How to Collect a Debt From a Business: 7 Steps From Demand Letter to Judgment

Before You Sue

If your customer business owes you money, first try to find out why they’re not paying, and keep records. You should make a written demand for payment, and document that you made it.

Before you sue, negotiate or at least offer mediation (the “try talking before you punch” rule). Once you’ve decided to sue, remember to watch the filing deadline, and sue in the right court. Know and follow the rules for getting someone into court, and work up to enforce a judgment yourself. Consumer collection laws like FDCPA require certain practices of bill collectors, but generally do not cover small-business-to-business debt.

First, find out why the debtor hasn’t paid. Are they willing to pay, but unable? You might want to ask whether they’ve been unable to pay because of something that’s your fault - for example, you messed up an order or performed bad work. If the customer felt you didn’t deliver, or delivered a product or service that was subpar or defective, then they might refuse to pay.

You should make careful written records to support your claims. Make an organized folder with copies of documents showing the goods or services and the price the customer agreed to pay. Add any communications with the customer you can find. Write out anything you remember about their promises to you.

If you want the debtor to pay, the next step is often sending a written demand letter explaining that you’re planning to sue if the debtor doesn’t pay you by a certain date. The demand letter should recap the situation as you see it: the agreed price, any discussion or documents, any payments or partial payments received. Be polite, businesslike and patient. Stay practical, don’t get emotional or angry. After you send your demand letter, you might be contacted by the debtor or their attorney. They might challenge the demand and refuse to pay. On the other hand, they might offer to pay in installments. Either way, consider negotiation or mediation.

To work, negotiation has to be two-way. You probably won’t be able to dictate the terms of the settlement. One good rule about making deals is, put everything in writing. If the business agrees to pay in installments, keep track of each installment the customer does or doesn’t pay.

For each legal claim (e.g., a claim for money owed for goods sold or services rendered), there is a time limit for suing called the statute of limitations. Once the statute of limitations ends, you may lose the chance to file a lawsuit. So it’s important to pay close attention to these time limits. The time periods set by statute of limitations vary, depending on the type of legal claim. Debt-based contracts for the purchase of goods have a 4-year statute of limitations period. You and the customer could have adjusted that timing in the agreement to sell the goods. The contract can’t make the statute of limitations longer, but it could have made it shorter - even down to as little as one year - so check your contract.

If you can’t work things out through negotiation, you might want to try mediation. A mediator helps opposing sides in a dispute come to their own agreement on how to settle. Mediation is informal, fast, and cheap compared to going to court. Even winning a lawsuit can be bad if you wind up having to deal with ruined relationships and alienated customers. The parties’ conversations are private, and the mediator won’t tell outsiders what they said. A case that could sit on the court calendar for over a year might be resolved in an afternoon of mediation. If you reach an agreement, and both sides sign it, it is enforceable as a contract. Mississippi courts often require that parties try ADR before going to trial. You can offer mediation at any time, including after you’ve filed a lawsuit.

File a Complaint in Court

To start a lawsuit, you file a complaint in court. There are “federal courts” and there are “state courts”. You can sue in the small claims division or regular division of your state’s trial court. Smaller claims might qualify for your state’s “small claims court”. Procedures in small claims courts are more simplified. For instance, in California, businesses have to work with a filing limit of $6,250. Small claims is usually fairly cheap, with filing fees that range from $30 to $100. Know that to appear in California small claims court you usually cannot bring a lawyer. It is also quite fast. Usually a case in small claims reaches trial about 1 to 2 months after filing.

Texas justice courts hear debt claims up to $20,000 (counting attorney fees). Mississippi Justice Court hears cases up to $3,500, and County and Circuit Courts handle bigger commercial cases. The federal courts, on the other hand, only handle certain lawsuits (about federal laws, for example) or those between residents of different states where the amount in question is greater than $75,000.

Once you’ve filed, if the debtor claims they’re broke, make them prove it. Before you start a trial, use tools like subpoenas and depositions to see what they have. If you sense there might be hidden assets, a lawyer might help.

Collect a Judgment

Sometimes winning a lawsuit isn’t the same as getting paid. Let’s say you get a judgment, which means that in theory the debtor owes you money. However, that judgment is only a piece of paper. You might have to take more steps to collect from them. Know the tools you’ll use to collect a judgment. You can try garnishment to seize the debtor’s accounts or business earnings. You can place a judgment lien on their real property, paid if it is sold or refinanced. In some instances you could use replevin to take back the equipment, vehicles or inventory that’s held as collateral, giving you another way to retrieve its value.

California courts won’t collect for you. California winners must first wait 30 days. That’s the window for the other side to appeal or ask to cancel. Only then can a winner get a Writ of Execution to order the sheriff to levy the debtor’s bank account. A judgment against a business automatically charges interest at the rate of 10% a year and lasts 10 years, renewable.

Collection is a race against the clock. Other creditors are racing, too. What you recover is likely to depend on what you can take in first. Debtors have assets, but they can move them. A Mississippi court can freeze property in the state owned by out-of-state debtors. For big debts, consider getting a local attorney involved.