How to Use a Lawsuit or Collection Agency to Get Paid

You don’t always need a lawyer or lots of money to take a client to court for non-payment.

You've tried emails, calls, and letters, but your client still hasn't paid you for work you've performed or goods you sold, and now it's time to decide whether to take more forceful measures.

You can sue a client who has repeatedly ignored your requests for payment, use a collection agency to recoup at least some of what you're owed, or try mediation to work out an agreement. Unlike the sequential steps you followed to collect on your own, you'll have to choose among these three options (though you can always try mediation first and, if that fails, turn to a collection agency or go to court).

Hire a Collection Agency

Collection agencies are highly effective at getting clients to pay up, but they typically recover only a portion of the debt owed, and their services don't come cheaply. These services charge anywhere from 15 percent to 50 percent of the amount of money they recover, depending on a number of factors, such as the size and age of the debt.

If the amount of money you're owed doesn't warrant the cost of a collection agency, or you feel your case is strong enough to go to court, you have two options—small claims or trial court.

Taking Your Case to Small Claims Court

The small claims court process is easier and faster than taking a case to trial court, but small claims courts place limits on the amount of money you can collect. Depending on the state, the limit ranges from $2,500 to $25,000. (You can still use small claims court if your state's limit is less than what you are owed, but you are willing to trim your demand to the maximum amount allowed in your state.)

A judge decides small claims cases—there's no jury. You won't need an attorney unless you choose to hire one (although many states don't allow (you can always consult with an attorney before going to court, however). You'll typically get a ruling the same day.

You will have to gather and present documentation to show that you delivered the work or goods ordered, the customer didn't pay you, and you made a reasonable attempt to collect the debt.

To file a complaint in small claims court, you'll need to:

Identify the business. To file your claim, use the official name of the business, not the name of the client you worked with, unless that person's name is the same as the business name.

Identify the jurisdiction. Small claims courts have authority to decide cases only in the location (usually the county) where they are located—usually that is the county where you performed the work for your client.

Obtain and complete the necessary forms. For forms, contact the small claims court in the jurisdiction where you are filing your complaint. Some courts allow you to file your complaint online.

Pay a filing fee. If you win your case, you'll usually be able to collect the filing fee from the defendant, in addition to the amount the court awards.

Serve the complaint. Once you've filed the necessary forms, the court will appoint an officer to serve your client with a summons to appear in court. (You'll be charged a fee for this service.)

Appear in court. It's possible that your client will decide to pay you once it's clear that you are suing, and you won't have to go to court. But don't simply forget about your case based on the client's promise--proceed to court anyway. Bring all your evidence—documents such as work agreements, invoices, and emails—with you on the day of the hearing and present your case. If your client doesn't show up for the hearing—a likely scenario because most clients know they owe you the money and can't win—you'll automatically win your case.

Filing a Lawsuit in Trial Court

If the amount you're owed is larger than the small claims limit in your state, and you don't want to accept a smaller amount, you'll have to take your case to a trial court.

Engaging an attorney to represent you will increase your costs considerably, and even if you win, you'll usually have to foot the bill. But if your case is simple, you might consider handling it without an attorney, or limiting the scope of the work the attorney does to giving you some legal advice or helping with strategy.

What to Do Before You Sue

Using a collection agency or a lawsuit to collect what you are owed can be costly and time consuming. Before you go that route, be certain that you have evidence to support your position, your client has the means to pay you, and the potential payment you'll receive is worth the effort and the cost.

Tally the amount your client owes, including unpaid invoices and any other unreimbursed expenses you've incurred, and figure out whether the customer has the wherewithal to cover the debt.

If the business has folded and left no trace, it will likely be a waste of time and money to go after your client for payment. On the other hand, if your customer has filed bankruptcy, you might be able to file a claim for the money you are owed in bankruptcy court. Check with your state to determine whether your business and the type of debt qualifies for a bankruptcy court claim.

If your customer is financially healthy and you file a lawsuit, you'll need to show that you made multiple attempts to collect what you're owed on your own (See the All Law article, What to Do If a Client Won't Pay), and that you're bringing the matter to court as a last resort. Don't skip the last step, the final demand letter, because it will serve as evidence that you gave your client ample opportunity to pay you.

When to Use Mediation

With mediation, an independent third party (usually a judge or a professional mediator) helps both sides in a dispute work out a satisfactory agreement.

Mediation is more informal and, usually, faster than a court hearing, but the process isn't binding. It's possible the two sides won't come to terms, or one or both parties will decide not to abide by the agreement and file a lawsuit anyway.

Some contracts include a boilerplate clause requiring the use of mediation to resolve disputes. Review your work contract to make sure it doesn't require you to seek mediation before filing a lawsuit or using a collection agency.

Winning Isn't the Same as Collecting What You're Owed

Just because the court awards you a settlement doesn't mean you'll automatically collect it. In some cases, the business you've sued might refuse to pay you anyway, and you'll have to go back to court to ask for assistance getting your money.

The court has the authority to garnish a business's bank account or put a lien on property, but it will be up to you to take the necessary steps to ask for and carry out these measures.

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