Best of the ISP-Lists

Don't Use Domains as Collateral

Members of the ISP-Webhosting list point out that ISPs should never make loans and should cut off customers who don't pay. Here's an example of what can go wrong when those basic business rules are ignored.

[May 3, 2002]

On the ISP-Webhosting list in April, TC complained,

"One of my customers is a Web designer who hosts about 140 domains with us. About a year ago, he started getting behind on his hosting fees: when he was $13,000 behind, we loaned him the money with payments secured by the domains we were hosting for his customers. It's now obvious that he's not making it, so we've called in our loan and our collateral. My question is, is there a precedent for taking control of the domains? They were our collateral for the loan, but they are his customers' property. Any advice on how to make this work?"

A number of respondents noted that there wasn't ever any collateral on the loan to begin with:

[JP observed] "He has used collateral he does not own! The domains were not his to use. If you take him to court and he has nothing, then you get nothing. There's not much you can do without losing more money. Instead, it's best not to let someone get $13,000 behind before you cut off their service."

[HM agreed] "There is no collateral in this case: you can't place a lien on something he doesn't own."

[CV added] "The domains would not be considered collateral: you have tangled quite a web here, even though your intentions were honorable. In an effort to go the extra mile—because you already had so much invested—you dug a deeper hole. Sometimes the best medicine is to set boundaries, cut your losses, and move on."

Others suggested suspending the domains until paid for:

[JB offered] "To protect yourself in the future, add this to your TOS: 'Webhosting accounts not paid in full cannot be closed, and will continue to accrue pre-agreed monthly charges until paid in full. In addition, if a webhosting customer fails to pay for the service for a period of 90 days, then the customer forfeits all rights to the domain name hosted on our servers and agrees that we may seize the domain name ownership and transfer same to us without any notification to the webhosting customer, in lieu of payment of the past due amount. A webhosting customer agrees that an implied lien is placed on any domain name hosted on our servers.'"

[WS added] "Our prevention in resale designers hosting on our systems is to suspend the customer's site if payment for the hosting isn't received in 37 days, on 30-day terms. This immediately invokes a call from the reseller or even the customer, payment is made, and they are back on."

[SP advised] "Create an HTML file that says, 'This site is temporarily unavailable. Comments or questions about this site? Contact Z.' Create a new virtual host directory, and put the new file in the new directory. Then point all hosts for way-past-due domains to the new directory. When the domain holders contact you, inform them that the domain's hosting account has not been renewed; don't point the blame at anyone. When they say that they paid their agent, say, 'I can only tell you that the services for your domain have not been renewed.' Some of them will ask what it will cost them to restore service immediately through you. That's the tricky part, because they've already paid. I would forgive the past due amount, and ask for a one-time connection fee and a hosting fee beginning today."

Others contended that this was a perfect time to stop trying to go it alone, and to call a lawyer immediately:

[HM warned] "Be very careful: you can get yourself into a heap of legal trouble if you start telling his customers that he isn't paying his bill, that he's behind on payments, etc. Doing so is illegal. Take the best free advice you're going to get: go see a local lawyer."

[RS agreed] "Call a lawyer: don't follow any other advice. The tragedy here is that you entered into a complicated transaction (issuing a loan) to a non-performing client without any legal advice. Issuing a loan to a good customer is complicated enough: now imagine doing that for someone with a poor track record. We are in business to make money, right? We provide professional services and wish to be paid for them, right? So why do we resent paying for professional help from lawyers, accountants, and other experts? If you can't afford the basic 'infrastructure' to run a business (lawyer, accountant, etc.), then it's not a business: it's a hobby."

—End