If you own or manage a business in California, you may have heard of the Rosenthal Act. You may be wondering: Do these strict collection laws apply to business debts?
Generally, the answer is no. However, recent changes to the law now cover some business-related debts. Understanding the scope and limitations of this Act will help you collect funds safely without accidentally breaking the law.
What is the Rosenthal Act?
California has its own debt collection law called the Rosenthal Fair Debt Collection Practices Act (RFDCPA). This law gives consumers stronger protection and prevents debt collectors from using abusive tactics, including:
- Harassing people with constant phone calls
- Lying about how much a person owes
- Threatening to take property without a court order
Usually, the law protects consumers with personal debts. It is not for debts incurred primarily for business or commercial purposes.
The commercial exclusion
If another corporation or limited liability company (LLC) owes your business money, they generally cannot use the Rosenthal Act to protect themselves. Because they are corporate entities and not individuals, they do not get consumer protections. In California, these business debts are generally governed by the state’s Commercial Code and other business-related legal rules.
Exceptions to be aware of
There are times when a buyer or customer can legally claim protection under the Rosenthal Act. The law can extend the rules to some business-related obligations, including:
- Debtor is a person: Sole proprietors or individual business owners who signed a personal guaranty for the business debt
- Total debt has a cap: Commercial debts that are $500,000 or less
- Debt owed to certain covered entities: Qualifying creditors include bank, business loan providers and debt buyers
If you are simply collecting an unpaid invoice from a corporate client, you are normally in the clear. However, if the debtor meets the criteria above, your collection practices need to follow the Rosenthal Act.
Protecting your interests
Ensuring that your debt recovery methods remain compliant is vital for safeguarding your business’s reputation and avoiding potential litigation. An experienced commercial collections lawyer can help you create the right approach to collecting a commercial debt.