If you are a business owner, sooner or later you will have a customer who fails to pay you. What you do before the relationship turns bad can make the difference between getting paid and coming up empty.

The Contract

First, a good contract can go a long way toward helping you collect. Your contract should clearly define the goods and/or services you are selling and the amount and terms of payment. It should also state where the parties can file suit if there is a breach of contract. Interest or late penalties on past due invoices provide an incentive for the customer to pay on time. In addition, include a term that requires the other party to pay your attorney’s fees if you must bring suit. Of course, other clauses can be helpful, too, but these are a few that business owners often overlook.

Knowledge is Power

Second, the information you gather before the relationship sours can help you when it is time to collect. All too often lawsuits end with judgments that cannot be collected. Knowing the other party’s employer, where they bank and what assets they own can turn a judgment into cash.

If your customer pays with a check, keep a copy or, if you use mobile deposit, keep the check itself. When you have a judgment against someone, you can “levy” on their bank account and receive the account funds. However, you have to know what bank to serve with the levy.

Find out where the customer works. You can often do this in an informal conversation. Just be sure to make note of it in case you need this information later. Or, in some instances (such as with a tenant), you can have them fill out an application that contains this information. Knowing where the debtor works allows you to file a wage garnishment. A garnishment requires the employer to pay some of the debtor’s compensation into court to pay the debt.

Lien in

Third, many people do not know that they can record a judgment in the County real property records. When it is recorded a judgment becomes a lien on any property the debtor owns in that County. Usually, it is impractical to foreclose on a judgment lien because of prior lien holders such as banks. However, the property owner will have to satisfy your lien if they sell or refinance. The lien is good for an initial term of 10 years, so this happens surprisingly often.

Finally, understand that your attorney cannot “spin gold out of straw”. You will probably have to put a little money and effort into collecting the debt. Court filing fees, process servers and possibly even private investigators may be necessary to get a judgment and collect it. Be prepared to work with your attorney and you will increase your chances of success.

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