12 Feb Collecting Customer Debts/Accounts Owed
Most small businesses occasionally have customers who fail to pay their invoices. Let’s talk about the legal options available for collection.
Businesses are most likely to succeed in debt collection if there is a signed agreement between the business and customer. Within the contract, it is best to assert an “absolute” and “unconditional” promise by the customer to pay the amount owed. This way, there will likely be no uncertainty that a debt exists. The customer knows, the business knows, and a judge would also realize this upon reading the contract. In some cases, if the business makes loans or leases property to customers, the contract can secure the debt with collateral. For example, if a car dealer lends money for the purchase of a vehicle, the contract could allow the dealer to repossess the car if the customer misses a payment.
If an invoice goes unpaid, one option is to collect directly from the customer. Most businesses attempt to do this by sending demand notices and calling customers, in hopes of securing a payment plan that both parties can agree upon. Businesses may face legal liability if they use deceptive or harassing means to obtain payment. For example, a business owner may not call a customer and falsely imply that she/he is an attorney or government representative. If the parties reach an agreement, it is best to have this new, repayment agreement in writing, signed by both parties in the event of a later dispute.
Another option is to sue the customer in small claims court for the amount owed. To sue in the District of Columbia small claims court, the customer must live, do business, or have business contracts in D.C. The amount owed must be $10,000 or less. The business must file two forms at the Small Claims Clerk’s office: (i) a Statement of Claim, which explains the reason for the lawsuit, and (ii) an Information Sheet, which lists the parties involved, contact information, and type of suit. The filing fee is between $5-$45, depending on the amount owed. Because small claims procedures are relatively simple, many claimants are able to sue without hiring an attorney. For this reason, small claims court is usually viewed as a relatively efficient and inexpensive option. Further information is available at http://www.dccourts.gov/internet/documents/SmallClaimsHandbook.pdf.
Finally, the business could hire a debt collection agency to collect the debt. Many of these companies either work on a contingency fee (i.e. will only charge your business if they are able to collect the debt) or charge the client a percentage of the debt to be collected. For example, if $5000 is owed and the debt collection agency has a fee of 10%, your business will be billed $500 for the debt collection agency’s services. It is advisable to research the collection agency thoroughly and consult an attorney before signing a contract for debt collection.