Collection lawsuits can resolve stubborn unpaid accounts

July 22, 2011
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In this summer's tough economy, assume you have a customer who will not pay. Your credit department has made calls and written letters. There have been promises of payment. Still, the account remains unpaid.

Sometimes the customer has no money to pay, and rather than “throw good money after bad,” you need to make the business decision to write the account off as a loss.

Other times, though, the customer is surviving by paying only those creditors who are making the most noise. If that is the case, the best way to quickly become one of the noisiest creditors is to turn the matter over to a legal counsel for collection.

Before filing a lawsuit, an attorney will typically send a letter to your customer (the debtor) demanding payment within a certain number of days. Sometimes all it takes to “shake the money loose” is a letter from a lawyer.

If the letter does not work, the lawyer will file a complaint to start a lawsuit. After the complaint is filed and served, your customer will have three or four weeks to answer, depending on how the complaint is served.

Sometimes the customer will call wanting to resolve the matter. This is a good opportunity to not only get a payment plan in place, but also to improve your position as a creditor. For example, the customer may be willing to give security for the payment of the debt, or personally guarantee the debt, in exchange for a dismissal of the lawsuit.

If there is a resolution that calls for payments to be made over time, your lawyer should have the payments “secured” by a consent judgment that can be filed with the court if a payment is not made. That way, you can avoid having to start over if a payment is missed.

If the debtor does not answer the complaint — and, where the debt is truly owed, many debtors will not answer — your attorney can fill out a form requesting the court to enter a default judgment. The court will normally enter the default judgment within a matter of days.

Even when you have a judgment issued by a court ordering the debtor to pay you, the debtor will probably not pay voluntarily. The value of the judgment, though, is that it makes available several tools for forcing the debtor to pay, including:

Writ of Garnishment: You can send to the debtor’s bank, or to anyone else who owes the debtor money (including the debtor’s other customers), an order issued by the court that the money that would otherwise be paid to the debtor must instead be paid to you. In most cases, you can find out where your customer banks by looking at the last check the customer wrote to you. This is the easiest way to collect the judgment if you “hit” your customer’s bank account at the right time.

If the amount in the account is not enough to pay the judgment in full, you can try again. Some debtors will close an account after a writ of garnishment. Others will replenish the funds, giving you a chance to collect more of what is owed with another writ of garnishment to the same account.

You can also garnish debtor's state tax refunds.

Writ of Execution on Personal Property: You also can get an order of the court that vehicles, trailers, equipment and merchandise owned by the debtor shall be seized by a court officer and sold at auction. Often a debtor will pay the judgment to avoid having its assets seized and sold.

Often the property will be subject to security interests that will complicate or preclude execution on it. Vehicles often make good targets because it is easy for a court officer to verify title to a vehicle and vehicles are easy to tow away.

Liens on Real Property: Until a couple of years ago, it was difficult in Michigan to put a judgment lien on real estate. You had to determine that there were no other assets to satisfy the judgment, find real estate owned by the debtor, and have a court officer put the lien on the real estate.

Today it is much easier. With the debtor’s tax identification number or the last four digits of the debtor’s social security number, the court will issue a notice of lien that your attorney can record with the county register of deeds placing a lien on all of the real property owned by the debtor in the county in which the lien is recorded. This is a quick, inexpensive and easy way to tie up title to any real estate owned by the debtor in an entire county.

Debtor’s Exam: Your attorney can get a court order that the debtor, or an agent of the debtor, appear to produce documents and testify, under oath, as to the nature and location of its assets. This is a good chance to find out where the debtor banks, or the identity of customers who owe money to it. Often the threat of having to testify under oath will cause a debtor to make at least a partial payment of the judgment.

Getting counsel involved early can help ensure that, if the customer can pay, you are one of the creditors who gets paid. In the right circumstances, a collection lawsuit can free your staff from the headache of dealing with old accounts and add money to your bottom line in as little as three or four months.

Randy Groendyk is a trial lawyer in the law firm of Varnum, Riddering, Schmidt & Howlett LLP.

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