There's an old adage out there that is due for a revision. "The more
things change, the more they stay the same" is actually no longer true in
the context of that inescapable business dark cloud known as the "lease
default, investment-gone-south, and/or bad debt."
In financial circles these days, instead of hearing the instruction "go out and collect our money," we hear all too often "if you can't collect it, find a way to write it off!" Quite a change from old school thinking!
Those of you more seasoned professionals may wonder "how did things get this way?" You have a valid question. The answer of course is even more surprising and actually contrary to many business issues these days, we can actually trace the one cause that exists for this latest and (perceptibly) most devastating blow to creditor rights.
In short, the credit world has been turned on its ear primarily because of identity theft, and secondarily the response by the U.S. Congress to thwart what has been easily classified as the fastest-growing, most widespread crime in history. Many believe that identity theft is the black plague of modern times and except for some fairly swift moving legislation, it could actually have wiped out the entire electronic worldwide financial system if left unchecked.
The problem that comes into play however for creditors, lessors and investors stems from a unique anomaly in that the information needed to help a creditor complete the sale is identically the same information sought by identity thieves to exact their craft on unsuspecting victims.
Just as with the need to learn of bank accounts, stock portfolios and other liquid assets upon which this scourge will electronically manipulate, so exists the legitimate need of the creditor for the same information upon which to legitimately execute a collection effort, TRO or levy once a court judgment is received. That makes the creditor an unwitting accomplice in the eyes of Congress and ultimately the victim of the laws designed to protect the American consumer from identity theft.
Just as the passage of Gramm-Leach-Bliley Act and the updating of the Fair Credit Reporting Act via the Fair and Accurate Credit Transactions Act and other privacy statutes preclude identity thieves from gaining access to your financial information, at the same time legitimate creditors are precluded from access of the same kind of financial information seriously thwarting creditors‟ ability to collect the debt other than by the determination of assets and liabilities via public records.
This sets up a huge stumbling block on the road to the completion of the sale, IF the lessor, lender or investor is unsavvy, and has not paid attention to an unlikely source for the ultimate relief of an uncollectible lease default, "investment-gone-south" or simple bad debt .
For purposes of this article, your bad debt is defined as follows:
Now when discussing #1 above, this course of action is usually referred
to as a "litigation determinant" report, or a report designed in concert
with your independent knowledge to lead you to the determination as to whether
or not to charge-off or litigate the debt.
It is usually supported by the discovery of public record based asset(s) which may include real property, vehicles, vessels, aircraft, other businesses; and is "netted" by a corresponding determination of the offsetting liabilities such as mortgages, competing creditors (including tax liens, judgments, competing litigation, etc.) providing a thumbnail net worth position of the debtor.
#2 is the worthlessness or deductibility part in the title of this article!
Now enter the Internal Revenue Service. The IRS Publication 535 entitled, "Business Expenses," Chapter 10, Section 5; subcategorized as "When a Debt Becomes Worthless," states:
This means that the IRS has given creditors a wonderful way out of a
bad debt by no longer requiring a creditor to go through an expensive court
process in order to obtain a worthless judgment previously required to legitimately
write-off the bad debt.
Remember what it says in IRS Pub. 535:
Pure and simple it means that as long as you perform "Collection Due
Diligence‟ in the form of Lease Default Reports, Contract Due Diligence
Reports and/or Investor Due Diligence Reports to determine if a debtor is
insolvent, and the debt is determined to be worthless, you NO LONGER have
to go to court to prove up the bad debt, and that is easily accomplished
through a decent Collection Due Diligence report in any of the styles cited
This also means that the landscape of the pursuit of assets in satisfaction of the debt has changed forever, since you now only need to show if there would be sufficient attachable assets less liabilities upon which to determine if the debt is worthless. Naturally, if you do identify attachable net assets upon which to levy, your decision to pursue more aggressive collection efforts is justified and the course is charted by the same report.
This fact combined with the lack of availability of banking and financial (liquid asset) information as a result of the Financial Privacy laws other than in the public record (UCC filings) and no easily available credit report, means that the determination of the worthlessness of a debt can be reported by a third party through research of the public record.
And, in terms of what the IRS looks at as viable due diligence, third party is key and tantamount to an easy charge-off.
So while you may wish to have the scourge of identity theft dispatched in favor of your ability to collect the debt, you may thank the IRS for recognizing that the maze of privacy laws has seriously stifled creditors to the point that all you need to do now is determine the worthlessness of a debt in order to write-it off.
The good news for creditors is that rather than spending $5 to $10 grand and a lot of wasted time to get a worthless court judgment, you can spend 5 to 10% of that figure to determine if you should pursue further efforts to collect it -- or write it off.
Finally, relief for creditors.
For a .pdf or copy of IRS 535, please go to the following website:
* What you MUST know about the use of Consumer Credit Reports and "Ancillary" Credit Reporting Products.
As to personal guarantors, recently, the U.S. 9th Circuit Court of Appeals upheld new language in the FACT Act, which clearly defines the word "credit". As a result of the new definition, the position that is being advocated is that the "collection of an account" is a permissible purpose to obtain a consumer report only when the collection is in connection with a credit transaction.
Simply put, this means that, unless a personal guarantee was obtained, and a Consumer Credit Report was authorized and obtained prior to issuing the credit, or securing the lease and/or tenant improvements a credit report may NOT be obtained for collection purposes. Simply put, unless a copy of the original credit report obtained prior to the issuing of the credit or guarantee is provided along with a copy of the original signed (appropriate) consent (obtained at the outset of the credit qualification process), a collection credit report cannot be included in this report, as a matter of law.
** What you MUST know about "Bank Account or other "Liquid Asset" Searches
Let's remove the mystery surrounding locating bank accounts which are only discoverable through publicly available Uniform Commercial Code Searches, the ONLY legal method available under Federal and State Laws. In the event a bank is found through legal means, attached to the report will be suggested language for use in Writs of Execution and Restraining Orders. In the case of a business bank account search, sometimes banking associations are revealed through the Business Credit Reporting service utilized in the report and thus writs may be placed on the discovered institutions. Business bank accounts are "quasi-exempt" from the protections afforded Consumers (Individual account holders), and are thus available sometimes through an instruments such as a Uniform Commercial Code Financing Statement and/or a business credit report, however the methods of obtaining those accounts ("sourcing through a bank contact, and/or 'pretexting') are still highly illegal under the G-L-B Act.
*** A Word About Legal/Case-Law Database Information Providers
As law firms seek new ways to increase legitimate billable hours, and as a natural outgrowth of the advancing support professions, such as paralegals, and with Shareholder meetings more often discussing ways to improve the bottom line, law firms are easily lured into the opportunity to have their paralegals and legal assistants perform once "investigator-traditional" services, such as asset searches, locating people for service of process, etc. This phenomenon has been spurned quite effectively by responsive marketing programs asserted by the major on-line case law houses, which provide "one-stop shopping" for law firms on the go.
Not a day goes by when we don't hear:
"please conduct a collection due diligence for us, we have spent thousands of dollars in time and fees clicking our favorite case law site, only to end up with information we don't feel we can depend on, and which we can't in good conscience bill our client for" Sound familiar?
About the author:
Thomas C. Lawson, CFE, CII lives for the purveyance of "quality-yet-controlled" legally reportable information. As a Certified Fraud Examiner, and Certified International Investigator Mr. Lawson is the longest serving member of the Editorial Review Board of FRAUD Magazine, a Life member of the Association of Certified Fraud Examiners a founding member of both the National Association of Professional Background Screeners and the Public Record Retriever Network; a Friend of The Institute for Real Estate Management, Former Chapter Chairman of the Orange County Chapter of the American Society for Industrial Security, Professional Member of the Professionals in Human Resource Management Association, and the Society for Human Resource Management, and is the Founder & CEO of APSCREEN, the nation‟s oldest, continuously operated factual employment screening firm, with divisions specializing in tenant qualification, due diligence, fraud examination and expert witness testimony. Lawson was a civilian research contractor of record for the Charles Keating/Lincoln Savings matter, the drafter of the employment screening and "asset search‟ guidelines for the civilian asset disposition contractor of record for the Resolution Trust Corporation and has appeared in many national television and radio shows, as well as has been published extensively throughout his career and can be reached through www.APSCREEN.com for presentations.