How to Collect Accounts Receivables for Goods or Services Valued < $10k.
Running a small business means that you will occasionally run into an accounts receivable situation. If you are a trade, like a flooring supplier, you also have the added remedy of the mechanic’s lien (assuming you followed the pre-lien procedures) but for the rest of the small businesses out there, the only recourse may be small claims court.
5 Preliminary questions to ask yourself:
- Is the amount owed below $10k? a. If yes, then you can sue for the entire amount in small claims court. b. If no, is it close enough to $10k that you are willing to forego the amount over $10k?
- Do I have a contract with the debtor? a. If yes, is there an attorney fee provision? In the case of debts over $10k, and where the contract contains an attorney fee provision, small claims court may not be the right avenue for you. The downside of small claims court is that if you are the plaintiff, the decision is final and cannot be appealed so consider this carefully and you may want to hire an attorney to prosecute your case and collect your debt for you.
- Do I Want to Present My Case Myself? a. If not, you may have a problem, as you generally cannot be represented by an attorney in small claims court. TIP⇒ Consider hiring counsel for a limited engagement to prepare you for the court proceedings and assist you with organizing your arguments and evidence. b. Are you incorporated? If your business is incorporated, then in order to appear in small claims court, only an employee, officer or director may act on the corporation’s behalf and present the corporation’s case in small claims court. The corporation may not hire an attorney solely to represent the corporation in the small claims proceeding. c. Are you an association? Similarly, only a regularly employed person of the association or entity may appear on behalf of the association in a small claims action.
- Where Can The Defendant Be Sued? a. In the law, one of the first considerations is jurisdiction, meaning which court has the power to summon the defendant to appear or otherwise issue a binding, enforceable order? If you have a contract with the debtor, then the debtor can be sued in the county where the contract was entered into, or where the services were performed or where the defendant resides.
- Is this Debtor Collectible? a. In some rare cases, you may have some financial information already about the debtor (in a loan situation, you may have a loan application), but usually, you do not have way to know if they have a hefty enough bank balance to pay the debt. Chances are that the reason they did not pay you in the first place is because they did not have the money. However, if they own a home, or later inherit property, your judgment can attach to the real property in the form of an Abstract of Judgment. Short of a bankruptcy discharge, the Judgment is good for ten years. If you believe the debtor is gainfully employed, you can garnish their wages or levy on their bank account. It takes some effort and coordination, but again, that depends on how motivated you are to collect this receivable owed to you.