As a small business owner, you could be wondering if during the chaotic times of COVID-19, is it still possible to sue a customer for an unpaid account/debt?
In the first instance, you should try as hard as you can to recover funds you’re owed through processes such as payment plans if a customer simply can’t pay the whole amount.
This will be the path of least resistance and, while it may take longer to receive the full payment, it will usually guarantee you see that money.
If unsuccessful, accounts which are uncollectable by your business should be passed over to a debt collection agency as soon as possible.
It’s important to make sure the agency you choose operates solely based on no–recovery no–charge. That is, the only charge you will pay will be commission on successful collection of the debt and if they are unable to collect, you won’t pay.
However, there will be times when you will need to sue a customer for non-payment of a debt. So, what should small business owners be looking out for and how should you go about recovering debts?
If your debt is undisputed and the debtor simply refuses to pay it, the good news is that you can usually obtain a judgment in about six weeks and there will be no need for a court hearing at all.
The reason is that if the debt is undisputed, and if the customer does not lodge a legal Defence after being served with court documents, you can then enter judgment without the a hearing.
Where should you sue?
Legal action is a state process as opposed to Commonwealth, so each state and territory has its own processes. In saying this, the underlining principles for each state are largely the same.
To make sure you have the home advantage, you would normally strive to sue in your home state, even if your defaulting customer is based in another state.
What’s the minimum amount you should sue for?
Technically speaking, you can sue for any amount that needs to be recovered.
However, it would not be practical to sue for a debt of under $500 and, in most cases, you would probably be looking at a minimum debt amount of $2,000 to make the process viable.
Why should you sue?
There are many benefits in obtaining a judgment, however the main benefit is it’s likely to pressure your customer to pay up immediately.
The normal life of a debt is about six years. However, if you obtain a judgment, the judgment has a life of between 12 to 15 years, depending on the state.
Something to consider is a judgment will contain a cost component. Normally, the customer will be ordered to pay approximately 70 per cent of the legal costs and disbursements you incur through a lawyer.
Interest will run on the judgment, from the date payment was due until the date payment is made, at a prescribed interest rate. The rate varies from state to state but in most cases, it is between 8–10 per cent per annum.
If you take out a default judgment, it will automatically be recorded on the credit file of your customer. It will sit there for five years and if the customer applies for credit, a home loan or to rent a property, they will be required to pay out the judgment amount owing to clear their file.
Legal enforcement options
After obtaining a judgment, you can proceed immediately to various legal enforcement options. The major enforcement used is garnishee of wages.
What this means is if your customer works in a regular job, the garnishee order will order the employer to deduct a specified amount from the customer’s pay packet each pay day. These deductions will be paid to you until the judgment debt has been paid in full.
If the judgment debt exceeds $5,000, you can commence bankruptcy action against the customer. This is a serious process, with major ramifications for the customer. Keep in mind you may not receive the whole amount owed, so it’s up to you whether you will accept a reduced sum.
It’s not usually worth commencing bankruptcy action unless the customer is a homeowner, or you believe that they have access to funds.
Until September 2020, bankruptcy action is effectively on hold.
What’s the cost involved?
Whilst you could handle the legal work yourself, it’s not recommended as there are many traps along the way. You’re better off with a lawyer, especially one that specialises in debt collection.
For an indication on cost, Mendelsons National Debt Collection Lawyers provides fixed–price, fully–inclusive legal action for all states, which includes all disbursements payable – including court fees and process serving fees. When searching for a lawyer that’s right for you, make sure to look for inclusive fees.
A $3,000 debt in Victoria has a fee of around $1,900. In New South Wales, a $5,000 debt has a fixed price fully inclusive legal action fee of $1,800.
What do you need from the customer?
It’s crucial to gather information about your defaulting customer. You’ll need a confirmed residential address, as well has where your debtor works, who they work for, and what type of work they do.
Additionally, it’s helpful if you know that your customer has bought their house, as opposed to renting.
Ultimately, suing should be a last resort and is often best used as a pressure tactic to encourage a bad-paying customer to pay their debts. The threat of legal action should usually be enough.
Prushka CEO, Roger Mendelson, has over 44 years experience as a commercial lawyer. Prushka handles debt and claims recovery for the corporate, small business, medical and insurance sectors – sectors in which it has dominant market share.
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