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A major challenge for every business owner is the arduous task of collecting past due account receivables. All too often, bill goes unpaid and a business owner is forced to take action to collect payment. Along with the business choices involved in deciding when to chase down an unpaid debt, there are important legal considerations to keep in mind.
When considering the dos and don’ts of debt collection, the conversation has to start before there is even a debt to be collected. The first step is to make sure the party you want to do business with is credit worthy.
To increase your odds of success in collecting a debt, you need to set yourself up for an easy case to litigate. A written contract is much easier to collect on than a verbal contract. It also allows you twice as long to bring suit. By ensuring that contracts are documented, you are more likely to obtain a faster resolution if the matter later goes to trial.
Although a fully documented contract (with a provision for an award of attorney’s fees) is always preferred, the reality is that a lengthy contract cannot always be drafted before a transaction.
Even so, it is imperative to record each and every handshake deal with some form of writing. Even something as simple as a signed receipt or signed invoice can be considered a written contract and entitle the creditor to the added benefits of a written contract. When in doubt, put the deal in writing.
Once the debt is established, the focus shifts to actions to collect the debt. It’s best not to wait too long. The statute of limitations controls how long a creditor has to bring a lawsuit. For example, with an oral contract a creditor only two years after an agreement is broken while the statute of limitations for a written contract is four years from breach.
However, bringing a lawsuit is not the best way to recover a debt. Considering the money and time involved in initiating a lawsuit, it’s best to start with informal negotiations.
The first consideration when beginning negotiations as a creditor is to know whether the debt is a consumer debt or a business debt. The vast majority will be business debts. However, for those few who collect consumer debts, it is important to note the additional restrictions.
Consumer debts stem from transactions in which property, services or money is acquired on credit primarily for personal, family or household purposes. Those debt collectors are regulated by the California Fair Debt Collection Practices Act. Restrictions on collecting a consumer debt include the forms and nature of communication and what can and cannot be said to the debtor.
As a creditor, if you violate the California Fair Debt Collection Practices Act, you could wind up paying money to the debtor rather than collecting money from him.
Negotiations are a crucial time in collecting any debt. While it is important to recover as much from the debtor as possible, remember a bird in the hand is worth two in the bush. If the debtor is willing to pay a significant portion of the debt voluntarily, a creditor should weigh that against the costs of initiating a lawsuit: the time and money spent litigating the suit, and the difficulty in enforcing a judgment.
Chasing a debtor for years to collect on a judgment can be costly in and of itself. Further, there is always the risk that a debtor will file for bankruptcy protection and completely eliminate any potential of collecting the debt.
If negotiations fail, then it is time to consider filing a lawsuit. A business can proceed in small claims court if the debt is $5,000 or less ($10,000 if the plaintiff is an individual). If the debt is above the limits for a small claims case, it is highly advisable to seek legal counsel, even for an open and shut case.
The California Code of Civil Procedures, which governs civil lawsuits, are highly technical and a wrong move could jeopardize the entire case. An attorney can quickly move from filing to judgment and proceed with enforcing the judgment against the debtor.
These are just a few of the considerations of collecting a debt for business owners. Most importantly, it is critical to have a knowledgeable attorney from the beginning to assist in all phases.
– Keith R. Wood is an associate at Calone & Harrel Law Group, LLP who concentrates his practice in bankruptcy, tax collection, and corporate, partnership and limited liability company law matters. He can be reached at [email protected]