Business Law: When to Close the Barn Door (on Delinquent Clients)

By Nina L. Kaufman, Esq

My college roommate, Jenny, called me at the end of an aggravating day at her graphic design firm - to vent. "I wasted the entire day trying to chase down customers who owe me money," she said. "I've called them on the telephone. I've sent e-mails and letters. I've even met with some of them in person. But do I get my money? N-o-o-o-o. I get hot air, or no response at all." She paused for a moment, then continued: "Nina, how can I get these people to pay me? Does it make a difference that I didn't have a written agreement?" Hearing my sigh, she added, "I'm afraid to ask: how much will it cost me to get you involved? Is it even worth it?"

Unfortunately for Jenny, as I told her, she wants to close the barn door after the horse has gone. It's easier to get paid when your customer relationship is active than when you have finished your work and the client is already showing signs of slow - or no - payment. But unless you're prepared to take the hit as a matter of regular policy, you may well need or want to sue for the debt. What is the weird Wonderland that Jenny - or anyone else in her situation - can expect from the process? There are several phases to it:

Phase 1: The "Expectation-Setting" Phase

In a word, keep them low. Don't let visions of full repayment dance in your head like sugarplum fairies. Why?

First, you have attorney's fees. Very few claims below $20,000.00 can be pursued profitably by an attorney, without legal fees exceeding the value of the claim, except on a contingency fee basis. If you do pursue legal action on a contingency basis, you'll pay nothing in fees unless there is a recovery; but if there is one, the attorney or agent will take a percentage of it. (Don't blame the lawyer - she didn't create the mess.) Second, you have to ask, how strong is your case? Is it well-documented, with a written contract and unchallenged invoices? Does the contract provide for interest on the unpaid balance? Or for attorney's/collection fees and costs? If not, again, consider whether it's worth the expense, or whether you might heading for a pyrrhic victory. Finally, realize that most cases settle. Compromise is the name of the game.

With Jenny's $7,200.00 printing bill, she could send the claim to a collections agent, let's say, on a one-third contingency. If it settles for $3,600.00 (50%) - with Jenny's consent, of course - the agent gets 1/3 ($1,200.00). So, ultimately, of that $7,200.00, only $2,400.00 gets returned to Jenny. It's something, but it's not much.

Phase 2: The "Hiring The Attack Dogs" Phase

If you're ready to move forward nonetheless, it's best to leave these kinds of matters to the professionals -- collection agents and lawyers. For several reasons. First, they know what they're doing. They've developed arts of persuasion that most of us can only dream of, as it's their core business. Which leads to the second reason: by hiring someone else to step in, you get this matter off your plate so that you can return to your core business. Third, it sends a strong signal that you appear willing to fight. Customers may bank on your not having the guts to take them to court to collect. This tells them otherwise (although you may have to go to court to prove it).

Phase 3: The "Paper Trail" Phase

Collecting a debt may seem straightforward, but it's good to establish certain legal proofs before starting the lawsuit. For example, if you've sent a payment demand and it wasn't contested, the customer will have a harder time claiming later that your work was faulty (a typical response). Once again, having the correspondence come from someone other than you will lend authority to your demand.

Phase 4: The "Waiting Game" Phase

If the phone calls and letters from the professional attack dogs didn't persuade the customer to reach for his checkbook, it is unlikely that you will see your money without bringing a lawsuit. These may be the times that try your soul, as the process can take 1-2 years (depending on the size of your claim). Plus, the vast majority of commercial cases settle. Often "Solomonically," which means a figure somewhere in the middle of your claim (the stated dollar amount) and the customer's response (zero). If you primed yourself properly in Phase One, you'll weather this phase with greater equanimity. Still, settling the case has the advantage that you actually get the money, which you might not if you have to take the case through to trial.

Phase 5: The "Post-Trial Actually-Getting-the-Money-In-Your-Pocket" Phase

So let's say you go to court. And let's say that after a long, two-year ordeal, the judge finally decides that, yes, you are entitled to be paid . . . in full. Do you have the money yet? No! All you have is the "judgment" of the court that you are entitled to the money. Now you have to actually collect it. If you're dealing with a crafty debtor, you (or your lawyer) can go crazy trying to find the bank account where the debtor's money is held. If you can't find an account with funds, or if the debtor files bankruptcy, all you've got is a doughnut hole.

Rather than getting caught in collections nightmares, work out ways to avoid them. Know your customer - and whether he or she is an "ideal" client for you. And know how much credit leeway you will give to clients - if any. In particular, having a written agreement that includes your payment policies can substantially cut the time and cost you spend in the "rabbit hole" of collections. Communicating your policies clearly, "up front," and in writing makes them easier to enforce. That way, when you close the door to go home for the night, you know your horse is going to stay securely in the barn.

© 2004-2009 The Legal Edge LLC. Nina L. Kaufman, Esq. is an award-winning business attorney, author, and speaker. Under her Ask The Business Lawyer umbrella, Nina offers easy-to-understand business law resources that protect small businesses and save them money. To learn more, and receive our FREE "LexAppeal" ezine, visit http://www.GreatBusinessLawTips.com  or contact Contact Us. This article is for your general information only. Be sure to consult with an attorney regarding your particular situation to make sure you get the specific advice you need.

Nina Kaufman, Esq. Award Winning Business Lawyer, Author & Speaker