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Posted: March 17, 2011

Six tips for collections in a down economy

Your business relationships and good name may be more important than that receivable

Joanna Kitto

Our firm represents small and medium-sized businesses, and one of the most common reasons we have been contacted by our clients in recent years during the economic downturn is to address questions about collecting monies owed. Collecting overdue receivables is occurring more and more in this down economy. Below are a few considerations.

• Is the client relationship important to you? Many folks wish to collect monies owed, but of course, filing a claim almost always burns a bridge. Business owners need to ask themselves if the ongoing business relationship is more important than the money involved. One case that I keep in mind is the client came in for a consult to discuss the pros, cons and costs of suing one of her larger clients who had not paid her. She left feeling annoyed at being owed receivables, but something held her back from taking the next step to sue the client, even though she was relatively sure she did not want to work with that business again. The next week, the client, while feeling bad that he himself had no cash, gave her a glowing recommendation to a new client, with 10 times as much strong revenue as the first client, providing her with a much-needed, ongoing stream of stable at a key point in her year-old business. Lesson learned? Your business relationships and good name may be more important than collecting that receivable.

• Where to sue? Jurisdiction. Clients who have done business with an out-of-state company or person are often dismayed to learn that they may need to go to the defendant's own state to collect those monies, depending on the circumstances. This is an issue of jurisdiction, and the analysis the Court would make turns on where the parties are located, where the work was done, does the dispute involve real estate and who initiated the first contact, among other things. If you file in the wrong state and another party has to move to dismiss, now you have exposure to their attorneys' fees or costs. If your jurisdiction is not in Colorado, you now need to retain counsel in another state, and plan on the additional cost of flying to that state for court dates, no matter how small the amount at issue. This is one reason to be contract-savvy and address the choice of law and venue up front in your contracts and choose Colorado! Better yet, when you have a choice, do business with Colorado companies.

• What Court? Small claims courts can hear certain matters, while some jurisdictions also have county courts, and then district courts hear matters involving $15,000.00 or more, but have more complex rules for civil procedure and discovery and trial will take longer, need more participation by you and your attorney, and a district court case is generally more expensive than a small claims or county court matter. If you have claims based on federal law, you may need to retain an attorney familiar with federal court jurisdiction and rules. If you have a contract requiring arbitration, you may need to pay heightened fees for the arbiters' time or for hearing space. Analysis of your contract and claims, and the amount of money at dispute, assists in figuring out where, exactly, to file suit.

• Bankruptcy Issues. So you've brought your claim, and the party owing you money files for bankruptcy or threatens bankruptcy. First of all, be aware, not all parties who threaten bankruptcy actually file for bankruptcy. It is often be a negotiating tactic to try to dissuade one from pursuing their rights. Second, if bankruptcy is filed, you need to participate as a creditor, and certain creditors get paid in a more timely manner than others, depending on the nature of the services or product your company has provided. Some bankruptcies involve reorganization of debts, and others a discharge of debts. See an attorney to learn more about pursuing your claims.

• Doing it yourself? For disputes involving smaller amounts, you can arguably bring a claim yourself without an attorney in small claims court in an appropriate county. This experience involves your time, and you getting familiar with the rules of the Court, and preparing a complaint, and serving it upon the party owing you money. Some parties view it as an interesting and empowering experience, and I would not say never do it, but be aware that it comes at the cost of time and more than a little risk. Generally, you are in unfamiliar territory as a pro se plaintiff and it is almost never advised. Judges are not patient with pro se plaintiffs who do not understand the rules of civil procedure, the law or forms, and you run the risk of paying the other side's attorneys' fees, costs, damages or sanctions if you do it wrong.

• Are you exposed? When bringing a claim in the business context, be aware that the other party will analyze their facts to ascertain whether they have counterclaims. The other side may allege you also breached the contract, or made misrepresentations, or otherwise violated a law. Contractual disputes or business tort cases often involve complex facts or credibility contests about performance, so be sure you understand how strong your case is before rushing to court, and be sure to analyze the risk of counterclaims and your own exposure prior to poking the "litigation stick" in another's eye. Often, a contract or statute provides for attorneys' fees for a party, so you may find that you are suing over a relatively small amount of money, but will be at risk of paying the other side's attorneys' fees if that party prevails.
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Joanna Kitto is an attorney and partner in the business law firm of Ambroziak Kitto, LLC. More information can be obtained at www.ambroziak-kitto.com or from her at jo@ambroziak-kitto.com.

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Readers Respond

Great article, Joanna. There is one more factor to consider, in my opinion, in deciding whether to litigate. How are your other clients going to view it if you DON'T litigate and they find out that someone walked on a fee? Will it cause others to think they can do the same? If so, I think it may be worth it to sue for a small amount of money (several thousand dollars) when other collection tactics are exhausted. By John Heckers, MA, CPC, BCPC on 2011 03 17

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