Tina Dettman-Bielefeldt column: Small-business bill collection struggles

7:46 PM, May 8, 2013  |  Comments
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A SCORE client called me recently for advice. She had performed service work for a client and the client was refusing to pay the bill. There was no written contract; she was operating on a verbal agreement. What steps could be taken to collect?

Jon Olson, an attorney and a Green Bay SCORE volunteer, says that the first mistake was failure to get a written agreement.

"Verbal agreements are difficult to enforce because they're difficult to prove," Olson said. "When a case like this is brought before a judge, there will be different recollections of what the agreement was. The easiest way to handle collections is to make payment terms clear upfront."

Payment terms should be specific and include the number of days before payment is due, the amount of interest that will be charged on unpaid balances, and a statement that says they will be liable for interest and all costs of collection including attorney's fees. Good accounts receivable practices also mean that the business follows procedures closely so that steps are automatically taken when payment is late.

Olson said that can mean a polite call and letters of reminder that increase in intensity. Having a lawyer write letters often has greater impact.

"They know then that the file has been turned over to us and the creditor is willing to spend money to collect," he said. "If the person is in the habit of not paying their bills, it might not make any difference, but for the majority of people, it's going to wake them up."

If letters don't make a difference, there are several options. For amounts less than $10,000, the business can file with small-claims court. The fee is $96.50 so it doesn't make financial sense to file unless the amount owed is great enough and the person owing money has the financial wherewithal to pay.

"The court doesn't make the debtor pay, but there are things you can do like wage or bank account garnishments," he said. "If they own real estate or other property, you might be able to file a lien. But, if they're uncollectable, it doesn't make any difference if you have a judgment."

Amounts greater than $10,000 would be handled in Circuit Court if the creditor decides to pursue payment through the courts.

Courts are also involved in the event of bankruptcy, and creditors may have a difficult time ever collecting anything if the debtor goes that route. If a debtor has an LLC and files for Chapter 7 bankruptcy with that LLC, he may say that he doesn't have to pay even if his personal assets are strong. Olson advises that businesses consider getting personal guarantees before extending credit.

"This might not be a standard practice, but it should be," Olson said. "There's a reason banks check your credit before giving you a loan. If a person is reluctant to give a personal guarantee, there's probably a reason why. Ask yourself, is this something you'd be willing to do for free?"

Next week's column will look at other options including collection agencies.

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