past due debtDuring the economic downturn of the last few years, an increasing number of our firm’s clients have expressed concern over the fact that a growing number of their business’s customers are becoming slow pay . . . or, perhaps, no pay.  In some instances, clients have asked, “what should I do when a customer has an account receivable that is more than four months past due and that customer refuses to return my call?”

1. Informal Resolution

The initial step any individual or business should take (during an economic downturn or otherwise) is to find out why the customer hasn’t paid.  It could be that the customer is refusing to pay because that customer is unsatisfied with your product or the service you provided.  If this is the case, you should offer to try and work out an acceptable resolution, perhaps providing a discount or replacement of the product, if this is appropriate.

2. Mediation

If you still can’t reach an acceptable resolution, you may want to encourage your customer to participate in mediation to attempt to resolve the payment issue.  If you skip any attempt to mediate (or informally resolve the dispute) and automatically proceed with filing a formal collection action, the customer may respond by filing a cross-complaint against your company, claiming the service provided was substandard or that the product they purchased was defective.

3. Demand Letter from an Attorney

If the customer is simply trying to avoid paying, and refuses to engage in any meaningful resolution of the account receivable, you should have a lawyer send a demand letter to the customer advising that you may file a collection action if the balance is not promptly paid.

4. Foreclose on Security / Collateral

If the customer does not respond to the demand letter, and you have security for the debt, then you should have your lawyer file a lawsuit to foreclose on the security interest.  This may be possible if you have a security interest in the products that you sold to that customer.  If this is the case, it is important to have your attorney act quickly, before the customer does something with the security interest to try and prevent you from recovering it.

5. File a Lawsuit

If you do not have any security for the debt, the next step is to file a collection action or a small claims court action depending upon the size of the debt.  In most jurisdictions in California, you can file a small claims court action if the amount owed is up to $7,500 if the plaintiff is a natural person or up to $5,000 if the plaintiff is an entity (i.e., corporation or partnership).  Small claims court can be a good alternative for collecting on debts that are not substantial.  It is also a good option to consider as is it inexpensive and you can obtain a judgment quickly.  You cannot have a lawyer represent you in court, but you can have a lawyer assist you with filling out the paperwork.

In situations where the customer owes you more than $7,500 you will need to retain a lawyer to file a collection action in superior court.  The fees you pay your attorney for filing the collection action may be recoverable against the defendant customer.

The debt collection attorneys in Riverside and Orange County at Reid & Hellyer have extensive experience in the debt collection process.  Call us if you can use some assistance with your collections.