Debt Collection In The Construction Industry For Subcontractors
Why Liens Are Often Insufficient At Debt Recovery In The Construction Industry For Subcontractors
In the past, many subcontractors and companies in the construction industry relied on liens to collect unpaid debts. This solution is insufficient for debt collection for the construction industry. Why are liens beginning to fall short in the construction industry?
The international monetary fund has recently projected global GDP to decline by as much as 5% in the second quarter of 2020. Such a substantial decrease in global GDP would make it is by far the most significant economic decline in the last 100 years, yet many people are still wondering exactly how this might affect them?
Well, one industry that has begun to experience some hard-hit of facts is the construction industry. Many companies and subcontractors have experienced difficulty collecting construction debt payments on accounts receivable, with up to 60% of companies reporting they have had a year-over-year increase in accounts receivables going unfunded.
Mechanics Liens
In the construction industry, a mechanics lien will be placed on a property when work is done to improve the property before payment is received by the person or company providing the labor and materials. It is a type of security interest tied to the property title that can include provisions for real property and personal property.
The specific laws that regulate how mechanics liens or construction liens will vary depending on the area that you live, but they all suffer from similar shortcomings. While they do allow some legal recourse for subcontractors to pursue debt recovery when clients fail to pay, these proceedings are often more expensive than they are worth. The main purpose of a mechanics lien is to guarantee that the first people compensated in the event of a catastrophe that results in the company’s liquidation are the workmen.
Short Expiry Period:
The contractual terms must be agreed upon by both parties, but they usually involve some statute of limitations that place a time constraint on when the mechanic’s lien may be enforced.
While the exact terms will vary from one agreement to the next most mechanics liens will include a clause that allows for the forgiveness of the debt after the expiration date of the mechanic’s lien. Many times, these expiration dates are 90 days or less, with many being only 30 days long.
Lack Of Payment Unless The Lien Is Sold:
When there is a claim placed against the lien, the property is placed on the market, and the claimant is entitled to whatever debts they are owed whenever the property is sold, and payment is collected on the sale of that property. Often, this leads to an easy process for quick debt recovery, but if the property does not sell immediately, then you will not get paid quickly.
If the property is in an undesirable location, it can take months or even years before it is sold. This can be much longer than most subcontractors are willing to wait to get paid for the work they have already completed.
Foreclosure Process Is Costly And Often Unsuccessful:
If a mechanics lien is filed, it will force the foreclosure of the property if it is on real estate unless the defendant is capable of paying for the claim out of their pocket. Unfortunately, if they do not have the cash on hand, you will need to wait for the home to be foreclosed on, which can be an incredibly costly process that may leave you with less than you had before.
If there is not enough money from the foreclosed sale to pay all of your client’s debt, you will still be left without recovering all of your accounts receivables. To top all of this off many times foreclosures do not and then a successful sale anyways, which means that any money spent on the foreclosure process was entirely a waste.
Liens Tie Up Property
When a lien is placed on a property, then it will become impossible for the property to be sold. If the property is sold and a new owner takes ownership of the property, they immediately take responsibility for any active liens that are on the property. Most of the time, sales will be blocked if a lien is active on the property, and anyone interested in purchasing the property will be able to easily see whether or not there is an activity on the property by merely performing a title search.
When you perform a title search, any active liens will be included with the results for the title of the property at which you are looking.
Alternative Solutions For Efficient Debt Recovery In The Construction Industry
Subcontractors have been struggling since they have had declines in new sales and an increase in the failure to pay for previous sales. With liens beginning to fall short in their promise to help recover money owed to laborers, many are beginning to wonder where else they can turn? Buckling, there is another option that can help to reclaim your compensation successfully.
Third-Party Debt Collection Agencies
Third-party debt collection agencies are often a much more effective solution than any mechanics lien. These companies have teams of dedicated professionals and only work to help recover your money for you.
Flexible Payment Plans For Clients
Mechanics liens can be difficult to enforce because they force the sale of a property. Third-party collection agents can create flexible payment plans, so even while you may not receive your full compensation, they will immediately be paid starting right away.
Reliably Collect Payments On Time
Most third-party debt collection agencies will show you their debt recovery rate and on-time payment rate. This gives you confidence that you will collect all of your money, and it will be collected on time.
Better Recovery Rate For Partial Recoveries
Liens often fail to collect, and when they do, they do not collect anything for you at all. Although third-party collection agents may not recover the entire amount, they are much more successful at collecting partial payments for subcontractors in the construction industry.