Predictably, the current economic downturn has increased requests for long-term payment plans from customers whose accounts have gone past due. Requests for payment plans are nothing new to credit and collections professionals. It is the frequency and terms of the requests that have changed.

The norm for granting such a request was that the debt be repaid within no more than three to six months. Currently, though, the number of requests for payment plans extending longer, even up to one year, is increasing significantly.

A creditor’s decision to accept an extended payment plan should be based on a variety of factors, and implemented only after a careful evaluation.

Reasons for Requesting Extended Payment Terms

It’s no secret that virtually every sector of the economy has been negatively affected by the current crisis. Creditors are faced with customers who have a good credit history, but are now finding it impossible to pay invoices on time. Debtors requesting payment plan are generally not able to meet their financial obligations to their suppliers. In the hope of maintaining sales relationships with their creditors that will see them through the weak economy, they seek to pay down debt in smaller portions and over longer periods of time.

Location of Creditor and Debtor

Normally payment plans are granted by a creditor under the condition that the full amount be paid within three to six months. That time frame is not arbitrary, and we generally do not recommend our U.S. clients accept plans longer than six months from U.S. debtors.

Payment plans that extend longer than six months lose value because of the amount of resources and manpower required in monitoring the plan. In addition, US-based creditors can generally file a lawsuit and obtain judgment against a debtor within 3-6 months.

When the creditor and debtor are located in different countries, however, the time frame and costs to pursue a lawsuit increase dramatically. In those instances, it is likely to take at least 6 months or even several years, to obtain a judgment and execution. Creditors in this situation are faced with the prospect of accepting an extended payment plan, writing off the debt, or pursuing the debtor through legal channels at great expense. Often, accepting an extended payment plan is the best choice.

Financial Condition of Debtor

Creditors considering granting a request for an extended payment plan should do some homework on their customer. This can be as basic as obtaining fresh credit information from credit reporting agencies and/or participating in industry credit groups. Look for signs that will tell you if the debtor is facing immediate insolvency, or if other creditors are closing in on them. Don’t be afraid to ask the debtor questions about their financial situation, and what measures they are taking to improve it.

You can further mitigate your risk by requiring a debtor to sign a promissory note with clauses in place that will award judgment in the event of default or, by asking the debtor to sign personal guarantees. (Important: When requesting a personal guarantee, do not have the debtor fill in his title. As soon as he adds his title, what was supposed to be a personal guarantee, becomes essentially worthless.) Taking these steps will help to securitize your interest and will also ensure that the debtor will be more likely to pay you before paying unsecured creditors.

Cost Effectiveness of Extended Payment Plans

Extended payment plans might seem like a good solution to a bad situation. However, there are costs to monitoring and managing an extended payment plan.

Creditors must have resources in place to monitor the plan. This includes a mechanism to remind the debtor of an upcoming due date, and follow-up calls if a payment isn’t made on time. If a large volume of customers are on extended payment plans, the drain on credit, collection and accounting staff resources could have a negative impact on revenue.

It is critical, therefore, that you take the necessary steps beforehand to determine the costs and benefits of accepting extended payment plans, and to securitizing your interests whenever possible.

Conclusion

Credit and collections practices are changing. Professionals in that field are confronted with tough challenges. Accepting extended payment plans that would have been unheard of ten years ago, has now become a common decision faced by every credit professional. With careful analysis and measures in place to mitigate risk, extended payment plans can help both creditors and debtors at a time when maximizing revenue and reducing costs are more important than ever.

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This information is provided by ABC-Amega Inc. -- providing 1st and 3rd party commercial collection services since 1929, and collecting in more than 200 countries worldwide. For further information, contact info@abc-amega.com.

Riki-Lee Ritz received a B.A. in French language and literature and is a bilingual senior collector and Asst. VP in the international department at ABC-Amega. She manages the international department, as well as handling claims in Europe and francophone countries in Africa and the Caribbean.