Deadbeat clients, what to do?
January 21, 2005 2:11 PM   Subscribe

When do I call a lawyer? I did some contract work for a small firm that has been unable to pay me. We're way past Net-30, and it's enough money that I can't deal with it in small claims court (about $15k). I'm in contact with them, and I believe that they want to pay me, but simply don't have the cash (I could be wrong). At what point do I stop waiting? Is it worth calling a lawyer if they don't have the money, or is it important to call a lawyer in case they declare bankruptcy?
posted by anonymous to Law & Government (13 answers total)
If they don't have the cash, what good is a lawsuit? You'd be throwing good money after bad.

I've had a client with much the same problem. We resolved the issue by arranging a payout schedule. I actually quite liked that system: it meant that for a number of months I had a guaranteed income. Sweet!
posted by five fresh fish at 2:16 PM on January 21, 2005

I agree with Five Fresh Fish. I run a small business, and at times the money simply isn't there to pay everyone on time, as much as I would like it to be.

Talk with the owner or manager about setting up a payment schedule. Be frank and let them know you're serious about getting paid, but that you're willing to work with them on repayments.

If the owner is being straight and honest with you, you should be able to work out something.
posted by tomble at 2:22 PM on January 21, 2005

If you want to claim the debt as a business loss on your taxes you may need to call a lawyer. The IRS wants to see you went to all reasonable efforts to collect on your business debts before writing it off as a loss. Reasonable efforts is really subjective, but I've been told by really experienced tax preparers that it usually means you've tried collections and/or taking them to court.

On preview: I do think setting up a payment plan would be the best thing to do if they honestly want to pay you and are just in a rough patch now.
posted by Kellydamnit at 2:24 PM on January 21, 2005

Suing someone without money isn't a good idea, unless they have other assets you can take.

This might be a good opportunity for you to explore the bad debt buying / collection agency universe. Depending upon the debtor, you can make as much as 75 cents on the dollar selling the debt, or get the collection agency working on a contingency basis -- they front for the lawyers, etc. There are some complicated rules about bad debt writeoffs for taxes, but they should be handleable by your regular tax accountant.

Creditors generally don't need their own lawyers in a bankruptcy unless the amount you're owed is a significant chunk of the overall debt, or the bankrupt customer contests your "proof of claim" (which is basically a duplicate invoice, on special court forms, which you submit to cover your unpaid bills.)
posted by MattD at 2:34 PM on January 21, 2005

fff has good advice. However, it might be advisable to get a lawyer to look over any payment plan you work out, or to send a letter on your behalf stating the due payment -- even if the lawyer doesn't do anything else, his/her involvement may show the firm that you're serious about getting paid.
posted by me3dia at 2:39 PM on January 21, 2005

My almost completely uninformed advice is, yeah, if you think they'd pay you if they could, you're probably best off working with them. They won't have any more money after you win a lawsuit against them than they do now.

My random anecdote is that this happened to my employer a while back: a client wasn't paying, and wasn't paying, etc. We did a lot of work for small companies and startups, so it wasn't too unusual for someone not to be able to pay on time or to go under in the middle of a project, but these guys were still in operation and seemed to have cash flow. So: activate the lawyers. Many months and a few court hearings later, after it'd been determined that they (a) should pay us and (b) weren't about to, we got to the point that we could legally seize their assets to fulfill the debt. To my surprise, this could be taken very literally; we could go over there with a sherriff and say, "OK, we want that desk ... and those computers ... hey, that's a nice router ... um, and that chair ...". Continue until the value of assets seized matches money owed. Unfortunately(?) the day before that would have happened they sent us the money.

(I say "unfortunately" because seizing assets would have been very satisfying. In practice, of course, we preferred the money.)

Of course, the legal costs were nonzero, and for some debts it's cheaper to write it off, and some clients work on the assumption that you'll decide to do that. :-/

Anyway, IANAL, nor even particularly knowledgeable, I just like to share this anecdote.
posted by hattifattener at 2:41 PM on January 21, 2005

Have you talked to them candidly? Granted, this is a small company, but sometimes accounts payable sits on things for plus thirty. Call your project manager inside and talk through it. Also try sending the right department two dozen donuts on a Friday morning, that gets people looking at business cards.
posted by sled at 2:57 PM on January 21, 2005

If it's in NY, as a public service, I'd be happy to lend my letterhead and phone calls to this--I don't do enough pro bono.
posted by ParisParamus at 3:14 PM on January 21, 2005

Try to work out the payment schedule first. If they miss the first payment, which I suspect they will, then turn to a collection agent &/or the legal system. And do it fast. They have to have something of value that you can get... take the damn Xerox machine or some Aeron chairs that you can sell on eBay. Wait too long and you'll get nuthin'. Don't waste time. Don't fool around. And don't feel bad about getting tough if you have to. It is they who should feel bad for contracting you for labor that they could not pay for.

Yes, this is the voice of experience talkin'.....
posted by spilon at 3:23 PM on January 21, 2005

is it important to call a lawyer in case they declare bankruptcy?

To answer a question that may not in fact have been asked (but just in case): using a lawyer (in any way) before a firm files bankruptcy will not give you any more rights. You're still an unsecured creditor.
posted by WestCoaster at 4:15 PM on January 21, 2005

Good idea to keep a photocopy of a client's first check. If you ever win a judgment for non-payment, the photocopy makes it much easier for the sheriff to collect at the bank (assuming there's money in the account in the first place).

At least, that's how it works in Connecticut.
posted by ZenMasterThis at 4:17 PM on January 21, 2005

Act now, play hardball. It is a virtual certainty that you are not the only person or firm that these people owe money.

(1) You want to get paid first.
(2) The squeaky wheel gets the grease.

Offering the payment plan option is a good idea, but if they don't agree immediately and start servicing their debt as agreed, find yourself the most aggressive collections firm or attorney you can and get a strongly worded demand letter in their hands immediately, then work through the process and get whatever you can out of them while the gettin's good. To quote Sonny Corleone: "Nothing personal, just business."

I feel your pain, by the way. I got left holding the bag (to the tune of $25K in uncollectable fees) as a contractor in the late 80s. This was largely because I was nice, polite, and mindsnappingly stupid: I believed that I had a "relationship" with the firm who was stiffing me, and also believed their promises that I would be paid "real soon now."

Never again. Before I do business with anyone, I pull a Dun and Bradstreet report and/or get credit and trade references, and usually some kind of retainer up-front. Not perfect protection, but far better than doing nothing.
posted by enrevanche at 5:39 AM on January 22, 2005

Be aware that anything you collect on an overdue invoice in the 90 days preceding a bankruptcy filing you'll most likely have to pay back to the bankruptcy court as the "avoidance" of a "preference."
posted by MattD at 5:42 AM on January 22, 2005

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