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Five Common Myths About Suing for a Bad Debt
by Lisa Goldoftas and Steve Elias
Copyright © 1990 Nolo Press
It's happened again--you're stuck with another bad debt. Sure, you can
it off at tax time, but that's a year away. And your small business
not tax write-offs, to survive.
What about taking the culprit to court? Unfortunately, a whole set of
grown up, all with the same moral: that it's futile to sue for a bad
claim that lawsuits are inefficient and costly, and even if you win,
probably never see a penny.
Well, no one can deny that the court system is notoriously slow and
But there are ways around that and the other problems you've heard
bottom line is that if informal collection efforts don't work, a small
is almost always well advised to sue, get a court judgment and take a
steps to ensure the judgment is eventually paid.
Here's a look at the myths that may be keeping your business from
Myth #1: You'll Have To Hire a Lawyer or Collection
Get Into a Costly, Time-Consuming Lawsuit.
Most business people properly fear that a court case can quickly turn
and nasty. And what's the use if you'll have to hire a collection
attorney to do the job for a portion of the debt--often as much as
The good news is that small claims court is quick, cheap and effective.
states, lawyers are barred. Even where they are allowed, procedures are
enough for you to represent yourself competently if you carefully
case. Most small claims courts let you sue for up to around $2,000. But
your claim is for twice the small claims court limit, you'd probably
out better if you sue for the limit than if you hired someone to collect
Myth #2: Suing Is Worthwhile Only If the Debtor Has
To file a lawsuit, you don't need proof that the debtor will be able to
debt now--or ever. Even if the debtor has evaded your collection
have a steady job or seems like an ideal candidate for bankruptcy, it
excellent sense to sue.
The main reason is that judgments last a very long time. Each state sets
limit; ten years isn't uncommon, and you usually can renew a judgment
longer. That means that the irresponsible eighteen-year-old who wrote a
to pay for his stereo system still can be faced with a court judgment
graduated from school, set roots down in the community and bought a
during the wait, judgments collect interest--often about 10% annually.
Myth #3: Court Judgments Aren't Worth the Paper They're
If a debtor didn't pay before you sued, why should she pay just because
a court judgement--a piece of paper--that says she's supposed to?
Because a court
judgment gives you legal standing and the right to have certain of the
assets seized to pay the judgment. The debtor's wages, business and
property, real estate and bank accounts all open up as possible sources
Myth #4: Collecting a Judgment Is Difficult and
Collecting a judgment against a wily debtor or one with few resources is
trout fishing. If you thrash around a lot, you may scare up some bottom
without getting a trout--but if you set up patiently, you rarely miss.
spend considerable money and energy trying to collect a judgment but
only end up
sending the debtor into bankruptcy or deep retreat. Or you can be
patient and put
yourself in the position to collect your judgment somewhere down the
This approach is inexpensive and easy to implement. A court judgment
the right to put legal claims, called liens, on the debtor's property.
You set up
liens and wait for them to pay off when the debtor goes to refinance or
property. Because the judgment lien is legally attached to the property,
go to the new owner unless it's paid. And since new owners won't want to
property that has a claim on it, the debtor must first pay off the
In most states, you can create a judicial lien without a lawyer's help.
Typically, you'll have to prepare and file one or two simple forms. For
you can create a lien on real estate by filing official proof of your
judgment with the county recorder of deeds. In some states, a lien
attaches to real estate the debtor buys later.
If you're suing a business, you may be able to create a lien against
property by filing proof of a court judgment with the Secretary of
if the business is sold or borrowed against, your lien shows up when the
purchaser or lender makes a search of the records.
Usually, you can put a lien on a debtor's personal property (anything
estate) by taking simple preliminary steps to collect the judgment, such
sending the debtor certain court forms. If the debtor tries to use the
as collateral for a loan or files for bankruptcy the lien will show up,
possibly produce payment.
Myth #5: If a Debtor Files for Bankruptcy, You're Out of
The conventional wisdom is that once a debtor files for bankruptcy, a
as good as dead. In fact, judgment liens that were created more than 90
before the bankruptcy filing date can survive the bankruptcy process. It
on the type of property involved and whether the debtor (or her
contests the liens during the bankruptcy. The more liens you create
debtor's property, the greater your chance of getting your money.
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