Handling Delinquent Customers: Legal Action and Collection Methods, Part II

Often times the most challenging part of operating a business is ensuring you’re getting paid for your efforts.  This involves the effective and efficient handling of delinquent customers, including formal legal action and collection methods.  Part I of this blog series discussed the importance of having a written collection policy in place for timely addressing delinquent accounts receivables and also provided best practices for your business’s contracts and credit agreements.  Part II will propose additional considerations for protecting your business’s bottom line and effectively addressing delinquent accounts.

Additional Considerations for Your Contracts and Agreements

It is vitally important that your customer contracts and credit agreements set your business up for success in the event collection action is needed.  To build upon the suggestions provided in Part I of this series, some additional legal issues to consider for your contracts and credit agreements are venue, jurisdiction and choice of law clauses.  Venue and jurisdiction clauses deal with the type of court and geographic area within which a lawsuit may be filed or judicial activity exercised.

If you do business across the entire State of Florida, you’d rather not have lawsuits in multiple counties and courts throughout the state.  The travel time and expense alone may make collection actions cost-prohibitive.  Therefore, include a venue and jurisdiction clause that requires all formal legal action to be commenced in, and subject to, the exclusive jurisdiction of the state courts serving the county of your business’s principal address.

If you do business across state lines, then you definitely want to include a choice of law clause.  If the majority of your business is in Florida, but you have a few customers in Georgia and Alabama, you don’t want to have to analyze how your contracts, or the nuanced legal issues involved in each dispute, are affected by three separate sets of state statutes.  Make the validity, interpretation and enforcement of your contracts and credit agreements governed by the laws of one state, such as Florida.

Avoid Violating Debt Collection Laws

There are federal and Florida debt collection laws of which all creditors should be aware.  Florida’s consumer protection laws are not restricted to collection agencies, but apply to any person collecting a consumer debt, and provide greater protection to consumers than federal law.  See Fla. Stat. §§559.55 – 559.785.  For example, in Florida, creditors are prohibited from publishing or posting individual names of debtors for purposes of intimidating or enforcing collection of consumer debts.  Creditors are also prohibited from communicating directly with a debtor if it is known that the debtor is represented by an attorney with respect to the debt.

Be on the lookout for any bankruptcy notices from your customers.  When a customer files for bankruptcy, an automatic stay of all debt collection commences.  Stated another way, the bankruptcy code’s automatic stay immediately ceases debt collection activities from all creditors and works as an automatic injunction that halts actions by creditors to collect on pre-bankruptcy debts.  Creditors who violate the automatic stay can be held in contempt of court and sanctions can also be imposed against them.

Formal Legal Action

The time may come where you’ve exhausted all steps under your internal collection policy and formal legal action is needed.  In Florida a corporate creditor can sue in small claims court without an attorney (i.e. amounts less than $5,000), but a corporate creditor must have an attorney in non-small claims actions.  You will want to work with your attorney to evaluate your claim before filing suit.  This can include a pre-lawsuit collectability analysis of the debtor and determining whether your business may be subject to a counterclaim by the debtor.  Remember, your case is only as good as the evidence you have to support your claim.

If your business obtains a judgment against the debtor, you should obtain a certified copy of the judgment from the court and record it in the county’s official records and with the Florida Secretary of State.  The judgment will not attach to the debtor’s real or personal property unless first properly recorded.  After recordation, various post-judgment collection actions can then commence, including, but not limited to, bank garnishments, wage garnishments, levy and sale of property, and post-judgment discovery.   It is best to engage competent legal representation to assist your business with efficient and effective post-judgment collection actions.