Introduction:

As an accounts receivable professional, understanding credit and collections laws is essential to your role. The goal of credit and collections is to ensure timely payment from customers and minimize the risk of financial loss due to bad debt. In this blog, we will discuss some of the key credit and collections laws that every accounts receivable professional should be aware of.

Credit And Collections Laws

The Fair Debt Collection Practices Act (FDCPA)

The Fair Debt Collection Practices Act (FDCPA) is a federal law that sets guidelines for debt collection practices. This law applies to third-party debt collectors, such as collection agencies, but it also applies to in-house collections departments. The FDCPA prohibits debt collectors from using abusive, deceptive, or unfair practices when attempting to collect a debt.

The FDCPA outlines specific guidelines for debt collectors, including how they can communicate with debtors, what they can say, and what actions they can take. For example, a debt collector cannot threaten a debtor with legal action unless they actually intend to take legal action. They also cannot call a debtor before 8 a.m. or after 9 p.m. unless the debtor has given them permission to do so.

The FDCPA also requires debt collectors to provide written validation of a debt within five days of initial contact with the debtor. The validation must include the amount of the debt, the name of the creditor, and a statement informing the debtor of their right to dispute the debt.

Accounts receivable professionals must ensure that their collections practices comply with the FDCPA. Violating the FDCPA can result in legal action, including fines and damages.

The Fair Credit Reporting Act (FCRA)

The Fair Credit Reporting Act (FCRA) is a federal law that regulates how consumer credit information is collected, used, and shared. This law applies to credit reporting agencies, such as Equifax, Experian, and TransUnion, as well as to companies that use credit reports to make decisions about consumers.

The FCRA requires credit reporting agencies to provide consumers with a free copy of their credit report every year. It also requires that the information in the credit report be accurate and up-to-date. If a consumer disputes information in their credit report, the credit reporting agency must investigate the dispute and correct any errors.

Accounts receivable professionals may use credit reports to evaluate a customer’s creditworthiness and to determine whether to extend credit to them. It is important to comply with the FCRA when using credit reports. Violating the FCRA can result in legal action, including fines and damages.

The Bankruptcy Code

The Bankruptcy Code is a federal law that provides a framework for individuals and businesses to seek relief from their debts. Bankruptcy can have a significant impact on accounts receivable professionals, as it can affect the ability of debtors to pay their debts.

There are several different types of bankruptcy, including Chapter 7, Chapter 11, and Chapter 13. Chapter 7 bankruptcy involves the liquidation of assets to pay off debts, while Chapter 11 bankruptcy allows businesses to reorganize their debts and continue operating. Chapter 13 bankruptcy is a debt repayment plan for individuals with regular income.

When a debtor files for bankruptcy, a stay is put in place that prevents creditors from collecting on the debt. This means that accounts receivable professionals cannot continue their collections efforts until the stay is lifted or the bankruptcy case is resolved.

Accounts receivable professionals must understand how the Bankruptcy Code affects their collections efforts. Violating the Bankruptcy Code can result in legal action, including fines and damages.

State Laws

In addition to federal laws, there are also state laws that govern credit and collections. These laws vary by state, so it is important for accounts receivable professionals to be familiar with the laws in the states where they do business.

State laws may address issues such as interest rates, collection fees, and statutes of limitations on debt collection. Some states may also require licenses or certifications for debt collectors.

Accounts receivable professionals must ensure that their collections practices comply with both federal and state laws. Violating state laws can result in legal action, including fines and damages.

Best Practices for Accounts Receivable Professionals

In addition to understanding credit and collections laws, there are several best practices that account receivable professionals can follow to improve their collections efforts and minimize the risk of bad debt.

1. Establish clear credit policies: Develop clear credit policies that outline the terms and conditions for extending credit to customers. This should include information on credit limits, payment terms, and consequences for late payments.
2. Communicate effectively with customers: Communication is key to successful collections. Establish clear lines of communication with customers and be proactive in following up on past-due accounts. Use respectful and professional language in all communications.
3. Use technology to streamline collections: Utilize technology to streamline collections efforts, such as automated reminders for past-due accounts or online payment portals for customers to make payments.
4. Maintain accurate records: Keep accurate records of all collections efforts, including phone calls, emails, and letters. This can be helpful in resolving disputes or in the event of legal action.
5. Stay up-to-date on industry trends: Stay informed on industry trends and best practices for collections. Attend conferences and seminars, read industry publications, and network with other professionals in the field.

Conclusion

In conclusion, understanding credit and collections laws is essential for accounts receivable professionals. The Fair Debt Collection Practices Act, Fair Credit Reporting Act, Bankruptcy Code, and state laws all play a role in collections efforts. It is important for accounts receivable professionals to comply with these laws to minimize the risk of legal action.

In addition to understanding the law, following best practices such as establishing clear credit policies, communicating effectively with customers, using technology to streamline collections, maintaining accurate records, and staying up-to-date on industry trends can improve collections efforts and minimize the risk of bad debt.

By following these guidelines, accounts receivable professionals can ensure that their collections efforts are effective, ethical, and compliant with the law.