Credit guru Thea Dudley has spent more than 30 years in LBM credit management. Now she's here to answer your credit and collections questions. Got a question for her mailbag? Contact Thea at [email protected].

Dear Thea,
A customer recently closed their doors and told me they could not pay me. They said I could sue them, but it would be a waste since there is nothing to get. I asked if they were filing for bankruptcy and was told they didn't have the funds to file. I don't want to spend the money to sue them, but just taking their word that they are broke and closed seems like I'm giving up.
Signed, Cashed Out in Kansas City

Dear Cashed Out,

To sue or not to sue, that is the question. Shakespeare just doesn't seem to cut it when it comes to money. Money may not be the most important thing in life, but it comes pretty close to oxygen in the "gotta have it" scale.

If money makes the world go 'round, that is especially true for business cash flow. Manufacturer makes the product, distributor purchases the product, distributor sells the product to the contractor, and contractor gets the product to the end user. At every stage, everyone wants—no, expects—to get paid. If any one cog in that machine breaks down, the whole process suffers. Or should I say, someone eats the cost of that unpaid product and takes the hit.

IF the end user does not pay the contractor, the contractor can't pay the distributor, the distributor can't pay the manufacturer, and the manufacturer can't pay for the raw materials and... well you get the picture. Someone, somewhere in the food chain has to absorb the cost of the lost. Which means some company has to make it up somewhere. Less people, less benefits, less of whatever. Someone at some point has to absorb the cost of whoever is the pothole on this road to capitalism. To be clear—and because I am biased—it usually is the supplier that eats the product cost.

In regards to your broke and out of business customer, Ronald Reagan said it best: Trust, but verify. I am not implying your customer is not telling you the truth, as he believes it at the time he is telling you, BUT can you confirm the company is actually closed and out of business? Go by the place of business and check it out.

Call the customer back with a few questions. In regards to being out of business: Do they have any work they are finishing up? Do they have any contracts or work upcoming? Yes, I know that sounds stupid. However, you would be surprised to find out what some people call "out of business."

"We are just finishing up some jobs, then we are officially out of business." If what he told you is legit, he won't mind answering a few questions. If he gets uppity, well, dig deeper, my dear, and all may not be what was purported.

Ask for financials. Get them to prove to you they are bankrupt on paper. The usual comeback is either "We don't have the financials" or "My attorney won't let me." Really, they won't let you? Why? Is the attorney afraid someone will figure out there is no money? That is top secret stuff.

Harsh as it sounds, but if they can't prove it, there is not choice but to file suit immediately or turn the account over to a collection agency to wreck havoc. Keep in mind that, as the credit manager, you have a fiduciary duty to the company. If you are declaring the account DOA and sending it to the bad debt graveyard, you dang well better be sure you have stake it through the heart to confirm it is officially dead.

We started with Shakespeare's words, so let's end with them. "Words payeth no debts." Check it out.