Dealing With Delinquent Debtors
RULE OF LAW - MAY/JUNE 2013
Have you ever been excited about a big sale only to watch that excitement turn to frustration when the payment never arrives? Don’t worry; it happens to everybody.
Every business will have clients that either stop paying entirely or slow down payments. There are legal strategies that work when these situations arise. Your first steps should be:
- Establish business practices that ensure this is only an occasional problem. You should not have a problem with more than 3 percent of your clients. If you do, this may be an indication that something is wrong on your end.
- Keep small receivables from becoming bigger ones. Big debts always start small—if a client is slowing payments, address the problem immediately.
- When you have a problem client, demonstrate that you are serious about collecting the debt.
- Select clients carefully. Small business legal expert Cliff Ennico notes that your instincts will often warn you of problem clients. If you really want their business, ask for money up front and replenish what you use every month.
Once you realize you have a problem client, here are your next steps:
Get as much cash as you can upfront. Clients who have trouble paying upfront are likely to have problems paying you once the product or service is delivered.a
Get a contract. Make sure you have a contract and that it is clear about when payment is due, and include that interest will be charged on overdue payments. You legally cannot charge interest unless this clause is in your contract. Also include a clause that requires mediation of any dispute. This will save you money from litigation.
Stop working. The minute a bill is overdue, hold that product or service. The client’s breach of payment means you don’t have to complete your side of the contract.
Even if you follow these rules, you still might have a customer who doesn’t pay. If this happens, follow these steps when collecting overdue debt:
Make a demand for payment. Legally, you cannot enforce a debt unless you first make a “formal demand” for payment. Have an attorney draft and send a letter demanding payment.
Try to negotiate a solution. Consider negotiating a “compromise” or an “extension.” A compromise is forgiving part of the debt if the client pays the rest quickly. An extension is offering a payment schedule. Make sure to get the agreement in writing.
Mediate/Arbitrate. This only works if both parties agree.
Survive small claims court. Sue where the client is geographically located. The client is required to show up, or go to jail for contempt of court. Travel and lodging expenses are tax deductible. In court, be prepared, be on time, keep your testimony simple, be polite and don’t try to be a lawyer. Once you win, go to the court clerk’s office for an “execution” to be issued against the client’s property. Once you get the execution, give it to the county sheriff’s office. Note that once you win in court you don’t automatically get the money that you are owed; you must get the execution and give it to the sheriff.