Spilled coins representing customer balances owed to your businessIt's a pretty common facet of running a business - your customers end up owing you money. When it's a lot of money, you're going to be highly motivated to go out and collect that balance. But when it's a smaller balance, enough to annoy you but not enough to keep you awake at night, how do you decide what to do next? Whether the balance is small or large is dependent on your business and what that balance means to your livelihood. A $50,000 debt to an international company making billions of dollars a year is insignificant, but to the local hardware store in town? That could be months of rent due from one customer.

If you were to go to a “one size fits all” website or law firm, they will likely have a formula that tells you immediately whether they will consider taking the case or not. But in reality, the question really is “If I hire a lawyer, what is the best use of my legal fees?” Before you sign that large retainer and end up with a bad taste in your mouth at the end, there are a few things to consider about those small debts.

What Type Of Debt?

One of the first considerations is what type of debt are you owed? If it’s a bounced check or a breach of a written agreement, these can be relatively straightforward cases. If you and the other person verbally agreed to some kind of pandemic loan and it wasn’t repaid, the case will depend more on the credibility of the explanations on both sides of the case. Where there’s nothing in writing, there will likely be more legal work to be done to be able to prove your case.

Can I Use a Demand Letter?

Once you’ve considered the type of debt, there may be an easy solution. Instead of immediately filing a lawsuit, you may be able to have a lawyer draft a demand letter on your behalf. The letter can be used to work out a settlement like a payment plan. You may also create a mechanism to get your debt paid without having to go to court. Especially now, when many courts are closed, avoiding the courtroom can give you a speedier resolution.

In addition, you can usually have a short agreement drafted up. If the other party does not pay, you have their written acknowledgment that they owe the debt to you. This would speed up and simplify the process if you have to go to court later on.

Courtroom Work

Filing your case and going to Court with an attorney can be the most expensive part of any small debt dispute. If the money is owed to your company, you need to hire an attorney because a company can't represent itself in court. When the dispute is over $100,000, hiring a lawyer seems like a natural next step. However, when the dispute is over $4,000, the amount of the debt can be eaten up quickly by legal fees. You can be left winning a judgment for $4,000, but spending $10,000+ on legal fees.

For small debts, you should check with your local Small Claims Court to see what the process is for filing a case. These courts are often set up for people to represent themselves and a lawyer isn’t necessarily needed. Many lawyers avoid Small Claims Court. The amount of the debts and the structure of the Court aren’t made for lawyers. These courts can be a fast and easy way to get a resolution to the money you are owed.

Collection Work

One advantage of talking to a lawyer may be (hopefully?) the insight that your legal fees may best be reserved for collecting the money you are owed. If your matter ends up in court and you win, you can hire an attorney to help you collect your money. Using subpoenas, wage garnishments, and other legal documents, a lawyer can assist you in getting the money that the Court has told you that you are entitled to. If the other party has gone missing, your lawyer hopefully knows a good private investigator.

Each case is unique and so is the decision of whether to hire a lawyer or not. Talking to a lawyer about a debt owed to you is usually a good first step. Many prospective clients are focused on a lawsuit out of principle. That is an understandable motivation, but an expensive one. Your money may be better applied to collection efforts instead. But that is a legal strategy. And as with most legal strategies, it’s a good idea to consult a lawyer. They may have some insight you hadn’t considered before…

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Next Steps

If you'd like to discuss your outstanding customer balances and whether working with an attorney is right for your business, let's set up a Legal Strategy Session to discuss the best options for you and your business.

Andrew Ayers
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I work with business and estate planning clients to craft legal solutions to protect their legacies.
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