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writing off bad debt / getting initials on contract / mechanic lien v UCC1 January 18, 2018

KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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writing off bad debt / getting initials on contract / mechanic lien v UCC1
 January 18, 2018
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writing off bad debt
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Ken,
    I have a question on bad debt write off.  I have a customer who is paying me monthly maintenance and is now changing software companies.  Instead of crediting off the balance of their account, I was wondering if I can write off their balance as bad debit for tax purposes.  If yes, is the amount of the bad debt from the time they left or the remaining balance of their contract to the term. 
    I have the same issue with a customer who sold their accounts.
Richard
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Response
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    Some customers don't pay and leave you with the option of commencing collection proceedings or just forgetting about the debt and move on.  If you have our Standard Form Agreement we will support your collection efforts, at least through the arbitration process [and hopefully any collectible amount will be recovered by then].  If you want to engage us for collection matters contact our paralegal Kathleen Lampert at KLampert@Kirschenbaumesq.com or 516 747 6700 x 319.
    As far as "writing off" the debt, you mean taking a tax deduction off your declared income tax.  You can't take a write off deduction unless you have already declared the account receivable as income.  You would have done that only if you are on an accrual basis.  That means you treat the accounts receivables as income once you bill it.  If you're on a cash basis, which is what most of you are on and all of you should be, you declare the income only when you receive it.  Since you never receive the bad debt, you can't write it off.
    Think about sending it my office and see if we can turn it into good debt.
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getting initials on contract
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Ken
    We purchased the Standard Residential Security Agreement and I have a question.  
I have a customer refusing to initial item 22 & 23 on page 4 concerning liability and legal action. 
Any suggestions on how to handle this?  Do we terminate service? 
    Any advice would be greatly appreciated.
Thank you.
Jill
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Response
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    The updated Standard Form Agreements have provisions that require the subscriber's initials.  These provisions are the ones that subscribers most frequently challenge as unfair, unconscionable and unenforceable, and in some cases the law in the jurisdiction requires the provision be conspicuous.  Getting an initial of the subscriber would count as conspicuous unless the statute is specific in how the provision is to appear in the contract. Even then getting an initial would help with enforcement.
    The problem with not getting the initial is that the subscriber would have a better argument that the provision was missed, or worse, that you diverted attention away from the provision.  
    It makes no sense that a subscriber would sign the contract but refuse to initial or sign the separate provisions.  If you do get a pain in the butt like that, then I suggest you add to the contract or in the Schedule of Equipment and Services [and in the Disclaimer Notice] that the subscriber refused to initial or sign paragraphs 22 and 23.  
    An unsigned contract is not worth anything and you shouldn't take a chance that an important provision in the contract may not be enforced.
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mechanic lien v UCC1
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Ken:
    We have a copy of a UCC1 which we got from you along with contracts a few years ago. I know we need to update the contracts, but I have a question now.
    We have an account with over a dozen different properties, each is its own LLC. They are 60 days behind, but have a new management firm handling their payables. So far it looks as if they will pay going forward, but the firm itself is responsible for payments prior to the new firm handling bills.
    One of the accounts past due includes the balance of installation charges. I am not sure whether to file a UCC1 or a mechanics lien – or both. There appears to be a difference with a mechanics lien requiring personal service. (in NYC).
    How much would it cost to have you file at least this one property for now. We may also file against the rest, or institute a lawsuit if they refuse to pay. It’s a fairly large suit combined, low six figures.
Thanks,
Mitch
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Response
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    Filing a mechanics lien is a good way to get the attention of the owner, but it's a costly procedure to file and it's very costly to foreclose the lien.  It's very unlikely that an alarm company would have a viable right to file a mechanics lien, let alone collect on it.  Here are a few things to consider.
    A mechanic lien can only be filed if the contractor has improved real property.  Since the Standard Form Agreements make it clear that the alarm system is and remains "personalty", does not become part of the realty, the work is not an improvement to the real property and is not eligible to support a mechanics lien.
    But let's assume the "personalty" wording is stricken from your contract or not there at all, and you install what arguably could be considered a permanent fixture in the building.  Now you have to file a notice of mechanics lien within the statutory time period, and it's a short period and it starts to run the last day you performed the work.  In NY it's 4 months for residential and 8 months for commercial.  Before you decide to file you have to ascertain the exact name of the owner and property address, legal and common address.  The cost to file is several hundred dollars and it has to be served on the owner and whoever hired you.  The lien is good for one year.  Then you either have to extend it or start a foreclosure action.  You have to name anyone who owns the property or has a lien superior or subordinate to yours.  It's a costly lawsuit.  You would take the filing of a mechanics lien route only as a last resort measure, and unless the property has sufficient equity you are not going to recover.  
    If a tenant hires you or an owner who in middle of construction and getting construction loan advances, sometimes the filing of a mechanics lien will encourage payment or resolution because the mechanics lien is always a violation of the lease or loan documents.  I've had some success under these circumstances.
    The UCC-1 is easy to file and inexpensive, however it's only a lien on personal property, not real property.  It can sit on record for 5 or more years and if the debtor [that would be the subscriber who owes you money] looks to sell or re-finance the personal property, or even real property where the personalty is installed, it might hold up the deal; you might get paid.  If the subscriber goes into bankruptcy you would be a secured creditor, at least as to your collateral.
    Protecting yourself with a lien, mechanics or UCC-1 are definitely in the legal arena.  You should engage counsel to handle it.
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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