collections, write-offs and developing a strategy June 25, 2018

KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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collections, write-offs and developing a strategy
June 25, 2018
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collections, write-offs and developing a strategy
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Ken,
    I see company owners write to you about customers who won’t pay.  You correctly advise them that most of the time it isn’t worth pursuing collection.  We typically advise our tax clients to simply write off the debt, take the tax deduction, and move on.  A recent tax court ruling may change this a bit.  The Tax Court ruled in Sarvak v. IRS, (T.C. Memo 2018-68) that the taxpayer most provide objective proof that a bad debt became worthless in the year that a deduction was claimed.  In the Ruling the Tax Court stated that, “[Sarvak] failed to present any evidence that the alleged debt was objectively worthless in 2011,” “He testified only as to his subjective belief.”  It went on to state that the Taxpayer “did not describe any actions taken to try to collect the alleged debt…” 
    I would encourage security companies with past due receivables to talk to Ken and his associates about developing a collection program.  It may not be worth the time and money to run down to Small Claims court every time that a customer skips out on a $32 monthly monitoring agreement, but you may lose your tax deduction if you don’t at least have Ken’s people send them a collection letter or two to evidence “actions taken to try to collect the alleged debt.”  Maybe the customer with the $2,000 past due service ticket will take you seriously when Ken’s firm threatens them with a law suit.  Who knows, you may actually collect on few of these and not even have to worry about the deduction.
Mitch Reitman
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Response
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    When you, and everyone else, enters into a contract, you and everyone else, expects the other party to perform, as long as you do.  You made a deal, expected a profit and expect to receive what you bargained for.  Not everyone ends up on the nightly news "shame on you", and certainly not alarm subscribers who decide not to pay their bill.  More likely it will be the alarm company who has the audacity to engage in collection practices because the customer breached the alarm contract.  
    You do have to learn to pick your battles.  It could be that not every subscriber is worth the time or expense to engage in collection practices.  Collection practices, by the way, begins with phone call or two, then a reminder or more forceful letter, and progresses to sending the "collection" case to K&K's collection department [or your attorney's office].  I do not recommend any "collection agency', a topic for another article.  
    When to cut bait and run and when to sue.  That's a question.  Here is advice I've consistently given:
    If you are providing nationwide service, and have a nationwide customer base, where you are providing only monitoring service, it's not likely that pursuing a defaulting subscriber will make sense.  One even frivolous complaint to a consumer agency and you'll be sorry you got involved.  Reporting the subscriber to a credit reporting agency might work, and it might backfire.  Better to stay ahead of these subscribers and just cut off service.
    If you have a sufficient number of defaulting subscribers it probably makes sense to pursue the collection cases.  Once the contract is accelerated, interest, legal fees and collection costs are added together the case may be much larger than you originally thought.  Handled right [and that means by a law firm with a 40 plus year track record collecting for the alarm industry -- that would be Kirschenbaum & Kirschenbaum - your collection department [non-legal] can work together with K&K's collection department [legal] and you can expect good to excellent results.  My unscientific and unverified statistics are that about 33% to 50% of the cases settle quickly or before a trial or hearing.  Our arbitration procedure has helped speed up this process because the cases get started quickly and move quickly.  Another 33% may end up paying some or all of the judgment.  On average you can expect to recover a judgment for the full amount demanded, including legal fees, and that's across the board - court trials or arbitrations.  Occasionally there will be counterclaims that need to be defended, though they are almost always frivolous; some are covered by your E&O carrier.  
    Mitch mentions writing off a debt and then taking a deduction.  Careful with that.  If you are on an "accrual basis" you are writing off the debt and taking the deduction.  And yes, your accounting will usually want a letter from your attorney that collection efforts were futile.  But most of you are on a "cash basis" and therefore, if you just forget about the defaulting subscriber and the debt owed, you can't deduct it, because you didn't take it as income in the first place.  I'll save Mitch the time of explaining the accrual and cash basis accounting methods, and you must be one or the other.  Cash basis is easy - you book income when it's received, payments when they are made.  Accrual is quite different; you book your income when it's contracted for and debt when it's incurred, no matter when paid.  So if you enter into a 5 year contract for $30 a month in July 2018, you book income of $1800 in 2018.  Let's say that customer defaults in July 2019.  There are 48 months left on the contract.  You can write off $1440 on your 2019 tax return, provided you can show the debt is not collectible.  
    There is a certain level of commitment on your part to get involved in collection matters.  If you have very few defaulting subscribers you probably don't have much experience with collection matters and also you probably don't have employees assigned to an internal collection department.  While you might get hot under the collar when a subscriber defaults, it would be a good idea to let your temperature cool before deciding to sue.  You may not want to jump in deep water before you're sure you can swim.
    On the other hand, if you 5, 10 or more, defaulting subscribers, it makes sense to send them to collection.  Trying to handle collection in house makes sense only in a very limited way - a phone call and one letter; no more than 30 day delay.  More involvement from your internal collection personnel and more delay is only likely to impede the success your outside collection lawyers will have.  If you have our Standard Form Agreements K&K will accept your collection matters.  If you don't use our contracts, don't use our collection services.  Why?  Because using our Standard Form Contracts [not more than from 3 years ago if outside NY, and 10 years ago if in NY] significantly increases your chances of having a successful collection matter.  Since we work on contingency, our fee depends on success; it matters what contract you have and what it says.  
    To get started with Kirschenbaum and Kirschenbaum's collection department please contact Paralegal Kathleen Lampert at KLampert@Kirschenbaumesq.com or 516 747 6700 x 319.  To get our contracts or update your contract contact Contract Administrator Eileen Wagda at EWagda@Kirschenbaumesq.com or 516 747 6700 x 319.
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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301
ken@kirschenbaumesq.com
516 747 6700
www.KirschenbaumEsq.com