A Guide to Smart Debt Collection
Don't throw good money after bad.
Before initiating the legal process to collect a debt, you must ask yourself one critical question: Is it worth the cost of litigation? Predicting your debtor’s ability to pay is essential in making this decision and avoiding throwing good money after bad.
Evaluate Your Debtor’s Financial Health
To assess whether your debtor has the means to pay, consider factors such as:
Income
Property ownership
Cash on hand
Inventory
Corporate bonds or stock
Notes receivable
Debts and liabilities
If your analysis reveals that the debtor lacks the means to pay or is on the brink of bankruptcy, you may want to write off the debt and move forward rather than pursue litigation. More on Debt Write-Off
Step 1: Make Your Formal Demand
If you decide to pursue legal action for unpaid invoices, the first step is to issue a formal demand letter to the debtor, whether it’s an individual, a business, or both. If an individual has signed a personal guaranty for the business, you can include both parties in your demand.
Your demand letter should include:
A statement that the client is in default on the invoice.
The total amount owed, including any late fees accrued.
A deadline for payment.
Notification that legal action will be pursued if payment is not made by the stated deadline.
For maximum impact, send your demand letter via certified mail to ensure it catches the recipient's attention and to create a formal record.
More on how to Get your client to pay overdue bills
Step 2: Commencing Legal Action
Small Claims Court
Determine if your case qualifies for small claims court, which is designed to be affordable, quick, and straightforward. In most cases, parties represent themselves without attorneys.
To succeed in small claims court, prepare evidence such as:
Contracts or invoices proving the debt.
Documentation that services or goods were delivered.
Proof of payment demands and non-payment.
Keep in mind that small claims courts have limits on the amount you can recover, varying by state, typically between $2,500 and $25,000. If the debtor doesn’t show up, you could win by default.
Civil Court
If your debt exceeds the small claims limit or involves complex issues, consider filing in a state trial court. These cases are more formal and time-intensive, often requiring legal representation. They are typically filed in the county where the transaction occurred or where the defendant resides or operates.
Pre-Judgment Relief
To secure your ability to collect, you may seek pre-judgment relief through:
Writ of Attachment: Placing a lien on the debtor's assets.
Writ of Possession: Taking possession of assets used as collateral.
These actions can safeguard your interests while pressuring the debtor to settle.
Collecting a Judgment
When you win a civil case in court, the judge may award you money damages, but In some situations the losing party (the debtor) will refuse to follow the court order and pay the judgment, this is the reason why a vast majority of judgments are not being collected. If this happens, you may be required to take additional measures to collect your judgment. More on How to collect a judgment
More on Locating assets of a debtor
Formal Dispute Mediation
You can hire a mediator to help you and your client come to an agreement regarding your dispute. A mediator focuses on non-adversarial conflict resolution without taking sides or providing a judgement. Typically, a mediator allows parties to a dispute to air their points of view and then encourages them to cooperate in reaching an agreement. Check the contract you signed to see whether disputes require binding arbitration.
Why Using a Debt Collection Service May Be a Better Alternative
Instead of navigating the complexities of debt collection alone, consider using Fair Capital’s Debt Collection Service. We offer a comprehensive approach that combines expert analysis, effective communication, and legal expertise to maximize your recovery without the stress.
You can sue to get paid – But utilizing our Debt Collection Service may be a better alternative.
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