No matter what you do, at some point in time, you must face delinquencies and evictions. Either way, you are normally left with an occupant who owes you money. Lien sales rarely raise enough money to pay the full amount of delinquent rent, along with sale and lien expenses incurred to get the occupant physically out the door.
It is a common misconception that selling an occupant’s unit or evicting a tenant from a unit somehow wipes out the debt you’re owed. Nothing could be further from the truth. Further, no self-storage statutes say that if you sell the occupant’s property you have to accept what you get and write off the rest. The same is true if you evict the occupant—it does not mean that you have to “walk away” from what is owed. Eviction is merely an action of ejecting someone, without some of the risks of a sale.
So, should you send your former occupants to collection? Is there a way to report your former deadbeat occupants to credit bureaus? And, moreover, is there value in doing so?
Get It in Writing
Even though your statute does not prevent you from collecting arrearages, you probably should have an appropriate clause in your lease stating delinquent accounts will be forwarded to collections. It can be simple and to the point: “In the event of a default, any delinquent accounts may be sent to collection.”
Your collection agency may also advise you to include an additional sentence stating the costs of collections are also recoverable, in addition to any amount owed as a result of the default. Check with your own lawyer or specific collection agency to assure the lease’s language is appropriate.
Next, a lot of people talk about reporting the delinquencies directly to a credit bureau. There are three major U.S. credit bureaus, namely Experian, Equifax and Trans Union. If you become a member of these firms, it’s possible to report delinquent tenants directly to them, assuming you have the proper software and ability to upload information to their databases, in their format, on a daily or weekly basis. A word of caution: Improper reporting may put you at risk for violating the Fair and Accurate Credit Transactions Act. Hence, if you are not prepared to give your full and undivided attention to credit bureaus, you should not be reporting directly to them.
Still, you can and should consider sending accounts, in excess of some dollar figure, to collections. You really have two alternatives when talking about sending your case to collection:
- Use an attorney who can do the collection on behalf of your company.
- Hire a collection company.
The risk of using a collection company is that there is a possibility that any mistake that the credit bureau makes can be bounced back to you because the credit bureau acts as your agent. Always make sure you select a collection company with well-written policies and procedures for collecting debts. Research how the company trains personnel, and ensure it has adequate insurance to cover you in the event a claim is made jointly against you and the collection company. Discuss with your attorney the advantages and disadvantages of using his services as opposed to the collection company, weighing out both sides, before deciding where to put your business.
The Odds of Collections
A certain percentage of people do not want their credit “damaged” and will pay when the collection company or attorney starts sending letters or making phone calls. This small percentage of people likely own property they’d prefer not be sold or evicted. There are also a certain number of people who will just be, for lack of another term, harassed into paying. Another set of delinquent tenants are those experiencing tough times, but will eventually get back on their feet. When they do, they will want to buy a home, car or something else requiring financing. If bad debt shows up on their credit report, it will hinder or prevent their purchase. In this case, they will likely have to settle the debt still owed you.
One way or the other, a good collections company or attorney will earn you approximately 30 percent of what you’re owed. While that sounds low, it is better than simply closing your files and letting people off the hook.
As always, this suggestion represents a change to the policies and procedures and the way that you operate your business and should be done in consultation with your local attorney, who can advise you to your statutes as well as the best means in which to send tenants to eviction or collections. Be smart and careful: Collections is by no means an easy or profitable route.
This column is for the purpose of providing general legal insight into the self-storage field and should not be substituted for the advice of your own attorney.
Jeffrey Greenberger practices with the law firm of Katz, Greenberger & Norton LLP in Cincinnati. He primarily represents owners and operators of commercial real estate, including self-storage. He is the legal counsel for the Ohio Self Storage Owners Society and the Kentucky Self Storage Association. His website, www.selfstoragelegal.com, contains his legal opinions and insights into the self-storage industry, as well as an article archive. For more information, call 513.721.5151; e-mail [email protected].