Attorney Outcomes
Let’s assume now you have an attorney, and they took the debtor to court and won- now what? You now have a judgement in your favor, letting the entire world know that a judge has determined that this debt is justly owed. But is the debtor now required to pay the debt? No. They have thirty days to appeal the decision and then you can record the judgement at the clerk’s office where it will normally stay in the records for 10 years. So how do you get your money? Well, you would have to continue to pay your attorney and keep going back to court. From here you have multiple paths to try to collect your money, since a debtor having judgement against them means very little- it doesn't even go on their credit anymore.
Option one: Garner their wages. Most states allow this practice though normally with very strict rules and debtor protections. The first thing you have to do is go back to court and get a writ of garnishment. Which is just a judge signing off on the creditor garnishing the debtors wages. From there it is not guaranteed. First you must prove to the judge that the debtor has the spare income to be garnered and they also have to have an employer that is willing to play ball. This can be a very long process and since you are only allowed to collect a percentage of their wages, it could take years to collect all the debt. And if they change jobs or move out of state then you must start completely over.
Option two: Levy their bank account/ foreclose on property. Levying the debtors bank account and foreclosing on the debtor’s property are very similar, it is legally taking the debtors assets for the creditor to be made whole. This also requires a separate court order and will require going back to court. Levying their bank account requires knowing where they bank. This can be very difficult. Every state has massive carve outs for money and property that can not be levied in order to protect debtors. For example, in Texas debtors can not have their primary residence/ homestead levied or foreclosed on by any creditor except the mortgagor. They are also allowed one car per person and loads of other exceptions. So, unless they have rental properties that have equity or lots of cash in the bank then this option is not great.
Both options, as with anything with the legal system takes years and lots of money before you receive a dollar from the debtor. Therefore, most people just quit before going to court. Most states have plenty of legal loopholes for debtors to get out of paying their bills and if the debtor remotely understands how to work the legal system, then you will have an incredibly hard time going down this route.
DIY Collections
DIY collections really should be the go-to for all small business owners. You have to look at it through the lens of power and how much does your time cost. For example, if you make $400 an hour then paying an attorney $300 an hour to do your collections is probably a good deal, assuming you can’t train your $20 an hour secretary to do it. Further, if you have a debt collector collect for you and they settle for 50 cents on the dollar and take-home 30 percent, then they might be making more than the attorney. Which would also be a bad deal. Most small business owners make much less than $300 an hour so let's assume it’s worth our time to try to collect a debt.
Now let’s look at collecting debts through the lens of power. What power does a debt collector have to force a debtor to pay that you don’t? In most situations, none. They have all the tools that you have. Mainly the threat of getting an attorney involved. As I mentioned earlier, attorneys do play an important role when dealing with higher amounts of debts. They are allowed to sue in court on behalf of your business and you are not.
So now let’s talk about what power a small business owner has when it comes to collecting debts. Threats are the main tool used by debt collectors and attorneys. I’ll assume that if you are searching for additional ways to collect outstanding debts that you have already attempted this common and obvious solution that sometimes works. Sometimes you just have to inform people of the consequences and how far you are willing to go to make sure that the debtor fulfills their side of the contract.
The next option, specifically if you are working in the home improvement industry, is the mechanics lien. Mechanics liens vary from state to state, but the premise is that you are attaching a notice to the title of the property stating that you made an improvement this property and have not been paid thus a part of the property belonging to you. Filing a lien is incredibly easy. There are online services that will do it for you for a few hundred dollars or you can go to your county clerk’s website fill out a form online, pay a fee which is always under $100 and you're done. Smaller counties might make you do it in person, but normally their filling fees are as low as $10. In most states you are required to mail the debtor a copy of the lien and sometimes that is all that it takes to get them to pay. Having a contractor fooling around with the title to their family’s home is enough for a lot of people to cough up a few thousand dollars that they owe. But some people want to go all the way especially if it is a large amount that they are not paying. From here you have two options. You can wait an undetermined number of years for the debtor to sell their home and have the title attorney send you a check at closing, which normally includes single digit interest, or you can try to foreclose. Waiting for someone to sell their home is not a great option, but better than nothing, especially if you only paid $10 to dirty their title. Option two is trying to foreclose on the mechanics lien. This option is incredibly difficult. You will have to go to court to get a judge to agree to a foreclosure and will require a lawyer. Further, a lot of states do not allow this on the debtor's primary residence/ homestead a la debtor protection laws. I have personally never seen this done before- so not a great option, but the threat of a foreclosure is a good option.
Since we just talked about DIY solutions for collections, let’s talk about The Credit App’s. As we just talked about there are very few good solutions for collecting debt, but you can always save money and have better ROI when you take matters into your own hands. The Credit App allows a third DIY option, reporting the debt to the credit bureaus. This has always been the go-to option for larger companies, but for smaller companies, it is all but impossible to get a data furnisher contract with one of the credit bureaus. First, they require a minimum of 50 new credit accounts per month. So, unless you are the worst contractor in the world or do 200 plus million in sales, this will probably be a no-go. Further, it requires a department of people that are qualified in formatting credit data and understands all the credit data reporting laws and systems. This is where The Credit App comes in. For $99 any small business owner that has a legit signed contract can report the default directly to the credit bureaus. The benefits of this service are obvious. If this is the go-to method of collecting delinquent debt for fortune 500 companies than this method should work great for small businesses. The Pros and Cons:
Pros
-The Credit App works a lot faster than a lien or going to court. The Credit App will report the delinquent credit mark 30 days after they receive the file, assuming it went unpaid in the grace period. Most people use their credit multiple times a year. So when the debtor goes to buy a car or get a job, then the negative credit mark will be there and most likely lock the customer out of the credit market until the debt is paid and the negative mark is removed. Using a lien only forces the debtor’s hand when they want to sell their house, which might never happen, but with The Credit App, the consequences come a lot sooner and are more apparent in the debtor’s life since so many people rely on credit. Going the legal route is similar, it can take the better part of a year to get a judgement and actually collecting on the judgment will take much longer, if at all.
-Price would be the next pro for The Credit App. At $99 The Credit App is similarly priced to filing a lien, assuming you are doing it yourself. But when you start trying to drag the debtor into court, even if you are doing it yourself, the cost would go way beyond $99.
-The Credit app is a very simple process and only takes a few minutes. All you have to do is go their website www.thecreditapp.org set up an account, fill out a form with basic information about the debtor, upload the contract that was defaulted on, and then check out. The process is a lot more straightforward than filing a lien and trying to represent yourself in court…
-The Credit App seems to have better results than a lien and comparable results to a long-drawn-out lawsuit.
Cons
-The most obvious con is that if a debtor does not have good credit, then they probably won’t care much about having their credit dinged. Further, the debtor might prefer keeping the $15,000 that they owe you over having good credit. They can just pay cash for their next car. Since most small businesses that are currently using The Credit App work in the construction industry and renters don’t remodel their kitchen, one has to assume that this is a small number of people that own a home and don’t care about their credit- they had to of had credit to buy their home and thus understand the importance of good credit.
What is the Process
The Credit App has a very streamlined process. The day after you place your order with The Credit App the debtor receives a text and email explaining what is going on, who they need to pay, and how soon they have before the grace period is over. They will receive a certified letter explaining the same thing a few days later. The Credit App always gives an average of 30 days to pay. This is required by law and the goal is to get the creditor their money, not to harm the debtor’s credit. Further, this gives the debtor the opportunity to dispute the debt, which The Credit App encourages the debtor to dispute the debt if the debtor thinks that there has been a mistake or misunderstanding. After the 30-day grace period the negative credit mark will be reported to the credit bureaus just like if they didn’t pay their car loan. If for some reason the debtor decides to dispute the debt, then they would be required to submit photos or documents evidencing the debt not being owed. When a small business owner reports a debt The Credit App does not take their word for it, they have to provide the signed contract evidencing the debt, so they have the same requirement for a dispute.
What are the Results
According to their website The Credit App Claims to have an 18% collection rate on all accounts in the first year after receipt. There is no readily available data on the succus rate for other collection methods, but this does not seem bad, considering the negative credit mark stays on their record for 7 years. To me it seems like a numbers game. If you have a $200 debt that you have to pay $99 to have an 18% chance of collecting on in a year, then this won’t be a good ROI, but at least it is a gut punch, and you are letting the community know that this is not a good person to lend money to. Now if you are dealing with debts that are closer to $1,000 then The Credit App really makes a lot of sense.
How to use The Credit App
The Credit App has a very user-friendly website www.thecreditapp.org that any small business owner can use. As long as you own a company and have a legitimate signed contract that was defaulted on than you can sign up for a Credit App account and start reporting customer defaults. This is very important information that other businesses use to make lending and business decisions. You can reach out directly to The Credit App by emailing them at support@thecreditapp.org.