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Behind on Collections? Go to Small Claims Court!

Behind on Collections? Go to Small Claims Court!
Pat Dickson - Fri Apr 06, 2012 @ 07:12AM
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I've been writing a lot about collections lately. This is probably a result of the down economy. Revenues are down all around, and so are collections. Everyone is in a cash crunch, and it hurts everywhere: at the gas pump, the grocery store, when paying the utility bills and just about anything else you can name. It especially hurts in your collections department. But it really, really hurts when trying to explain your current cash flow to the bank, trying to make payroll, or coming up with a large down payment on a special materials order. 

What I want to talk about today is using your local small claims court to go after the small stuff and hopefull ease some of the pain. This is an especially handy tool if your business has multiple small accounts that have gone unpaid. Every bit counts. It all adds up. Over and over again I'm surprised when I discover companies behind in collections have never used small claims court to make things a little better in the cash flow department. The process is usually very simple, and rather than use specific or regional examples I'll speak generally. Here is what you do:

1. Search Small Claims Court: More than likely you'll find a website for your local small claims court in a matter of seconds. Likely you'll find an easy how to guide. Simply read up on how to file your small claim and you'll be an expert in no time. In many cases throughout the nation you can just fill out a complaint online, pay the filing fee with your credit card, and hit submit. This rarely costs more than $100, depending on your jurisdiction, and you can probably sue for any amount ranging from $1500 to $5000. Serving the party you are suing probably costs between $50 and $100, so the total cost of going to court is likely less than $200. One of the magic things about this process, again depending on your jurisdiction, is you often don't need a lawyer. You can send your CFO or Controller or Collector to court when the day comes. Exempt employees just cost a little more in gas. Lawyers charge by the hour. Nevertheless, putting the power of the law behind your past due collections is often as easy as finding your small claims court's website and reading up on the process for filing a claim. It isn't rocket science.

2. Call Before You Sue: In most cases, if not all of them, your small claims court will require you to try and resolve your disputes without their assistance before you get to the point of filing an action. Even if not, I believe the best business practice is to always make a phone call, as well as write a demand letter, before you sue. Call your customer. Get her on the phone. Tell her you are in trouble because collections are behind and you are going to have to start going to court with some delinquent accounts. If you can, get her to commit to paying you by a given day, or at least to pay you in structured amounts. After she makes her promise, write her a follow up email setting forth the details of your agreement and get her to confirm the terms by reply email. This email may very well support your claim should you end up going to court. It will be especially helpful if it contains a clear promise to pay you if when you get to court this customer changes her story. She won't look very good when she tells the judge your work was defective or otherwise didn't exceed expectations.

3. Write a Demand Letter Before You Sue: When telephone conversations break down, write a demand letter. In it set forth how much you are owed along with a demand for payment by a certain date. Include a warning/notice that if payment is not made by the certain date, you intend to file a small claims action. However, before doing so, be sure to double check your small claims court's website to see if there are any requirements pertaining to what you need to include in your demand letter. As a rule of thumb, I try to give two weeks, or 10 full business days to pay. Also, you don't have to stick to any negotiated terms that reduced the original obligation, so long as the customer didn't meet her obligations fulfilling the renegotiated terms. When you negotiate new debt payment terms, the general rule is that the new terms are no longer binding when the debtor does not pay accordingly. You go back to what was originally owed and unpaid.

4. Never Sue if it will Destroy a Customer Relationship you Want to Keep: Always keep in mind that suing a customer can be like filing for a divorce. Always use business judgment when considering using legal remedies. Always ask how much it will cost you in the long run even should you be paid in full on this one delinquent account.

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