POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

SAN JUAN BRANCH

Case Studies on Collection and Collection (FIMA 30063)

Midterm Period

Instruction: Prepare an analysis for each case.

Based on the International Collection Case Studies by Jennifer Hudgens (Kreller Business Information Group, Inc.)

Case 1: Look Before You Leap

Several years ago, I had an interesting case cross my desk. I got a phone call from a
panicked credit manager asking for my help pursuing a debtor in Taipei, Taiwan. I asked the man
to tell me his story from the beginning of the sale. Apparently, the president of my customer’s
company (a small citrus grower) had met a Taipei businessman at a Taiwanese trade show. This
businessman was very convincing and said that he could buy and sell large quantities of my
client’s fruit. The now interested president spent the next day with the businessman, riding around
town in his luxury automobiles and touring his expansive warehouses. The president even spent
several hours in his impressive office, located in a wealthy part of the city. Upon returning to the
United States, the president instructed the credit manager to ship $150,000 worth of citrus to the
Taiwanese company.

Not wanting to question the president, the credit manager did as he was asked. The
Taiwanese Company was late in paying and had multiple excuses:

The bank messed up the wire transfer; they had the wrong account number; and so on.
The Taiwanese company owner called the U.S. president and told him they could not keep the
fruit on the shelf; send another shipment immediately. The president then instructed his credit
manager to send another $100,000 worth. The credit manager reminded the president that the
first $150,000 had not been paid. “If we wait for the payment, we will lose our window of
opportunity” was his response. So now the debt was 120 days past terms. At this point, the credit
manager asked our firm to check out the debtor’s credit.

When we did this through our in-country agent, we found that this Taiwanese company
was a complete sham. The office where the president had met the debtor was rented out for the
month. The automobiles were rented for the day. The warehouses that he had toured were owned
by people who had nothing to do with the subject. The president was now upset and called me
directly, saying we were wrong; he had seen all this with his own eyes. Further documentation
proved that the debtor had absolutely no assets, except for a joint profit from his brother’s market
stall stand in Hong Kong. After the debtor was called directly by the now-furious American seller,
he realized the jig was up and fled the country.

We were able to arrange payments through the debtor’s brother by appealing to his
family’s sense of honor several days before the Chinese New Year— a time when it is customary
to pay all debts. We were lucky to convince the brother to do this, as he was not liable, and the
customer really had no legal re- course. It will take years to pay back this debt, which only
represented three months of transactions. It was a huge blow to my client’s small company.

Case 2: Basic Prevention Techniques

What could have been done to prevent this whole mess is one of the simplest solutions:
Pull a current, in-country credit report prior to shipment. This may sound obvious, but it is amazing
how many collection claims pass my desk that were never thoroughly checked out. There is also
the political aspect of business (i.e., the president tells the international credit manager to ship
immediately). In these cases, I suggest that the international credit manager recommend that the
company wait for the credit report. If management refuses to wait, the international credit manager
should put the recommendation in writing, as management has a short memory when transactions
turn out poorly. Numerous international credit professionals have been blamed for a shipment
that went wrong. When asked if they pushed for a credit report, they say something like: “You
know, I wanted one, but the president (or sales, marketing) made me ship at the last minute.”

I know very well that salespeople often bring orders to your desk with de- mands for
approval in 24 hours. Of course, when you ask them when they got the order, they say “Oh, about
three weeks ago.” Right? Understand that the salesperson is living in a different world from the
one you are, a world where getting the sale at all costs is the rule of the day. You must educate
them on the importance of getting you the order with enough lead time to secure vital information.
Perhaps your boss can help you coordinate this in writing, so people are more bound to follow it.
In addition to having enough lead time, it is also important when requesting the report to use a
source who obtains the in- formation in the country of origin. I am sure you have been in a situation
where you need information right away and pull one of those database reports only to find that it
is two years old, or not even available. I cannot stress this enough: Do not base credit decisions
on old information.

Some credit professionals tell me that they do not pull credit reports but check trade
references that are on the credit application. This is a helpful part of the process but is not a
substitute for a credit report. Very few people will send you a bad reference. Often, overseas
companies that are having financial problems will pay a few accounts well and use them as
references when they are on the verge of bankruptcy. Do not be lulled into a false sense of
security. A credit report should always show you whether debtors are being sued, have collection
claims against them, have liens on their property, or have any pending lawsuits.

One customer had us check a potential client in Brazil. Apparently, his credit application
and references (even the banks) checked out. But my customer was a smart lady, and she would
not release the $1 million order until she had pulled the credit report. She wanted it fast because
she had two salespeople breathing down her neck for that deal to be approved. They expressed
great irritation that she was “holding up a big sale.” When we checked the company out, we found
it had a debt of $2 million with another local bank, one that was not on the credit application. Soon
after receiving this report, my customer called me to say that the sales reps had gone to the
president of the company and told him she did not know what she was doing.

I had my in-country agents get the tax ID number for the Brazilian company and a
statement from the bank in question that also had the same tax ID number. Faced with the
evidence that the credit manager did the right thing, the president made the sales reps apologize
to her publicly. She called and thanked me for “saving her job,” but I told her she had saved her
job by following her instincts and holding out for complete information. You can bet when raise
time came, she did not let the management forget she prevented a $1 million loss! Follow her
example and always hold out for the information you need. If things go wrong, it is not the
salesperson that gets the blame.

Case 3: Personal Debt and Personal Guarantee

A couple years ago a regular customer came to me about a debtor located on a small
island in the Caribbean who had really left the customer in the lurch. Apparently, the customer
had sold about $60,000 worth of dry food goods to a small food distributor. My customer had done
her homework and pulled the credit report first, finding that this small company was really only as
financially strong as the owner himself. The location was rented, but the owner appeared wealthy
and did a large amount of trading with several large, well-known grocery stores. My customer
made the debtor sign a personal guarantee drawn up by her legal department. This way, she
figured, if the sale went bust, she could pursue him individually.

The debtor told her company when his payment was 60 days past term that he was
declaring bankruptcy, as the companies he sold to did not pay him. My customer called me right
away; we got a collection attorney in the country to check the debtor out the next day. The debtor
had closed his doors and we could not see into the warehouse to see if the goods were still there.
The attorney then went to the debtor’s home address, but he was not at the location. Apparently,
he had given a false address. After multiple searches, the lawyer could not lo- cate the debtor.
She assured us she would ask around a lot. As a precaution, the attorney filed a motion with the
courts indicating that this man was not dealing with his debts and that we wanted legal recourse
(a judgment) if he could be found. She also pulled the legal records and found that he owed over
$300,000 to other companies, all about the same age as my customer’s debt. He had run up
debts with multiple U.S. suppliers and, when he got the goods, took the money and declared
bankruptcy.

It was amazing to find that no one had filed a legal action against him. This made our
attorney more determined, as we would be first in line to get paid if we found him. About a week
later, the attorney went to a cocktail party thrown by some friends. Another attendee was regaling
the crowd with a story of how that day she had bought several expensive items, brand new, at a
garage sale. “They were even selling their TVs and all the furniture, and the cars and house were
for sale too!” the woman continued. Our attorney asked the name of the people having the garage
sale and, to her shock, the woman gave the name of our debtor! Our attorney rushed out of the
party, ran home to change into casual clothes, and hightailed it to the debtor’s home address.

The garage sale was winding down, but the debtor and his wife were still there. The lawyer
played dumb and asked a lot of questions. “Turns out we have to leave the island very quickly,”
the debtor’s wife stated, “so we are selling everything.” The attorney asked to see the inside of
the house, and she walked through and wrote down every item of value, including the license
plate numbers on the cars. Within 24 hours, we had a Mareva injunction, which froze the debtor’s
assets and insured that he would be arrested if he sold any goods or left the island.
 We liquidated the property and got all of my client’s money back. The important thing was
that we had an original, notarized personal guarantee. This document gave us claim to the
debtor’s assets. Although this debtor had stolen money from several other creditors, we were the
only one with a personal guarantee and lawsuit, and thus the only ones that got paid. I cannot
stress enough how important it is to get a personal guarantee in cases where the financial stability
rests on the owner’s personal assets. My customer’s initial credit report showed that the debtor
was a rich man, and he was! Of course, he got rich by stealing shipments from multiple
companies, closing shop, and moving from island to island. Unfortunately, this is quite common
in the Caribbean and Florida, as well as in many other areas of the world, where tax shelters and
laws make it very easy for lawbreakers to flourish.

The homestead law in Florida prohibits the attachment of liens to a resident’s property for
any reason. This law was originally set up to protect senior citizens from having their property
taken from them prematurely by their children. Unfortunately, it makes it easy for con men to get
a number of shipments, close their company, and wait six months and start over. Their house is
in their name, and all the other assets—bank accounts, cars, and the like—under the wife’s name
or located in offshore accounts. This makes these con men virtually untouchable. It is important
to know the laws in the areas you sell, especially overseas. I have one customer who sells to
small medical clinics through- out South America. The products cost in the $100,000 range plus.
So the company gets a personal guarantee from each doctor who owns each clinic. It is my
understanding that the company rarely has a problem getting paid. With small companies such
as this, personal guarantees are a must.

Case 4: Never Give Up Originals

A customer of mine came to me to pursue a case in Mexico. The debtor resisted at every
turn with my client’s efforts and ours as well. Our collection agency in Mexico even approached
the debtor directly, when phone calls were not get- ting anywhere, and the debtor ran our agent
off at gunpoint. We immediately filed suit against the debtor, and my customer carefully prepared
and provided every document imaginable, from the shipping documents to every in- voice,
including correspondence with the debtor. The attorney called me and said this is great but of
course she would need the originals of everything. I went back to the customer; she had sent all
the original invoices to the debtor but carefully kept copies of all the documents. Could she have
the copies notarized? she asked.
 The attorney told us that copies would not be accepted in the courts, we had no chance
to collect, and to close the file. My customer was very upset. This is common procedure for courts
all over the world. Many debtors will claim they never got the goods. When only copies are
provided to prove otherwise, courts feel that these could be fraudulent. (Indeed, many people do
draw up false invoices to try to press payment for goods or services never rendered.) Although
some countries accept notarized copies, it is becoming much more prevalent for court systems to
demand originals. In Latin America, especially, this holds true. Always keep the originals and send
customers copies. Pink and yellow carbon copies often do not count as originals, either.

One side comment. Always have special terms, such as “interest due on late payments,”
or “the debtor must pay all collection and legal fees,” printed at the bottom of your invoices. It is
also acceptable to print the terms of doing business with your company on the back of the invoice.
A signed contact between the two parties of the companies’ terms is ideal.

To collect interest or other fees, if it is not on the invoice in a lot of countries, it cannot be
added to the debt in a court of law. Asking to have this added to the bottom of all your invoices
can save you a lot of grief in court later! I had a gentleman recently tell me, “But they knew the
terms of the sale and fees, be- cause it was in our sales literature.” It may have been, but if it is
not on the in- voice or in signed contract form, you cannot make it stick. Some people say “Well,
it is our company’s policy to send the original.” On these large international dollar deals, do you
want to forfeit your chance to sue? Having the originals can make a difference in court!

Case 5: Salespeople are Not Collectors

So many times, I have had customers tell me about terrible collection account problems—
large exposures owed, over a year past due, and so on. When I ask them what they are doing to
collect, they say, “Oh, we have a great salesperson who travels there all the time, who said he is
going to talk to them about it.” When I ask when the salesperson last said he would follow up, it
was usually several months ago. It is important to look at things from the salesperson’s point of
view. Salespeople are great at what they do and do travel overseas and have direct contact with
the debtor. No one questions that this is a benefit. Regarding handling servicing issues and
working out initial payment plans, the salesperson is well equipped to help you.

However, the salespeople have a very different mind-set from yours, and different
objectives. Salespeople are under constant pressure to sell, sell, sell. Salespeople do not want to
do anything that will lose a customer. Oh, sure, they will ask to get paid, but it is done very
casually. No salesperson is going to risk angering a long-time customer. Often, sales reps tell the
credit manager who presses for payment to hold off calling the debtor and let them handle it. They
do not want the credit manager upsetting a source of future business. The problem with this
scenario regarding collections is that often claims become dangerously old and the chance to
collect is extremely low or lost. I have had credit managers tell me that sales reps will not release
a file to them to collect, vehemently arguing that they are handling it. Not only do they not want to
lose future business, but also, they do not want to lose the commission from that sale. If they
collect it, it is better for them.

I highly recommend putting a plan in place that if a debtor is x days old, the account
automatically goes to the credit manager. Files have crossed my desk where the account was on
hold two years, due to sales not wanting to let it go. By the time we were able to pursue the
company, it was bankrupt. Also, the ad- vantage of having a third-party source pursuing the debtor
is that a collection agency has no emotional stake in the case and can be a lot tougher. Debtors
are much more likely to take notice of a collection agency, which can sue them and destroy their
credit rating and local reputation, than their good friend the sales agent, whom they know wants
to keep them as a customer. I speak from experience, as I am in sales for a living. The other
important thing to keep in mind is setting deadlines on when debts will be pursued and sticking to
them. I have been to countless credit manager’s offices over the years and personally seen the
three-feet-high stacks of accounts they were trying to pursue.

It is easy to hand off the international accounts to the in-country agents and leave it up to
them. Salespeople are great for those initial contacts to retrieve money; many are quite effective.
Just do not let them sit on it for months and months. Some salespeople get paid their commission
only if the account is paid in full. These sales reps are much more motivated to get the money
back. But even they should be given deadlines; otherwise, you lose control of the collection. Also,
once a file is placed for collections with an agency, make sure to tell the sales reps to stop
pursuing the debtor. Many times, debtors will get that first demand letter/call from the collection
agency and, to stall payments and stop being pursued, they call the sales rep, saying, “Let’s work
something out.” Of course, it is tempting for sales reps to do this, as getting their commission is
the most important thing to them.
 The problem is, if the sales rep starts working with debtors after the account has been
placed with an agency, the agency loses control to collect and debtors play the same games they
have for the past year, and you are back to square one. Not to mention you now have an angry
collection agency that has rights to the claim. It is important to set up boundaries with sales reps
before the col- lection gets to this point. I would also recommend that once you pull an account
from a sales rep to be collected, send a final demand letter to the debtors your- self, with a specific
date of when you expect to be paid. They may pay, but if not, and if that date comes and goes,
then place the account with a collection agency immediately. Remember, if debtors have any
intention of paying and want to continue doing business with you, they will not ignore a final
demand letter. In closing, boundaries set up front between sales and credit can provide much
better results. International credit managers should sit down with the head of sales, hear that
person’s side, explain theirs, and then if possible, set a policy. Sales reps will have a policy to
refer to as the standard when emotions are running high.

Case 6: Go to the Source

It is very important to use a collection agency that has local attorneys that specialize in
collection law based in the debtor’s country. Many collection agencies claim that they collect
overseas, but when you place the file, all they do is send a letter from the United States (in English)
demanding to be paid. Now, if debtors have ignored you, why would they pay someone who sends
them a letter from the United States? This is no threat. However, having someone based in that
country who speaks the language, knows the customs and laws, and can virtually show up on the
debtors’ doorstep, is much more compelling. Not only do debtors feel intimidated that you have
followed them to their turf, but they are also concerned that their local reputation will be harmed.
In the United States, use an agency that has a collection attorney in every state, as each state’s
laws vary.

Let me close with an amusing case that illustrates my point. I had a customer who sold
frozen fish and seafood. He came to me with a collection case in Ger- many, where the debtor
was refusing to pay for a large shipment of red snap- per. When our collection agency asked him
why he would not pay, he explained that his end user was an Asian seafood chain that did not
want the fish, as they “were the wrong gender.” Our agent was quite confused and asked for the
debtor to explain. Apparently, Asians want female fish, as they are more tender. The males are
“too tough.” The debtor insisted he wanted this cleared up as much as the creditor and that he
had the entire shipment sitting deep frozen in dry ice in his warehouse. We relayed this to our
customer, who said this was all a ridiculous story to avoid payment, and to sue. We involved our
local attorney, who, per procedure, approached the debtor to see if an amicable settlement could
be reached. When the attorney got to the debtor’s warehouse, he saw the shipment for himself
and saw that it was all there, as the debtor had said. We shipped the goods back and my client
resold his (male) red snapper to his less discriminating American clients. If we had not had an in-
country representative, the case could have been a long, drawn-out battle from the United States.
Instead, it was all cleared up on site in one afternoon. Be choosy in the firm you select. Ask a lot
of questions, including:
 How many phone calls will be made versus letters sent?
 How often will you receive status reports?
 Does the agency have people who work the debtors’ hours, speak their language, and
know their laws?

These things are all important to know up front.

I hope these tips are of help to you in your business dealings overseas. Always remember
to thank the powers that be for all those deadbeats out there— they keep all of us in
business.