Bad Debt Cases From the Plaintiff's Point of View

The job of the plaintiff who sues for nonpayment of a debt is often easy. That's because in the majority of cases, the debtor doesn't show up. In the absence of a defendant, the plaintiff needs only to introduce evidence that a valid debt exists and it has not been paid. To accomplish this, present written proof of the debt in the form of a contract, work order, promissory note, or purchase order signed by the defendant. Even if a debt is based on an oral contract, it's usually easy to get a judgment because the defendant isn't present to contradict the plaintiff's version of events.

Here are a few suggestions for plaintiffs who plan to sue to collect a debt.

When It Doesn't Pay to Sue

Although using small claims court to collect a bad debt often makes sense, there are exceptions. Here are the principal ones:

When there isn't enough money at stake.  For disputes involving a few hundred dollars or less, for businesses, the costs of filing, preparing, and presenting a small claims case are likely to be high relative to what they are likely to recover. Of course, this is doubly true if you doubt that a court judgment will be collectible.

When the defendant is a deadbeat.  When the defendant has a job, bank account, investments, or real estate, a court judgment is fairly easy to collect. However, some people are broke and unemployed and are likely to stay that way. Between 10%-13% of the adult U.S. population lives below the poverty level. Even those living above the poverty level, however, may not have money or property that can be easily collected. One thing is sure–you don't want to spend your time and energy taking to court people who are never likely to have enough money to pay the resulting judgment. Better to write off the debt and tighten up your credit-granting procedures.

When you want or need to get along with the person in the future. Any court action, even a small claims lawsuit, tends to aggravate a dispute, with the result that the parties become angrier at one another. This isn't a big problem when dealing with people or businesses you don't plan to have future contact with. But in other circumstances, such as where a relative or local business owes you money, it's possible that your ongoing relationship with a debtor may be more important than collecting all that you are owed. It may make sense to try to minimize conflict by trying to work out your dispute through mediation.

Ask for Your Money Before You Sue

Writing an effective letter demanding payment frequently produces a check by return mail. You should always do this before filing in small claims court (and your letter may be helpful in explaining your case to the judge). Unfortunately, instead of doing this, many businesses rely on fill-in-the-blank past-due notices and letters purchased from commercial sources. While sending one of these is better than nothing, it's far more effective to write your own, more personal letter–or at least to customize a form letter enough so that it's clear it is aimed at the debtor. But realize that whenever you persist in demanding payment of a business debt, a number of laws may protect the debtor from overzealous collection techniques. For the legal do's and don'ts of collecting bills, see Legal Guide for Starting & Running a Small Business, by Fred S. Steingold (Nolo).

Plan in advance to counter any claim that your bill wasn't paid for a good reason. If you provide goods or services, it's wise to include a statement on all your bills and collection letters requesting that the debtor notify you if goods are defective or services are substandard. Bring copies of these notices to court. Then if the debtor shows up and, for the first time, claims he or she didn't pay because the goods or services were somehow defective, you will be prepared to counter this claim. Do this by first showing the judge your many notices asking that any problem be brought to your attention and then testifying that the defendant never made a complaint. This should go far toward convincing the judge that the defendant is fabricating, or at least exaggerating, the current complaint in an effort to avoid paying you.

Bring Your Case Promptly

For maximum success in collecting on bad debts, file suit as soon as you conclude that informal collection methods are unlikely to work. You'll be pleasantly surprised that a small but significant number of debtors will quickly pay up–or call you to work out a payment plan–to avoid having a court judgment appear in their credit records. Fast action is also advisable for other reasons, the most important being that people who owe you money are likely to have other debts as well and may be considering bankruptcy. The quicker you act, the faster you'll get a judgment and be eligible to start collection activities, like wage garnishment or property attachment.

In addition, if you file promptly, you will avoid having to worry about whether you are within the legal filing deadline, the statute of limitations. Depending on the state and the type of debt, this usually is anywhere from one to four years.  

Judges tend to be skeptical of old claims. If you wait three years to sue over a $1,000 debt, the judge may wonder why you waited so long–are you honestly convinced your suit is valid? Did you and the defendant recently get into a spat over something else and you're trying to get even? You could end up answering a lot of questions you weren't prepared for.

Installment Debts

If you lend money or sell an item with payments to be made in installments, and a payment or two is missed, you normally are entitled to sue only for the amount of the missed payments, not the whole debt. Before you can sue for the entire amount, you must wait until all payments are missed. However, there is a major exception to this rule: You can immediately sue for 100% of the debt–plus any interest–if your contract contains an acceleration clause. This is a statement that if one payment is missed, the whole debt is due. To see whether this type of provision is present, carefully read your installment sales contract and consider rewriting it to include such a clause.

Written Contracts

Most debts are based on written contracts. The contract may be a purchase order, credit agreement, lease, or formal contract. It normally makes no difference what your document is called, as long as you have something in writing with the defendant's signature.

Always bring your written documentation to court on the day your case is heard and be ready to show it to the judge. Also, bring any ledger sheets, computer printouts, or other business records documenting the payments that have been made or missed. Bring an extra copy for the judge and defendant.

Take your responsibility to be organized seriously. Otherwise sensible-looking businesspeople too often show up with botched records and become flustered when closely questioned by the judge. The courtroom is not the place to straighten out a poor accounting system.

Oral Contracts

Generally, a debt based on an oral contract is legal as long as the contract was (or could have been) carried out in one year and is not for the sale or mortgage of real estate or the sale of goods (personal property) worth more than $500. Of course, it may be hard to prove the debt exists if the defendant flat out denies that he or she borrowed the money or bought the goods or services. Your best bet is to attempt to come up with some written documentation that your version of what occurred is true. For example, even if there is no written agreement, the defendant may have written you a down payment check or a letter asking for more time to pay. Either would be a huge help in convincing the judge that a debt exists. Or, when you write a letter demanding payment before you sue, include a description of the oral agreement and existing debt along with a phrase like "If my understanding is incorrect in any way, please contact me in writing or by phone by [date]." If the debtor doesn't dispute your version of events, then bring a copy of your letter to court and tell the judge you never got a reply, if that's truly the case.

If you can't come up with anything in writing, try to think of a person who has firsthand knowledge of the debt and who is willing to testify. For example, if you asked for your money and the defendant said in the presence of a friend, "I know I owe you $1,000. I'll pay you next month," or even, "Too bad you will never get your money back," or anything similar that indicates that the loan existed, bring your witness to court or have the witness write a letter explaining what that person heard, and show the letter to the judge.

If you don't have a witness, consider whether you can establish the debt's existence by looking at the debtor's actions. It is often particularly easy to do this when you haven't been paid for services you provided in a commercial context. After all, if the other party accepted your labor, there is almost always an implication that payment is expected.

EXAMPLE: Jane, a commercial illustrator, works as a freelancer for a number of ad agencies, publishers, and other clients. One day she gets a call from Harold, a dress designer, asking her to do a series of drawings of his new line of evening wear. Jane does the drawings and submits her bill for $2,000. Harold refuses to pay, claiming both that payment was conditional on the drawings being published in a fashion magazine (they weren't) and that even if a contract did exist, Jane is charging too much. Jane files in small claims court. The judge has no trouble finding the existence of an oral contract based on Harold's admission that he asked Jane to do the work. However, the judge only awards Jane $1,400, because she can't document her claim that she was to be paid $100 an hour, and Harold made a convincing presentation that illustrators with similar qualifications customarily charge no more than $70 per hour.

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