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Five Common Myths About Suing for a Bad Debt
by Lisa Goldoftas and Steve Elias
Copyright © 1990 Nolo Press
It's happened again--you're stuck with another bad debt. Sure, you can
write
it off at tax time, but that's a year away. And your small business
needs money,
not tax write-offs, to survive.
What about taking the culprit to court? Unfortunately, a whole set of
myths has
grown up, all with the same moral: that it's futile to sue for a bad
debt. They
claim that lawsuits are inefficient and costly, and even if you win,
you'll
probably never see a penny.
Well, no one can deny that the court system is notoriously slow and
expensive.
But there are ways around that and the other problems you've heard
about. The
bottom line is that if informal collection efforts don't work, a small
business
is almost always well advised to sue, get a court judgment and take a
few simple
steps to ensure the judgment is eventually paid.
Here's a look at the myths that may be keeping your business from
collecting what
you're owed.
Myth #1: You'll Have To Hire a Lawyer or Collection
Agency and
Get Into a Costly, Time-Consuming Lawsuit.
Most business people properly fear that a court case can quickly turn
expensive
and nasty. And what's the use if you'll have to hire a collection
agency or
attorney to do the job for a portion of the debt--often as much as
50%?
The good news is that small claims court is quick, cheap and effective.
In most
states, lawyers are barred. Even where they are allowed, procedures are
simple
enough for you to represent yourself competently if you carefully
prepare your
case. Most small claims courts let you sue for up to around $2,000. But
even if
your claim is for twice the small claims court limit, you'd probably
still come
out better if you sue for the limit than if you hired someone to collect
the debt
for you.
Myth #2: Suing Is Worthwhile Only If the Debtor Has
Money or
Property.
To file a lawsuit, you don't need proof that the debtor will be able to
repay the
debt now--or ever. Even if the debtor has evaded your collection
efforts, doesn't
have a steady job or seems like an ideal candidate for bankruptcy, it
can make
excellent sense to sue.
The main reason is that judgments last a very long time. Each state sets
its own
limit; ten years isn't uncommon, and you usually can renew a judgment
for even
longer. That means that the irresponsible eighteen-year-old who wrote a
bad check
to pay for his stereo system still can be faced with a court judgment
after he's
graduated from school, set roots down in the community and bought a
house. And
during the wait, judgments collect interest--often about 10% annually.
Myth #3: Court Judgments Aren't Worth the Paper They're
Printed
On.
If a debtor didn't pay before you sued, why should she pay just because
you have
a court judgement--a piece of paper--that says she's supposed to?
Because a court
judgment gives you legal standing and the right to have certain of the
debtor's
assets seized to pay the judgment. The debtor's wages, business and
personal
property, real estate and bank accounts all open up as possible sources
for
payment.
Myth #4: Collecting a Judgment Is Difficult and
Expensive.
Collecting a judgment against a wily debtor or one with few resources is
like
trout fishing. If you thrash around a lot, you may scare up some bottom
feeders
without getting a trout--but if you set up patiently, you rarely miss.
You can
spend considerable money and energy trying to collect a judgment but
only end up
sending the debtor into bankruptcy or deep retreat. Or you can be
patient and put
yourself in the position to collect your judgment somewhere down the
road.
This approach is inexpensive and easy to implement. A court judgment
gives you
the right to put legal claims, called liens, on the debtor's property.
You set up
liens and wait for them to pay off when the debtor goes to refinance or
sell the
property. Because the judgment lien is legally attached to the property,
it will
go to the new owner unless it's paid. And since new owners won't want to
buy
property that has a claim on it, the debtor must first pay off the
debt.
In most states, you can create a judicial lien without a lawyer's help.
Typically, you'll have to prepare and file one or two simple forms. For
instance,
you can create a lien on real estate by filing official proof of your
court
judgment with the county recorder of deeds. In some states, a lien
automatically
attaches to real estate the debtor buys later.
If you're suing a business, you may be able to create a lien against
business
property by filing proof of a court judgment with the Secretary of
State. Then,
if the business is sold or borrowed against, your lien shows up when the
purchaser or lender makes a search of the records.
Usually, you can put a lien on a debtor's personal property (anything
but real
estate) by taking simple preliminary steps to collect the judgment, such
as
sending the debtor certain court forms. If the debtor tries to use the
property
as collateral for a loan or files for bankruptcy the lien will show up,
and very
possibly produce payment.
Myth #5: If a Debtor Files for Bankruptcy, You're Out of
Luck.
The conventional wisdom is that once a debtor files for bankruptcy, a
judgment is
as good as dead. In fact, judgment liens that were created more than 90
days
before the bankruptcy filing date can survive the bankruptcy process. It
depends
on the type of property involved and whether the debtor (or her
attorney)
contests the liens during the bankruptcy. The more liens you create
against the
debtor's property, the greater your chance of getting your money.
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