Ohio Practical Business Lawyer & Attorney : Teri Rasmussen : Lane Alton & Horst Law Firm : Commercial Law, Creditors, Business Formation : Columbus, Central Ohio

Your business supplies a service or product to a customer and then bills the customer.  One month goes by, then two, and you hear nothing from the customer - no payment, no complaint, no explanation.  By the third month, you are probably becoming rather irritated at the very least and depending on how things are going financially, may be getting a bit concerned.  Or perhaps you've called the customer only to receive a series of excuses and promises that payment will soon be forthcoming.  What do you do?

Chris Moander of the Wisconsin Business Law and Litigation blog has been making a series of posts about how and when to make the decision to go to court to collect these sort of delinquent accounts.  My favorite, with the attention-getting title of "Would lower legal bills motivate you to organize your files?", explains what sort of information and records are helpful to your attorney when you turn the account over ro him or her for collection.  

What to Give Your Attorney.  I agree with everything on Chris' list and with his general point that the more organized information you can give your attorney about a delinquent account, the more quickly -- and inexpensively -- things can move forward.  While all of the items mentioned by Chris are certainly helpful, here's my list of what I find especially useful when I am asked to file a lawsuit against a customer who hasn't paid as agreed:

• Basic contact information (i.e.name, address, phone) of customer
• Credit application, purchase order, or contract documenting the purchase
• Invoice
• Ledger or account history for at least the last 3-4 months
• Copy of any checks previously sent by the customer (or information about the bank used by the customer)
• Any correspondence (including e-mails) exchanged (i.e. sent to, or received from) the customer relevant to the outstanding debt
• Any pertinent information about general nature or length of the relationship with the customer, i.e. was it generally good before this or has this customer always been difficult, is this a huge part of your revenues

With this information, I can get a fairly good idea of what the best approach might be and have what I need to file a lawsuit.  Getting it on the front end saves both time and money.

Why Collect?  Chris also addresses the question "Why collect?", and in another post entitled "Time to call Mr. Wolf", provides some guidelines concerning when it might be time to turn the matter over to your lawyer.  Again I agree wholeheartedly with Chris, but let me add some additional thoughts.  As far as the "why", that much seems rather self-evident.  Unfortunately, the world is not a perfect place and not everyone voluntarily does what they should.  If you're not willing to force the issue of payment when appropriate from time to time, it won't be long before you find you're not making any money and may have to go out of business altogether.

Deciding When to Pursue Legal Action.  Knowing "when" to pursue payment through legal channels and "when" it might be helpful to turn the matter over to your attorney is more complicated.  As Chris suggests, if any of the following are true, it probably is time to "go legal":

• The account is 90 days past due, and in some cases, even sooner.  If you wait too long to pursue legal action, events and circumstances may have occurred in the interim which make the legal option less effective
• Suddenly there's a "problem" with the product or service sold or the customer now has some other dispute with you and the customer wants some or all of their money back.  Of course in many cases, it makes good business sense to just go along with the customer and give a discount.  However, make sure you are doing that in appropriate cases.
• You've endured a series of excuses and broken promises that payment is right around the corner.

There are also times when it probably doesn't make sense to play the "legal" card:

• If there really was a problem or defect in the service or product, even if it wasn't near as big a deal as the customer is now making it
• The amount at stake is relatively small (or relatively small in comparison to the complexity of the situation resulting in nonpayment - read, lots of legal fees to sort through the facts and counter-allegations)  
• You have very important noneconomic reasons for wanting to avoid a dispute - perhaps it's your wife's brother's business
• Someone in your company engaged in some sort of objectionable behavior or made what could be characterized as misleading statements to the customer about any aspect of the business relationship between you (e.g. one of your sales people said somethingto the customer about waiting for the customer to get back on their feet before pressing for payment)
• There's virtually no chance the customer has any money or assets available to pay any judgment obtained

Thus knowing "when" it's time to pursue legal action is a case by case decision.  Often the choice will not be clear-cut. 

Once you've made the decision to pursue legal action, if the debt is small, you may still be able to handle it without the intervention of a lawyer if you really want to do so.  In Columbus where I live and practice law, and elsewhere throughout Ohio (and probably in other states as well), there are "Small Claims Courts".  In Ohio, these courts only have jurisdiction to hear matters involving $3,000 or less.  In addition, while it is possible for an officer or employee of the company to handle the case on behalf of the company without an attorney, he or she may only present documents such as invoices and testify only about facts of his or her own personal knowledge; no questioning or cross-examination of the customer's witnesses is permitted.  The Small Claims Division of the Franklin County, Ohio Municipal Court has prepared a very useful synopsis of how this court works.

If you decide to consult an attorney, that does not necessarily mean there has to be a lawsuit.  Often a letter from your attorney can prompt a response from the customer and it will be possible to work out a payment plan or other resolution of the matter.  An attorney can also help you make the determination whether pursuing collection makes sense in a particular case.

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Sooner or later every business experiences the bankruptcy of one of its customers.  If the customer has a large unpaid balance, this can be an especially unnerving experience.  There are, however, some basic things to know and do.

            1.  Don't Ignore the Filing.  The most important thing not to do is continue collection action against the debtor.  When a bankruptcy is filed, it triggers an "automatic stay".  The "automatic stay" prohibits any further action or activities against -- or affecting -- the debtor, the debtor's interest, or the debtor's property.  This includes foreclosures or sheriff's sales, garnishments, collection calls and, of course, the commencement or continuation of a lawsuit.  Violation of the "automatic stay" can result in monetary fines and sanctions against the offender.

One important "exception" to the "automatic stay" does exist for creditors who have shipped goods to the debtor which have not yet been delivered at the time the bankruptcy is filed.  In this situation, the creditor may stop the goods in transit and refuse delivery unless paid in cash.

            2.  Document the Debt Owed by Filing a "Proof of Claim".  To have any reasonable hope or expectation of receiving any payment on the debt owed, a "proof of claim" must be filed with the Bankruptcy Court by the designated deadline.  Frequently, though not always, a "proof of claim" must be filed within the first four to six months after the bankruptcy has been filed so prompt action is often necessary.  You do not have to be a lawyer to complete and file the proof of claim.

The initial notice of the bankruptcy will often contain a proof of claim form that can be filed out.  The "proof of claim" should set forth the basis for the debt (i.e. the service or product purchased), attaching copies of any written contracts or documents giving rise to the debt, identify any collateral pledged to secure the debt and specify the exact amount owed to the creditor. 

Filing this document with the bankruptcy court ensures that a creditor will share in any subsequent distribution of the debtor's assets.  It also makes it more likely that the creditor will receive notice of important events and deadlines in the bankruptcy. 

            3.  Read and Analyze the Initial Basic Documents.  At the time the bankruptcy is filed, or shortly thereafter, the debtor is required to file its "Statement of Financial Affairs" and "Schedules of Assets and Liabilities".  These documents list the names of creditors and amounts owed to each.  They also provide insight into the recent history and current state of the debtor's financial affairs and can be useful in determining the prospects and potential amount of any repayment of the debt owed.    

            4.  Attend the "First Meeting of Creditors".  Within the first month or so after the bankruptcy has been filed, a "first meeting of creditors" will be held.  Creditors who have been listed by the debtor will receive written notice of the time and place of this meeting; others can check with the bankruptcy court or the office of the United States Trustee for the district.  Attendance at this meeting is not mandatory for creditors.  However, the debtor is required to appear and answer questions under oath by the United States Trustee and any creditor in attendance about events causing the bankruptcy, prospects for repayment and other matters related to the bankruptcy.  You do not have to have a lawyer to participate and ask questions.   Thus, a creditor who fails to attend loses a valuable opportunity to learn about the debtor's financial situation and intentions.

            5.  Don't Expect Prompt Payment of Past Debt.  What happens next in the bankruptcy depends upon what type it is and the number and type of creditors affected by the filing. 

• In Chapter 7 liquidation proceedings, a trustee in bankruptcy (not the United States Trustee) will evaluate and dispose of the debtor's unencumbered assets, if any; after analyzing the claims made by creditors, the Chapter 7 trustee will then distribute those assets pro rata among eligible creditors who have filed a proof of claim. 

•  In a Chapter 13 "wage earner" proceeding, designed for individuals with ongoing income, a portion of the debtor's "regular income" over a period of generally three years, though sometimes longer, will be paid to a Chapter 13 Trustee to repay creditors in accordance with the terms of a "plan" approved by the bankruptcy court.

• In Chapter 11 reorganization proceedings, the debtor remains in control of its financial affairs and operation of its business while it attempts to develop and negotiate a "plan of reorganization" which provides for the treatment of creditor's claims; this treatment frequently involves large discounts of the amounts owed.  Chapter 11 proceedings are often complex and take months, or even years, to reach a conclusion.  The largest creditors in these cases may be invited by the United States Trustee to serve on an Unsecured Creditors Committee which acts as a fiduciary on behalf of the general creditor body with respect to evaluation of the "plan of reorganization" and other events during the course of the bankruptcy. 

            6.  Decide How to Participate.  A creditor's appropriate level of participation will naturally depend upon the nature and amount of the indebtedness, as well as upon the perceived prospects for repayment.  Creditors holding collateral will generally have the most leverage and the highest level of interest in the case; they may want to seek a lifting of the automatic stay so they can pursue their state court remedies and will undoubtedly have a number of other concerns raised by the bankruptcy.  Landlords and lessors are also afforded significant rights under federal bankruptcy law.  Trade creditors and other owed relatively small amounts may often find it cost effective to restrict their involvement to filing a proof of claim.

Many creditors view the "fresh start" philosophy of the federal bankruptcy laws as just another dodge for delinquent debtors.  However, there are also many provisions designed to protect creditors and assure an equitable distribution of the debtor's assets among all creditors.  A basic understanding of the fundamental aspects of bankruptcy can help avoid inadvertent pitfalls while maximizing the possibilities of at least some recovery of a bad debt.

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