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Collecting Monies Owed

Before addressing this less than exciting topic, I want to wish all of you Happy Holidays, Merry Christmas, Happy Hanukkah, Happy Kwanza, and a Joyous New Year. This next year is shaping up to be a challenge which will make us smarter and stronger. Hard work and careful planning will get us through it to enjoy the recovery.

The current economic disruption is presenting us with opportunities which some of my clients are exploring. However, many of us are confronting the “dark side.” In about half of my recent business related conversations and meetings, someone complains that they are having trouble getting paid for work performed. When we are unable to solve collection problems ourselves, the legal system provides both options for collections and contractual safeguards to mitigate risks. The only other alternative is to adopt the medieval Chinese and European practice of taking a voluntary hostage as security. Unfortunately, you must house and feed the hostage and probably provide them with a HD cable.


In business collections, the toughest decision is to pull the trigger. We all have spent our entire career establishing our reputation and cultivating relationships. While initiating a suit does not preclude talking, it certainly damages the relationship and the potential for referrals. While litigation is an act of last resort, at some point, the balance of relative harms dictates taking action. The collection process varies somewhat in different jurisdictions so I have generalized this discussion.

Clients must thoroughly and honestly evaluate the claim(s), factual context, potential defenses, and likely counterclaims. Simplicity correlates directly with speed and efficiency. Complexity increases both the cost and time to secure a judgment. Unfortunately, complexity sometimes is not apparent until after initiating litigation.

Depending upon the relationship, collection begins with the service of a written demand for payment supported by a threat of arbitration or the filing of a lawsuit. If forced to act, the arbitration award or court verdict is reduced to an enforceable judgment. The judgment is then levied against the assets in the debtor’s possession or the possession of third parties.

There are a few pre-judgment legal tools one can use to either accelerate the process or prevent dissipation of the debtor’s assets which will be used to satisfy an eventual judgment. A claimant of an ownership interest in land may file a lis pendens to secure their claim against both the debtor and an innocent third party purchaser. A construction contractor or tradesmen may file a mechanic’s lien. A creditor may secure a prejudgment attachment of an identified asset if he or she can prove a likelihood of fraud, unavailability of the debtor, or the risk of removal of assets from the jurisdiction. The owner of intellectual property may enjoin its misappropriation and use. And, of course we attorneys have the right to file a fee lien against the judgment in a case we have worked. Injunctions and pre-judgment attachments are expensive because they require a hearing and courts may require the posting of a bond or agreement to a penalty as a condition of their Order.

Once judgment is secured, the real collection process begins. Attachments, levies, liens, and garnishments are perfected against the judgment debtor’s goods, chattels, credits, personal property, divided and sometimes undivided interest in land, credits, favorable judgments, undivided interests in a partnership, wages, and etc. This process initiates a second mini-litigation in which both the judgment debtor and the third party have certain rights which must be addressed and resolved if asserted. Debtors and their sureties also may bond over liens and levies. Once all prerequisites are satisfied, the creditor takes possession or liquidates the asset to discharge or reduce the debt.

There are some collections roadblocks. Certain types of real property tenancies and homestead laws raise issues. Federal law and many state laws prohibit garnishment of the wages of public employees and all state laws limit garnishment to a percentage of “disposable wages.”

Ultimately, the biggest hurdle to collections is bankruptcy, to be the subject of a future letter. The second biggest hurdle is creditor fraud. There are a number of ways to mask assets or otherwise make them seem unavailable to satisfy a judgment. Untangling these knots, takes more aggressive legal work and, often, assistance from a private investigator.


While there are no magic bullets, it is important to try to mitigate risk. Before negotiating language and signing agreements, a fundamental safeguard is to study the client. Confirm their legal identity, corporate existence and good standing. Identify the directors and backers. Determine their ability to pay and speak with references regarding payment history. There are a number of internet services that can assist in this effort. Your lawyer can use Westlaw or Lexis to locate recorded claims and judgments. Private investigators can provide a lot of information with just a tax id number and some personal information.

It is equally important to employ contract safeguards. The most conservative devices are personal guarantees, parent company guarantees, security agreements, evergreen retainers, bonds, and payment by letter of credit. Software designers, IT providers, and re-sellers may consider incorporating disabling mechanisms which require quarterly code renewals. Structuring contract payments to require pre-payment on a task by task basis is a reasonable safeguard, and one that is more palatable to clients.

The relationship should be managed with a cautionary eye towards future difficulty. Confession of judgment contract language is useful to reduce the cost of litigation. Security agreements can protect the asset to be used to pay your bill from competing claims by unsecured creditors. Recording the client’s tax identification number is useful for post judgment asset searches. Photocopying all payment checks is also useful for post judgment asset searches.

Ultimately, mitigation requires that you cut your losses. Consider these simple maxims. (1) The more the client owes you the less likely it is that they will pay in full. (2) Your time is better spent improving your product and looking for new clients than serving clients who are not paying. (3) It can be a good investment and relationship builder to support a client when they are down, but only to the extent that you can afford to lose the money.

#businessorganization #smallbusiness #VirginiaAttorneys #DCAttorneys #MarylandAttorneys #commercialtransactions #litigation

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DISCLAIMER: The information discussed in our blog is generally gathered from third party publications. The Shaffer Law Firm does not assert the truthfulness of the content of third party publications. The information from third party publications is repeated solely for commentary on the legal system and how best to use it, it is not meant as commentary on the persons and facts actually involved.

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