How to Collect a Debt

By C. Stephen Stack, Jr.

Nearly all business owners and many individuals will find themselves at one time or another in the unenviable position of being owed money.  The question then arises: is the debt collectible and, if so, how does one go about collecting it?  There are many factors which must be taken into consideration, and, while the space limitations here prohibit an exhaustive discussion on the topic, this article will touch on some of the more practical considerations for a creditor.

First and foremost, there are things you can do before doing work or extending credit that increase the likelihood of being able to collect should the need arise.  The financial situation of the entity with whom you are doing business must be considered.  A credit application and asset search may be utilized to determine if the company seeking to engage your company to perform work and/or extend credit is creditworthy.  Second, if you are entering into a contract with this entity, a provision should be included that allows you to recover reasonable attorney’s fees and the costs of collection should that become necessary.  Without an express agreement on recovery of attorneys’ fees, Mississippi law provides very limited avenues for their recovery.  If a debtor is faced with the proposition of having to pay this amount in addition to the amount of the debt, he is less likely to default and/or breach the contract.    

Of course, even if you take these steps, the financial situation of the debtor may have changed by the time it is time to collect on the debt, and as the old adage goes, “you can’t get blood from a turnip.”  If the debtor is insolvent or otherwise has no assets, any judgment obtained against the debtor may not be worth the paper on which it is written.  However, most companies that are a going concern and most individuals who are employed have at least some income which may be potentially reached by a creditor.  And the same asset search that you hopefully utilized on the front end of the transaction can be used to determine if the debtor has vehicles, boats or any other unencumbered personal property which might be used to satisfy any judgment obtained.   

Once the creditor has an idea of the debtor’s financial situation, the creditor must decide whether it is worth pursuing the debt and how.  This decision is driven in large part by the size of the debt.  If the amount owed is less than three thousand five hundred dollars ($3,500.00), a creditor should strongly consider handling the matter itself in justice court.  In justice court, the creditor simply drafts (usually by hand) a simple complaint against the debtor setting forth the amounts owed and how the debt was incurred.  The sheriff then serves the debtor with that complaint and a summons to appear in court on a certain day.  A trial is held on that day before a justice court judge who hears testimony from both sides and then typically rules on the spot as to who prevails.  Assuming the debtor has no valid defenses or fails to appear, a judgment is entered that day in favor of the creditor.  The only expenses typically incurred by the creditor in this process are the filing/sheriff’s service fees and any costs of court.  But, of course, at the end of the day, the creditor has only a judgment which still must be collected unless the debtor voluntarily pays.  Even with the reduced costs associated with justice court, a relatively small debt may not be worth the time, effort and cost of collecting. 

If the debt is more than three thousand five hundred dollars ($3,500.00), suit must be filed in county or circuit court, and a creditor usually will want to have an attorney involved.  Where the attorney charges an hourly rate, expenses can quickly mount.  However, it is almost always worth, at a minimum, having an attorney write a demand letter, as this will oftentimes prompt payment from a debtor who simply has overlooked or been neglecting the debt for whatever reason.  If the letter garners no response, the decision must be made as to whether to proceed with suit.  The fees associated with suit will vary depending on jurisdiction and whether the debtor actually contests the suit.  Where the amount owed is less than ten thousand dollars ($10,000.00), serious consideration must be given to the debtor’s financial situation and whether there is a realistic chance of collecting on any judgment before proceeding.  Not only are there costs associated with obtaining the judgment (e.g., drafting pleadings, filing fees, service fees, any required court appearances), but, as discussed below, there are the costs associated with collecting any judgment obtained.  These costs can eat heavily into a smaller debt.  And although such costs are recoverable in certain situations, such as when the debt is incurred on an open account or the contract between the parties provides for the recovery of attorney’s fees (as discussed earlier), having them included in the judgment does not necessarily mean the creditor will ever recoup that money. 

If the amount owed is more than ten thousand dollars ($10,000), it is usually worth at least obtaining a judgment against the debtor.  Oftentimes the debtor will not even answer the complaint, and a default judgment can be taken with relatively little work expended by the attorney.  In Mississippi, judgments remain valid for seven (7) years (and can be re-enrolled after that time if necessary).  Even if it may not be collectible at the present time, the debtor’s financial situation may change in the future, and the judgment will already be in place and ready to collect.

The final step in the collection process is executing on the judgment.  Probably the two most effective tools for satisfying a judgment are a writ of garnishment and a writ of execution.  A writ of garnishment is issued by the Court to a third party, such as a bank or the debtor’s employer, and that person/entity must file something with the Court stating whether: (1) he owes the debtor money or knows of someone who does; (2) has any property of the debtor or knows of someone who does; or (3) whether he employs the debtor and, if so, his rate and time period of payment.  If the third party has any property or funds of the debtor at the time of service of the writ, they are paid to the creditor instead.  And if the debtor is employed by the third party, up to 25% of the debtor’s salary is paid to the creditor until the judgment is paid off.  There are certain exemptions that a debtor may claim, but when a bank freezes the debtor’s account or he gets notice from his employer that a portion of his paycheck will be withheld, that usually will prompt an immediate response. 

Similarly, if the creditor is aware of unencumbered real or personal property owned by the debtor, he may have a writ of execution issued by the Court whereby the Sheriff is ordered to seize the property and sell such property at auction to satisfy the judgment.  Again, certain exemptions may apply, but the prospect of losing a home, vehicle, etc. will usually prompt a response from the debtor.  

Finally, if the creditor has no idea where the debtor is employed or where his assets are located, he can file a motion with the Court to conduct a judgment debtor examination whereby the debtor is ordered to appear in open court and answer questions about its finances. This prospect leads to trepidation in many debtors, and they will oftentimes seek out a resolution with the creditor beforehand simply to avoid it. 

As should be evident at this point, the decision on whether and how to collect a debt is one that must be made upon the unique facts of each situation.  No two debtors or debts are alike.  Nothing is more frustrating for a creditor than to spend more money trying to obtain money that is already rightfully owed…especially when the efforts ultimately are to no avail.  As such, the individual or business must make a conscious decision based upon a number of factors, including the size of the debt and the financial situation of the debtor, as to whether and how to proceed.