How To Take Legal Action for Non-Payment of Invoices
If you run a business, whether a major corporation or a sole proprietorship, one of the biggest headaches is not getting paid on time. Accounts receivable are the lifeblood of any operation and when that spigot turns off or even slows down, it can have a devastating impact.
Understanding your rights to take legal action for non-payment of invoices is an important part of ensuring the viability of your business. Below is a helpful primer on how the legal process can help you recover your losses.
Determine Your Damages and the Likelihood of Recovery
Before you initiate the legal process to collect a debt, you need to make an important business decision -- is it worth the cost of litigation to pursue? As you weigh this decision, you'll need to know what your damages are and whether the customer can pay up.
When determining damages, you'll want to calculate all of the unpaid invoices and, if the customer was renting or buying goods or equipment, whether they were damaged in any way. If so, you can factor in repair costs and possibly other damages due to lost income from future rentals (this is more likely if you already have future rental agreements in place).
The next step is to examine the customer's financial health by analyzing factors like:
- Fixed assets (vehicles, equipment, machinery, etc.);
- Cash on hand;
- Liquid inventory;
- Real property;
- Corporate bonds/stock;
- Notes receivables; and
If you're dealing with a customer that doesn't appear to likely to pay you back or is on the brink of bankruptcy, instead of litigation, you may want to consider selling the debt to a debt collection agency and moving on.
Make Your Formal Demand
If you decide to take legal action for non-payment of invoices, you initiate the process with a formal demand letter to the defendant, whether it be an individual or a business, or both. If the defendant is a business, but an individual signed a personal guaranty, you can make the demand on both.
In your demand letter, among other things, you'll want to:
- Identify how the customer is in default;
- Identify how much is owed;
- Demand payment of all past due amounts by a certain date; and
- Advise of possible legal action.
File a Lawsuit and Seek Pre-Judgment Relief
The next step is to file and serve a complaint in a court with the proper jurisdiction. Typically this will be in the county where the transactions took place or where the defendant resides/operates.
After you file a complaint, there are ways to seek relief early on in the process. For example, you could apply for a writ of attachment or writ of possession to either place a lien on some of the defendant's assets or to take possession of them (if they were collateral for your agreement). This can protect your ability to collect on a judgment while also pressuring the defendant to settle the case.
Finally, during the pre-trial phase of a case, you can utilize the discovery process to not only obtain evidence supporting your claims, but also to identify and locate a defendant's assets which can help you enforce a judgment down the road.
Obtaining and Enforcing Judgments
You can typically obtain three types of judgments:
- Default judgment (where the defendant fails to answer the complaint or appear in the case);
- Summary judgment (obtained on a motion); or
- Judgment after trial.
Once a judgment is obtained, you can immediately start the process of enforcing it. Each state provides different types of judgment enforcement mechanisms, such as:
- Judgment liens;
- Abstracts of judgment (which can be used to place liens on real property); or
- Writs of execution (which can be used to direct a sheriff to seize equipment or garnish cash assets held by the defendant).
Keep in mind that in many jurisdictions, your judgment may also include interest, attorney's fees and court costs, all of which can be part of your judgment enforcement efforts.
Next Steps: Find out More About Collection Issues
There are a number of factors when deciding whether to take legal action for non-payment of invoices which can consume precious time and resources. Speaking with an attorney can help take that weight off of your business while also ensuring that you make sound business decisions when recovering your losses. Get in touch with a collections attorney in your area today to find out more.