The first step is to try and collect the money yourself with follow-up invoices, letters and an offer of a payment plan. In this stage you can often accomplish two important things: getting a personal guarantee from the business owner, and getting the business owner to sign a promissory note.

A personal guarantee allows you to sue the owner personally for the money owed and not just the business. This is important because a lot of times a business can look cash poor even while the owner is still making a tidy profit. And if the business fails, you can't require the owner to pay you unless the owner has personally guaranteed the contract. A personal guarantee may allow you to garnish the owner's wages and/or put a judgment on the owner's house. (Remember, you only get a 'judgment' if you go to court and win.)

A promissory note is a kind of contract in which the debtor promises to pay a principal amount and interest by a certain date. Again, it's best if the business owner signs the promissory note both as a representative of the business and in his or her personal capacity. You can find sample promissory notes on the web, but if you're nervous about drafting it, hire a lawyer to help you. Keep in mind that it is illegal to charge too high an interest rate, so know your state's laws before trying to charge someone 30% interest!

If your personal collection efforts aren't successful, then you can either (1) turn the account over to a collection agency; (2) take the client to small claims; (3) hire an attorney to write a collection letter for you; or (4) hire an attorney to start a lawsuit for you. These methods are not universally appropriate. Let's look at each one individually:

1. Collection Agency. You can pay a collection company (usually a certain percentage of the collected amount, plus fees) to get the money for you. Collection agencies do nothing but collections all day long, so they are experts at locating the debtor and getting them to pay up. They work with courts and credit rating companies. They are very often successful at collecting at least most of the debt, but not always. You will need to provide the collection company substantiation for the amount, such as the signed contract and a printout of the debtor's account. Collection agencies, in my opinion, are best for smallish debts. Collection agencies are also good if the debtor lives in another state. Just make sure you find a collection agency that's national in scope or in the state where the debtor is located.

2. Small Claims Court. If the debt is small enough and you live in the same area as the debtor, you can take the debtor to small claims court. There are strict limits on the dollar amount you can ask for in small claims. Regardless, I wanted to put this option in the list in the event that you have problems with smaller amounts. Also, you have to bring the small claims action where the debtor is located. Thus, this is really only an option if the debtor is local to you. Attorneys aren't allowed in small claims court.

3. Attorney Debt Collection Letter. Some debtors are really intimidated by letters from attorneys. Maybe it's the letterhead? Maybe it's because it shows how serious you are about the matter? Some attorneys will charge a nominal fee to write a threatening collection letter on your behalf. The price could range anywhere from $50 to $350. If you have a pre-existing relationship with an attorney, she may give you a better deal. Note: some debtors get nasty letters from attorneys all the time so they are not particularly moved by them. Thus, attorney-drafted collection letters don't work every time, but they do work sometimes. When they do, it's a great deal for you because it means you didn't have to pay commissions, just a one-time fee!
  
4. Have your attorney file a lawsuit. If the debtor doesn't respond to a collection letter from you or your attorney, you can hire an attorney to sue the debtor for you. Sometimes, unfortunately, the only way to get paid is to start a lawsuit. This is a last resort because it is expensive and uncertain. It's only worth it if you are owed a large amount, the debtor has the actual ability to pay (you can't bleed a turnip!), and you have good substantiating evidence of the debt (a promissory note would be ideal). It's also much more attractive if your contract with the debtor allows you to get attorneys fees and costs in the event of a dispute. That way, you can ask the debtor to pay your attorneys fees as well. Take a look at your contract because if it allows you to collect attorneys fees and costs, then a lawsuit is a much more attractive option. Lastly, be sure and hire an attorney who works in the state (preferably the county) where the debtor resides. Generally, you have to sue the debtor where he or she lives. Thus, you need an attorney who is licensed to practice law in that state and comfortable in those courts.

One final note about using a collection agency versus an attorney: a lot of people like collection agencies because they require minimal payment up front; you only pay omission if they collect. On the other hand, attorneys require you to pay a retainer up front.

There's no exactly right or wrong way to go about this, so just do a little research about what commission (and fees!) a collection agency would charge you, and whether your contract allows you to recover attorneys fees. You can also switch tactics. Sometimes clients would ask me to sue the debtor after a collection agency was unsuccessful collecting the money.

I'm going to end on an important piece of advice: Sometimes it's better to just let go.  Never forget that we're emotional beings and often get carried away by them. Don't let your feelings of anger, guilt, and revenge drive you to pursue a debt beyond what is permitted by debtor's laws or just good financial sense. Learning to let go is also an important skill that needs to be developed over time.

I hope this post helped broaden your collections horizons and made you aware of some important collections issues. Please let me know if you have follow-up questions or concerns.

Respectfully,

Sarah