There are few things more frustrating than not getting paid for services and/or goods provided to a customer. It is especially frustrating when the amounts owed are fairly modest because multiple, small delinquent accounts can add up to a hefty sum and affect cash flow. Plus, a provider of services and/or goods should be paid for what it delivered! So, what are the options for obtaining payment from a delinquent customer/client?
First, consider whether the amount is worth pursuit. As an attorney, I am often told that the quickest way to get sued by a client/customer (warranted or not) is to sue the client/customer to recover a debt owed for services provided. Thus, before undertaking collection action against a delinquent customer, consider whether the account is a "problem" account that has a heightened risk for a claim. If so, it may be better to forgo a collection action and "hold" the balance owed on the account as potential leverage, or an offset, in any future adverse action.
For all delinquent accounts, it is also likely best to wait to pursue a collection action until the statute of limitations for a negligence/malpractice claim has run. By way of example, in Oregon and Washington, the statute of limitations for a malpractice claim runs several years before the statute of limitations runs for a breach of contract claim. Filing a collection action after the statute of limitations for the negligence claim has run should reduce potential exposure to such a claim. Therefore, it is prudent to determine the applicable statute of limitations in one's state for each of these types of claims before undertaking collection action, particularly for a "problem" matter.
Having a clear and concise written agreement with the customer that sets forth the terms and conditions that govern the services and/or goods provided will significantly enhance the likelihood of success in any collection action. Such an agreement can also provide the right to recover attorney fees, collection agency fees and/or collection costs incurred in collecting on a delinquent account. It can also establish where a lawsuit must be filed and, potentially, be used to limit liability to a customer.
Depending on the amount owed, the venues for a collection action can either be in small claims court, where parties can represent themselves, or in state district or circuit/superior courts. In the latter forum, a corporation or a limited liability company likely will need to hire counsel for representation. In Oregon, for example, such business entities cannot represent themselves in circuit court.
Rather than pursue the claim oneself, a party could tender the delinquent account to a collection agency. Most agencies operate on a contingent fee basis, so only the hard costs associated with collection must be paid. While paying a contingent fee can be unpalatable, 75 percent of something is better than 100 percent of nothing. Indeed, in some instances, employing a collection agency can be a preferable alternative to paying an attorney on an hourly basis to pursue collection. Things to consider when deciding whether to use a collection agency or an attorney are: the amount at issue (a higher amount disfavors a contingent fee arrangement); the likelihood of collecting the amount owed (lower collectability favors a contingent fee arrangement); and whether the matter will be "hotly" contested (if yes, a contingent fee arrangement is usually better because litigation costs are higher). In any event, hiring a third party to handle the collection matter is usually a better business decision because it allows one to spend time running the business rather than sitting in small claims court.
Once a court enters a judgment against the delinquent customer, the most popular (and usually most cost-effective) collection tool is a writ of garnishment. A writ of garnishment, generally speaking, typically allows money to be "taken" from the customer's bank account or paycheck to pay the amount owed to you. In Oregon, a writ of garnishment issued to banks is particularly effective because the writ may be issued by an attorney, and the writ hits all accounts held by the debtor at the garnished bank. In Washington, writs of garnishment are more complicated, must be issued by the court, and are less cost-effective.
The issuance of a writ of garnishment, whether successful or not in "hitting funds," often persuades a customer with assets to pay the debt to avoid further collection action. Of course, if the customer has no assets, the judgment may not be worth the paper it is printed on. Regardless of the states you do business in, the old adage is true – you can't get blood from a stone.
William Fig is a partner in Sussman Shank LLP's litigation and construction practice groups. Contact him at 503-227-1111 or firstname.lastname@example.org.