How to Collect on a Customer's Past Due Credit Account

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1Sending a Demand Letter

2Initiating a Lawsuit

3Enforcing a Judgment

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Most of your customers pay their accounts on time and in full. For those who don't, however, you need to act fast if you want to collect the money owed. Keep in mind that the longer an account sits unpaid, the less likely you'll be to collect the amount due. In the meantime, that outstanding debt is costing your business. To collect on a customer's past due credit account, first send a demand letter. If that doesn't do the trick, you'll need to file a lawsuit.

Steps

Part 1

Part 1 of 3:

Sending a Demand Letter

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   Format your letter. A formal demand letter should be formatted in traditional business style, on your company letterhead if you have it available. Typically you can find a template on your word processing application for the appropriate format.

   • You also may be able to find forms or templates that you can use which are specifically designed for collection of a past-due credit account from a customer. Check online with your local court and small business associations.
   • Make sure you're addressing the letter to a specific individual person by name – not a company or a department generally. If your customer is a business entity, you may have to make a phone call to find out to whom you should address your letter.
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   Provide information about the debt. The first paragraph of your letter should include a basic breakdown of the customer's past due account, including when the debt was initially incurred and the amount the customer owes.

   • Include details such as the date the debt originated, as well as the date and amount of the last payment made. These details allow the customer to check your records against theirs.
   • Particularly if you've had little contact with your customer in the meantime, it's possible they simply forgot to make a payment or even that your records are in error and a payment was made that wasn't properly credited to their account.
   • Since part of the purpose for a demand letter is to make sure that all records of the debt are accurate and up to date, including as many details as you have in this regard enables your customer to check their records and verify the amount owed.
   • If you have copies of invoices or other notices you've previously sent to the customer, you may want to attach copies of these to the demand letter.
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   Maintain a firm, professional tone. Your letter should stick to the facts regarding the past due account and demand payment in a professional way without insulting the customer or using threats or intimidation.

   • Your demand letter doesn't need to be long – typically three paragraphs will suffice. The first paragraph provides details about the debt, while the second recounts any previous efforts you've made to collect the debt, including phone calls made or notices sent.
   • In the third letter you will make a demand for payment and let the customer know the next steps you plan to take if payment is not received by a certain time.
   • When discussing previous attempts made to collect the debt, in particular, pay attention to your tone. Keep in mind that if you end up filing a lawsuit, your letter will be read by the judge and potentially attorneys or other court staff.
   • Avoid any language that could be perceived as insulting or accusatory. If the customer previously indicated that they would make a payment, but failed to do so, you can include those facts – but at the same time, you don't want to say that the customer lied or deceived you (even if you feel like they did).
   • If you're at all concerned about the tone of your letter, consider having a neutral person read the letter before you finalize it to confirm that it's not over the top.
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   Set a deadline. Give the customer a specific date by which you expect a response or payment in full. This deadline typically is measured as a period of time from receipt of your demand letter. Decide whether you are demanding payment in full, or are open to negotiating a settlement or payment plan.

   • Typically a week to 10 days is sufficient time – but the amount of time you give your customer may depend to some extent on what you're asking them to do, as well as how far past due the account is.
   • For example, if you've indicated that your open to making arrangements or setting up a payment plan, but you merely want them to contact you, two or three days from receipt is plenty of time for the customer to simply pick up the phone.
   • On the other hand, if you're demanding payment in full, you may want to give them a little more time to come up with the cash. Less than a week and you run the risk that a court would find you didn't give them sufficient time to remedy the situation before you filed your lawsuit.
   • State explicitly what will happen if your demands are not met by the deadline. If you intend to file a lawsuit to collect the debt, indicate when you will file the lawsuit and which court you will use.
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   Finalize your letter. Once you've finished drafting your letter, proofread it carefully and make sure the date on your letter matches the date you intend to mail your letter out. Then print your letter and sign it.

   • Be especially careful to double-check the name and address to which you're sending the letter. Make sure you've addressed the letter to the right person and that their name is spelled correctly.
   • Sending the letter to the wrong person can cause delays as well as result in difficulty filing a lawsuit if the situation reaches that point.
   • Before you sign the letter, you may want to have someone else read over it. Often another pair of eyes can more readily spot a mistake that you may have overlooked. Spelling and grammatical errors reflect poorly on your business and make you look sloppy.
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   Mail your letter. You should send your letter to your customer using certified mail with returned receipt requested so you'll know when they have received the letter and can determine when the deadline you established in the letter will fall.

   • Be sure you make a copy of your letter before you send it so you have one for your records.
   • When you get the green card back in the mail letting you know that your customer has received the letter, attach it to your copy so you can keep them together.
   • Keep in mind that many courts require proof of previous efforts you've made to collect a debt before you will be allowed to file a lawsuit.
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Part 2

Part 2 of 3:

Initiating a Lawsuit

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   Organize your information. Before you file your lawsuit, you will need to gather all documentation you have regarding the customer and their past-due credit account so that you can properly list the allegations and the amount owed on your court documents.

   • Go ahead and make copies of any invoices, account statements, or other documents related to the customer's debts, as well as your demand letter and any other notices you've sent to the customer regarding their past due account.
   • Separate these documents from your other account documents, since you'll need to present them at the hearing. The easiest thing to do is create a separate file and organize all documents chronologically by date.
   • If the situation has been going on for quite some time or if there have been extensive attempts to collect the debt, you may want to create an index and timeline so you can easily identify each letter or statement.
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   Choose the correct court. Generally, you can file your lawsuit in a court that has jurisdiction over the county where the account contract was entered. Depending on the amount of money the customer owes you, you may be able to file in small claims court.

   • Filing in small claims court has a lot of benefits for you as a small business owner – chief among them, the fact that you don't have to hire an attorney and the process typically is simpler and much faster than a civil suit in state court.
   • However, keep in mind that if your business is organized as a corporation, you may not have the ability to use small claims court. Many states restrict corporations from using small claims to sue customers to recover debts.
   • Small claims courts have a maximum limit for which you can sue – typically between $2,000 and $7,500. If the customer owes more than that, you cannot use small claims court, because court rules dictate you must sue for the total amount you are owed. You can't simply sue for a portion of the amount owed and use small claims court.
   • However, if you caught the situation early and acted quickly, you typically will have no problem falling under the small claims limit.
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   Complete your claim forms. If you're filing in small claims court, claim forms are available from the clerk's office or on the court's website that you can fill out to initiate the lawsuit. In other courts, you may have to draft a full complaint from scratch.

   • The claim forms require you to provide information about the customer you're suing, including a full legal name and address where they can be served with the claim once it's filed.
   • You also must provide information about yourself or your business, and the customer's past due account, including the specific amount of money you're owed (including interest, if applicable, but not including any court costs).
   • Typically you must indicate on the form any attempts that you've previously made to collect on the past due account. Some courts may require you to attach a copy of the demand letter you sent to your initial claim form.
   • Once you've completed all the information required accurately, sign your claim form and make at least two copies of each page. Some courts require more copies – you may want to call ahead to the clerk's office and find out, because although the clerk may make copies for you, they'll charge you a fee per page for doing so.
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   File your claim. Once you've completed all necessary forms, you must take them along with your copies to the clerk of the court that you want to hear your lawsuit. Give the clerk your originals and copies and tell them that you want to file a small claims lawsuit.

   • You must pay a filing fee – typically around $100 – when you file your forms with the clerk. You may want to call ahead and find out exactly how much your filing fee will be and what methods of payment are accepted.
   • Keep in mind that some courts do allow you to recover court costs from the customer as part of your final judgment.
   • After you've paid the filing fees, the clerk will file-stamp your originals and copies with the date and return the copies to you. One copy is for your records, the other must be delivered to the customer you're suing.
   • In small claims, the clerk also typically will schedule your court hearing at this time. Some small claims courts have an initial appearance date before the final hearing is scheduled.
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   Have the other party served. Before your lawsuit can proceed, you must provide notice to your customer that they are being sued so they have the opportunity to answer your claim and defend themselves in court.

   • Technically you can complete service by having any person over the age of 18 who is not directly involved in the proceeding hand-deliver the court documents to the person you're suing.
   • If you want to use a more formal method, you can pay a small fee to the sheriff's department or a private process serving company to have a sheriff's deputy or professional process server hand-deliver the documents for you.
   • Occasionally small claims courts allow you to use mail service, which involves mailing the documents to the person you're suing using certified mail with returned receipt requested. The green card you get back in the mail will serve as your proof of service.
   • Once the documents have been served, you must file a proof of service document with the court. If you had someone hand-deliver the documents, they typically must complete the top part of this document themselves when they deliver the documents.
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   Attend your hearing. Particularly in small claims, your casual proceed fairly rapidly after the customer has responded to your lawsuit, and your hearing may be held within a month or so after you initially filed your claim.

   • Some small claims courts require the person being sued to make an initial appearance, or to file a written response by a certain date. In others, they simply have to show up at the hearing.
   • If the person you're suing does not show up at the hearing, you may win your case by default – however, you still must prove to the judge that they owe you the amount you stated in your claim.
   • Although basic court rules of evidence and procedure also apply in small claims court, the hearing will be considerably less formal than a similar hearing in state or federal court. That doesn't mean you shouldn't dress and present yourself with the utmost professionalism.
   • Take your copies of all your court documents with you to the hearing, along with all your other account statements, demand letters, and other documents that have relevance to your case.
   • When the judge calls your case, explain the details regarding the customer's past due credit account and the money they owe.
   • If the customer appeared at the hearing, they will be given the opportunity to provide whatever defense they have as to why the judge should not order them to pay the amount due.
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Part 3

Part 3 of 3:

Enforcing a Judgment

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   Get the written order. You can't enforce the judgment until the judge has issued a written order, and in some court you may have to wait for a brief period after the order is entered – typically 30 days or less – before you can do anything to enforce the judgment.

   • Keep in mind the court will not enforce the order for you – you must take steps to enforce it yourself if the losing party doesn't immediately pay up.
   • The wait period is necessary if the other party has the right to appeal the judgment, because they have that amount of time to file an appeal. After that period ends, the judgment is considered final and you can enforce it.
   • In the meantime, consider sending a demand letter to get the person to pay up. Let them know that you will pursue other collections if the judgment is not paid in full. You also may want to remind them that if the judgment remains unpaid, it will show up as a negative mark on their credit report and can significantly impact their credit score.
   • You may be able to find sample demand letters that you can use at the clerk's office or on the court's website.
   • Provide them with an address to send payment in full or reach you to make installment payment arrangements.
   • When you receive the written order, make several copies of the written order as you will need them to use other collection methods if the person doesn't immediately pay.
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   Conduct post-judgment discovery. Many courts give you the option of sending interrogatories to the customer, which essentially are written questions that they must answer in writing, under oath, within a set period of time after receiving them.

   • These questions must be limited in scope to determining the income and assets the person owns that you can go against to satisfy the judgment.
   • Procedures differ significantly among courts. Some courts require the losing party to appear in court and answer questions regarding their assets and income so the judgment can be paid.
   • In other courts, a form is available that you can send to the customer to fill out. The form requires the losing party (now known as the judgment-debtor) to provide information about the property and assets they own that could be used to satisfy the judgment.
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   Get a writ of execution. A writ of execution, sometimes called a writ of garnishment or similar, is issued by the clerk of the court where your judgment was entered and gives you the power to seize income or assets from the debtor to satisfy the judgment.

   • After you have the information you need about the judgment-debtor's income or assets, decide which route you want to pursue and have the clerk issue a writ to that effect.
   • For example, you may have the option of getting a bank levy to take the money from the judgment-debtor's bank account to satisfy the judgment.
   • Wage garnishment is another common way by which judgments are satisfied. The amount you're allowed to take from each paycheck will be limited by state law.
   • The clerk will have forms you can use to calculate this amount, and then you'll determine how many times the amount must be garnished until the judgment debt is paid.
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   Have the writ served. You must give the writ to the sheriff's department, which typically will have a deputy deliver the writ to the company that holds the income or assets that you are seizing or garnishing to pay the amount of the judgment.

   • Who is being served depends on the method you've chosen to collect the judgment debt. If you've decided to seize funds in a bank account, the writ would be served on the judgment-debtor's bank.
   • If you're pursuing wage garnishment, the sheriff's deputy will serve the writ on the judgment-debtor's employer. The employer must deduct the amount calculated from the judgment-debtor's paycheck each pay period and send that money to the sheriff's department or to the court.
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   Collect on your judgment. Once the writ has been served, the sheriff's department will collect money from the judgment-debtor according to the plan established in the writ until the judgment is paid in full.

   • In some jurisdictions the money is kept by the sheriff's department, in others by the clerk of court.
   • Typically you will receive payment when the judgment is satisfied in full, although some jurisdictions may have it set up so that you get periodic payments as they are received.
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