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I Want My Money! But How Do I Get It?

Columnist: Scott Gerien
June, 2012 Issue

Scott Gerien
All articles by columnist
With the downturn of the economy, we’ve seen the issue of debt collection become more prominent with parties either unwilling or unable to make good on their debts.

To get an overview of the debt collection process and what businesses may do to mitigate the risk presented by extending credit to customers, as well as the recourse available when faced with debt collection, I turned to my partner at Dickenson Peatman & Fogarty, David Balter, a litigator who regularly deals with debt collection and enforcement for our clients.

At the outset, David notes that legal action to collect a debt can be an expensive and time-consuming process. Unless a contract or statute is present that provides for the recovery of your attorney’s fees and costs, the cost of collection will come off the top of any recovery. Moreover, winning an uncollectible judgment is pointless.

David further points out that, because of these factors, typically the best practice is to avoid a debt collection action in the first place. But if you have to engage in litigation to collect what you’re owed, efficiency is key, and David provides the following guidance.

Know your customers. It may seem obvious, but the best way to avoid a debt collection action is to manage your accounts receivable in a way that avoids the accrual of the underlying debt.

The first step in this process is to know your customers. For example, if you’re selling goods on a net 30-day invoice basis, have all potential customers complete a credit application before you sell them anything. If the potential customer is an entity, such as a corporation, partnership or limited liability company, then obtain a personal guarantee from some or all of its principals. Check the website for the superior court in the jurisdiction where the potential client is located—lots of litigation history is usually not a good sign, and you may wish to avoid doing business with them. Ask for credit references and verify them.

Trust but verify. Monitor the customer’s payment history on a regular basis. If a given customer gets beyond 30-days out on a net 30-day invoice, call him to see if there’s a problem. If he doesn’t call you back or respond to an email, assume you have an issue.

To sue or not to sue? If informal attempts to collect your debt have proven fruitless, you probably need to engage an experienced debt collection attorney to analyze the viability of initiating a collection action. Alternatively, a collection agency may prove more cost-effective, depending on the amount at issue.

The first step either will likely engage in is analyzing the viability of your claim. For example, is your claim based on a written or oral contract? Does it provide for the recovery of any attorney’s fees and costs expended in the collection process? If not, is there a statute that provides for such recovery? Has the statute of limitations expired? Is your claim secured or unsecured? Is it likely to cost more to litigate your claim than the amount you’re owed? Are any Fair Debt Collection Practice statutes implicated? Is the debtor currently in bankruptcy?

Once these basic questions have been answered, the next step is to analyze your ability to collect on any judgment that may be entered in your favor. Here too, experienced collection counsel can assist you in obtaining information on the existence and type of assets owned by your debtor and in analyzing where the likely priority of any judgment you may obtain falls in the statutory priority of any other liens and encumbrances already in existence against your debtor. For example, if you win a judgment for $100,000 against a debtor whose assets are already totally encumbered by other liens or encumbrances, then you’re probably unable to enforce it.

Moreover, you need to analyze if formal collection litigation may simply push your debtor into filing for bankruptcy. The timing of a bankruptcy filing by your debtor may result in your claim being discharged as an unsecured debt.

Sometimes the results of this type of analysis may show that a negotiated resolution with your debtor prior to litigation is the least bad alternative available. A written repayment plan that’s secured by an agreement for entry of judgment against your debtor in the event of its breach is one example of such an outcome.

Litigation. If litigation proves necessary, it must be handled with efficiency, as all collection actions involve a certain degree of losing, so to speak.

In certain situations, seeking a Right to Attach Order may make sense and could give you more rights in the event of a subsequent bankruptcy by your debtor. Similarly, if you're a secured creditor, you may be required to first proceed against the collateral for your credit vehicle.

Then a small amount of written discovery followed by a deposition of your debtor is probably in order. If you can establish the validity of your claims and absence of any factual dispute by means of such discovery, a motion for summary judgment may be in order. Alternatively, if the debtor fails to respond to such discovery, motions to compel and/or for sanctions up to striking their answer may be available.

Judgment enforcement. Once judgment has been entered in your favor, at a minimum, it should be recorded in the county in which the debtor lives and does business and with the State of California Secretary of State’s Office. You may wish to then consider completing these steps and simply waiting for the expiration of the required perfection period for the liens created thereby.

Once your judgment liens have been perfected, a variety of judgment enforcement proceedings are available, including taking the examination of the judgment debtor or anyone reasonably believed to be holding the property of the judgment debtor, or executing your judgment against the real and/or personal property of the judgment debtor. Steps for judgment enforcement can vary county by county.

Remember, your goal in any debt collection action is to get paid as quickly and cheaply as possible.


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