6 Ways Your Business Can Collect Unpaid Debt
Your business works hard to perform and deliver. So what do you do when you don't receive payment for goods delivered or services rendered? It's a question that takes on a new urgency in times of economic challenge.
Your company has available a variety of options and depending on your size, type of business, and ability to continue operations, what is best for your business may not be the same as what is best for the business next door.
Here are 6 options on how your small business can collect unpaid debt:
1. Use Self-Help Remedies to Collect, and Stay Out of Court. If you have a good working relationship with the debtors, the clients owing you payment, you may consider contacting them directly. You can set up a mutually-agreed upon payment plan, factoring in any interest incurred for the late payment. If the discussion would benefit from a neutral third party, consider retaining a mediator with debt-recovery experience to facilitate a resolution.
2. Engage a Collection Agency to Do the Collecting For Your Business. In many cases, you may not have luck negotiating payment with the debtor. If you are still looking to stay out of court, consider transferring the account to a collection agency to recover the debt. Debt recovery by collection agencies are regulated by the Fair Debt Collection Practices Act (FDCPA) and if the collection agency violates the act, it may be the debtor who will receive a payment.
3. Secure transactions to Increase Likelihood of Payment of Bad Debt. The debtor can give your business a claim to its property to secure payment of the debt. In a joust between creditors for claim to a property, secured creditors will be given priority over unsecured creditors. To become a secured creditor, your company will have to jump through a few additional legal hoops, involving filing certain documents in court.
4. Take It Up in Court. Two common pre-judgment remedies are replevin and attachment, also known as garnishment. In replevin, the creditor takes hold of the title to property that is central to the owed debt, and may recover the property if the debt is not paid. Attachment, governed by state statutes, is a court-issued order that authorizes the creditor to take title of the debtor's property or to take the property itself. Both replevin and attachment are considered extraordinary measures by the court.
If the prejudgment options do not deliver results, your business has the court-based option of suing the debtor. A creditor is entitled to an enforceable judgment if it can prove its case or if the debtor does not contest the claim.
5. Lien It Up. Liens come in various types. In general, a lien will give the creditor an interest in the debtor's property. Common liens such as the materialman's and mechanics' liens are two examples. In some circumstances, a creditor with either of these liens can foreclose on the debtor's property and then sell it to recover the debt.
6. Initiate Involuntary Bankruptcy Proceedings. When a few creditors are owed by a single debtor, they can get together and initiate involuntary bankruptcy proceedings against the debtor. The debtor may then be ordered by the court to liquidate its assets to pay off debts or it may be able to establish a reorganization and repayment plan that is filed with the court.
- Creditors' Rights and Collection Options (FindLaw)
- Debt Collection - Overview (FindLaw)
- Credit and Collections: Two Approaches (FindLaw)
- Collecting on Judgments FAQ (provided by Levey Filler Rodriguez Kelso & De Bianchi LLP)
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