By Bradley Hunt, Attorney at Law
Cash flow matters when you are operating a business. When a customer does not pay on time, you can be put in a position of being unable to easily pay your bills without borrowing money. When a late paying client becomes a potential write-off, it may be time to take legal action.
Most businesses send out email or direct mail reminders or statements as the invoice ages; others will call the customer to check on payment status. When you set up a collection process for your business, I recommend you follow standard debt collection practices and be consistent in the process across all customers. You will want to document all attempts to collect the debt.
Once the debt reaches 45+ days (you may choose to set a different limit, say 60, 90,120, or 180 days), send a formal letter requesting payment. You may wish to send this certified mail with a signature requested as proof you have attempted to collect the debt.
When it becomes clear your attempts to collect the debt are not working, it is time to take the next step. There are several options open to business owners to collect receivables owed:
- Engage a collection agency to attempt to collect the invoice. The agency will retain a large percentage of any funds they recover, typically 20-50% of the total. A word of caution: while collection agencies are covered by the federal Fair Debt Collection Practices Act and state NC Collection Agency Act (primarily impacting consumer debt collection), some have a bad reputation that might impact the reputation of your business. Use caution in hiring an agency.
- Write the unpaid debt off as a business loss. If the amount owed is small, it may not be worth your time and energy to pursue collecting it.
- Talk with an attorney about filing a civil lawsuit against the customer. This option can provide the best chance of recovering the money owed. This allows your attorney to deal with collection efforts, involving you as needed to either agree to a settlement with the debtor or to attend any scheduled hearing. If the judge decides in your favor (or the defendant does not appear), you will typically be awarded a judgment in your favor. The judge may allow you to include court costs and attorney’s fees in the total amount if you have an agreement in writing with your customer that allows you to recover such costs. The judgment would be recorded and stay in the public record for ten (10) years. You and your attorney would then discuss legal options to collect on the judgment. In most cases, the statute of limitations in North Carolina to pursue a collections action is three (3) years, so do not wait too long to pursue collection efforts.
It is important to note that if your customer chooses to file bankruptcy, your collection options are limited. If the customer includes your debt in the bankruptcy filing, you must cease and desist with all collection efforts. Your only option at this point is to file a proof of claim with the bankruptcy court. If the debtor files a Chapter 11 or 13 (reorganization), you will have a better chance of making some recovery – though often pennies on the dollar. When the debtor’s assets (if any) are liquidated and distributed to creditors, the type of debt will determine the payment priority. If your debt is secured, you have a better chance of recovering some of the funds you are owed than if the debt is unsecured.
If you need help collecting on monies owed to your business, please contact Brinkley Walser Stoner to speak with one of our collection attorneys.