Peyton is a freelance journalist who has written for many publications, mostly in her local area. She felt lucky when she found a publication willing to pay her more than the usual $50-75 per story that most other publications offered. The work was challenging and fun, and she felt proud of what she put out. Even more proud when the editor and publisher raved. Yet, while Peyton met every deadline, she found herself waiting a couple of months after issuing invoices to get paid. She kept working for them, thinking this would guarantee her checks got to her eventually. Then, one month after she turned in her stories and an invoice for the work, she got radio silence from the editor. She received no more assignments and didn't receive payment.
Almost a year later, Peyton still waited for payment for the final two invoices she'd sent the publication. She regularly emailed and called the publisher directly, asking for payment, whether in part or in full. Something, anything. She'd heard of other writers stiffed by the same publication but none of them took serious action. They all seemed scared to bite the hand that wasn't feeding them.
Peyton's story is not unique, sadly. Whether you're a freelancer or an entrepreneur running a business with employees, having a client fail to pay up can have serious consequences. Even if the amount is a few hundred dollars, those dollars could mean a lot to you. How can you go about getting the money you're owed?
First, do a gut-check and a wallet check. Is recovering the money worth the investment of what money you do have and your time? Is it about the money or about standing up for yourself? It's legitimate to want to chase your money because it feels personal; that intense emotional reaction may just give you the fuel you need to succeed. Though I'd always recommend talking it over with a cooler (less-emotionally-invested) head.
Once you've decided it's worth chasing your money, you have several options. Consider the following methods to recover debts owed to you by clients and customers:
Though more formal than a phone call, a demand letter is simply a letter demanding that the debtor pay the debt in full or pursuant to a payment plan. It is not an official order from the court and not even part of a court proceeding. There are a number of options when it comes to writing demand letters:
- Write It Yourself. This is the cheapest option. To get started, you should search online for a template to customize to your situation. Two great templates are available on Docracy and Rocket Lawyer.
- Engage a Collections Agency. This requires more investment than a DIY Demand Letter, but you won't have to actually put out any money upfront to hire the agency. Instead, the agency will draft and send a series of letters on your behalf. Cisco, Inc. actually offers a collections service wherein if your customer pays within the grace period you select, the monies will be paid to you free of charge. If the customer doesn't pay up within the grace period, the debt moves into their Immediate Collection Service, where they'll take a percentage of any monies collected.
- Hire an Attorney. This may be the most expensive option, but if the debt is substantial, it is also likely the best option. Ask other entrepreneurs in your area for a referral.
Small Claims Court
If you need to collect a debt that's less than $5,000, you might consider filing in small claims court. The details vary from state to state. For example, in Pheonix, Arizona, where I am a business lawyer, the maximum claim amount is $3,500. Small claims court is usually a more simplified and often less-expensive means to collect smaller debts, in part, because lawyers are generally not allowed.
As mentioned above under options for creating and sending a demand letter, you have the option of hiring a collections agency. It does not require an upfront investment of your own funds, but collections agencies charge as much as 50% of the funds they're able to collect.
Formal Court Action
Depending on the legal structure of your business, you may be able to file suit without a lawyer and appear pro se (on your own behalf). This can play out in a few ways:
- Settlement. Many if not most lawsuits don't actually make it to judgment by the court; rather, the parties agree to settle at some point during the court proceeding.
- Judgment. If the suit does make it to judgment, a judgment is issued by the court.
As Peyton learned from a friend who pursued a debt in court, a judgment in your favor does not necessarily make it easier to collect the debt owed. Yet, there are various ways to collect on a judgment issue by the court, including:
- Garnishment of Wages. Often seen in cases of failure to pay child support, this is a court-ordered legal procedure where a portion of the debtor's wages are withheld to pay their debts.
- Liens. This is a judgment lien placed on the debtor's real estate or valuable personal property, and the money is collected at such time the property is sold.
- Levy. This is a remedy whereby a judgment creditor can recover from the debtor by having a law enforcement official — often the sheriff — seize and sell the debtor's property.
These means of collecting on a judgment are, however, subject to limits by the Fair Debt Collection Processes Act. In general, these rules protect debtors from harassment.
Steve Cook is a lawyer at Cook & Cook in Phoenix, AZ. He advises small and medium-sized business on matters ranging from entity selection and formation to venture capital investment to mergers, acquisitions, and dispositions.