PART 2 OF 2 - WHEN CLIENTS STILL WON’T PAY

We covered strategies to avoid “deadbeat” clients in part one, but inevitably someone is going to slip past your tactics and still be noncompliant with payment. What then?

It is best to take action when 30 days have passed with no payment or contact from a client. First, enclose a personal letter with their next invoice. Restate the written agreement regarding payments (consider enclosing a copy) and that they are in violation of that agreement.

If a client cannot afford the entire balance due, they may get overwhelmed and simply ignore the bill, hoping it will disappear on its own. Where the logic is in this, I’m not sure, but it is reality. Consider offering to make monthly payment arrangements with the client in your letter, especially if the balance due is rather large.

It is important, however, that you suggest the monthly payment amount, which should be approximately ten to twenty percent of the outstanding balance, and specify their first due date. Provide the client with the option to contact you if the suggested amount will not work on their budget. If they do so, be sure to negotiate an amount that is not too hard on them, but will serve to get the whole balance paid in a timely manner.

Once you have made payment arrangements with a client, continue charging interest on the outstanding balance for the first couple of months. If the client makes her payments consistently during that time period, consider waiving all future finance charges so that her bill will diminish more quickly. This will also give the client an incentive to continue making payments.

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Before venturing any further, this is a disclaimer that I am not an attorney, however, I have three years experience working for collections attorneys and I am very familiar with collection law. From this point on you must tread lightly when attempting to collect a debt from a client. I recommend that you examine the Fair Debt Collection Practices Act (FDCPA), which is Federal law regarding what is required of any debt collector, even if you are not a collection agency or attorney.
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Many articles I’ve read on the topic of collections, including those listed below, recommend that you write and call the client a number of times and be persistent, increasing your directness and determination gradually. However, I DO NOT recommend writing and/or calling the client more than once. There are precise laws in place that protect a debtor from what can be deemed “harassing” contact. If you contact your client more than twice about an unpaid balance, you risk being sued for harassment, and no bill is worth that.

Give the client until the next statement cycle to respond to your letter. If they have not, call them, but only once. Even if you get a voicemail, I recommend that you leave a message but do not attempt to contact them by telephone again. If you get no response, then you must first determine whether the balance due is worth pursuing further. This is the point where you may begin to incur expenses to collect the debt owed.

If you decide that the unpaid balance is worth pursuing, you have a few options to proceed with:

1) Turn it over to a collection agency.
Keep in mind that collection agencies will keep 10-50% of anything collected on your behalf. Their primary means of collecting a debt are letters and telephone calls. Personally, I do not think a collection agency is your best option. More or less, they do what you could do on your own, except that they will report the debt to the credit bureau and are willing to risk a more threatening tone with the debtor if necessary.

2) Take the debtor to Small Claims Court.
Providing that the balance owed to you is within the limitations set by the court (you will need to check with your local clerk), small claims court will cost less than $100 to pursue and you can represent yourself. This saves the added expense of hiring an attorney. You will need to have a paper trail to validate the debt before the judge. Your strongest piece of evidence is the agreement you and the client initially signed. However, it is also helpful to have photographs or examples of the services you provided, copies of invoices, and notes from telephone conversations, etc.

Before you can pursue a case in Small Claims Court, you will have to send the client a demand letter. This is a requirement under the FDCPA and is different from the letter suggesting payment arrangements you may have sent to the client earlier. There are specific legal requirements for a demand letter. Please refer to Section 809 of the FDCPA, which lists those requirements in detail.

Typically, if you provide the necessary information to prove that the client owes you money, the Small Claims Court will find on your behalf and there will be a judgment entered against the client. However, it is still up to you to collect the debt. This can be time consuming and difficult, as your options for doing so are limited.

3) Hire a Collections Attorney.
It is important that you know upfront that a collections attorney will either take a percentage of what they collect (usually around 25%) or will charge you an hourly rate. However, unlike with a collections agency, some of your attorney fees can be offset, if you took the correct steps in your initial agreement with the client.

If your agreement stipulates that the client would be responsible for attorney fees should a lawsuit be necessary, then you will be able to collect reasonable attorney fees (usually 15% of the debt) as a part of your judgment. This an advantage to hiring an attorney yourself. Collection agencies will not pursue a judgment without hiring an attorney, and, if they do so, your fees would not be reimbursed.

Collections attorneys file a Petition in the Associate Circuit Court of the county where the debtor resides. The debtor is then served with a summons to appear in court. If they do not appear, the a judgment is entered against them automatically. If they do appear and admit to owing the debt, a judgment is still entered. Only if the debtor disputes the debt in court will the case go to trial, and it has been my experience that only 10-20% of the cases do so. Even if the case goes to trial, it is likely that you will still get a judgment against the debtor, especially if you have a contract and a paper trial to prove your case.

It is also much easier for an attorney to collect the debt once a judgment is entered. They have the means to file a garnishment on the debtor’s wages, bank account, even business. They can also file a lien against real estate the debtor owns or confiscate personal property, such as a vehicle, as payment for the debt. These options are not readily available to you if you have a judgment through small claims court.

An attorney will do everything legally possible to collect every last penny of what is owed to you, and then some, such as attorney fees and interest. They will do all the work, including the demand letter, and you will be free to continue business without the added burden of trying to collect an unpaid debt. It has been my experience that an attourney can provide the best results in the shortest amount of time.

Always consult with an attorney before pursuing any debt collection strategy. The opinions in this article are not to be taken as official guidance but rather as an informational supplement to your overall debt collection strategy.

PART 1: Avoiding Deadbeat Customers

Sources/Related Readings:
• SeniorMag.com: Bill Collections
• About.com: Collection Letter Secrets
• FindArticles.com: Collecting Payments Due
• BusinessKnowHow.com: Small Business Collection Strategies

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One Response to “Debt Collection Strategies that Work (2 of 2)”

1. Anonymous says:
   

   HOW ABOUT IF THE DEBTOR HAS A PROPERTY, AND HE IS WILLING TO PAY IF HIS PROPERTY WILL BE SOLD. ARE YOU GOING TO HELP HIM SELL HIS PROPERTY OR JUST TAKE HIS PROPERTY AS PAYMENT?

   Posted October 15th, 2007 @ 4:06 am
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