When attempting to collect a debt, you have two options: hire a debt collection agency or take your debtor to small claims court. The question is, which is the best option for you? So, let's look at how a debt collection agency differs from a small claims court.
Small Claims Court vs. Hiring a Debt Collection Agency
Debt Collection Agency
Overview
The most common way to collect unpaid invoices are by hiring a collection agency. Having a debt collection agency handle your collection needs will relieve you of the stress and increase your chances of getting paid.
Professional debt collectors such as Fair Capital know how to get debtors to pay their debts. You should also expect your debtor to take things more seriously once they are contacted by a debt collector.
Cost
Generally, collection agencies charge a percentage of the amount collected. The rate typically ranges from 20 to 40 percent.
Advantages
Leave the work to others
Many people find the small claims process and court proceedings complicated and stressful. As a result, they prefer to outsource the work to a reliable debt collection agency to save time and effort.
Only pay for results
Collection agencies charging on a contingency basis take no commission unless they successfully collect your debt.
Credit reporting
The ability to report to a debtor to the credit reporting agencies makes debt collection agencies very effective. It is not uncommon for debtors to pay their debt solely because it negatively impacts their credit score.
Small Claims
Overview
Another option for business owners to collect unpaid debts is filing a small claims lawsuit. Getting your paperwork filed at the local courthouse is not very complicated and doesn't require an attorney.
Cost
When you file a lawsuit in small claims court, you will usually have to pay a filing fee. Depending on the state, the fee can range from $35 to $150. Some states base their filing fees on the amount of outstanding debt.
Advantages
Less expensive
Suppose the collection agency successfully gets your debtor to pay up. In that case, you'll have to pay a substantial amount - typically more than what you would pay if you took your case to small claims court.
No minimum
Small claims court does not require a minimum amount of debt, so you can technically file a lawsuit even if you are owed just $25. (Although the filing fee would not make it worthwhile). Nevertheless, most courts do have a maximum.
Disadvantage
No enforcement
Even after winning a small claims proceeding, you should not expect the court to take any action against your debtor. It is estimated that approximately 80% of judgments in the United States are never collected. Ideally, before filing a small claim, one should have a strategy on how to enforce the judgment once it has been granted. Otherwise, you may end up receiving the money judgment.
Limitations
Depending on your state, you can't sue for more than a certain amount in small claims. A corporation or individual may also be limited in how many cases they can file in a calendar year or month.
Time-consuming
Besides the time spent filing your lawsuit, you may spend about half a day at the courthouse on the day of your hearing. And remember that the burden of proof is on you, not the defendant.
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Let others do the work | Yes | No |
Only pay for results | Yes | No |
Credit reporting | Yes | No |
Less expensive (in general) | No | Yes |
Minimum requirement | Sometimes | No |
Maximum limitations | No | Yes |
Collection efforts | Yes | No |
Time efficient | Yes | No |
Bottom Line
Filing a small claims lawsuit may be the best way to resolve an unpaid invoice when the debtor genuinely disputes his responsibility. If, however, there is no substantive dispute or your debtor is giving you the run-around, hiring a professional collection agency will likely be the best course of action.
