Collections: How to Recover Unpaid Debts and the Legal Steps Involved
For business owners, extending credit and invoicing customers is often a necessary part of growth. But when clients fail to pay on time, or at all, those unpaid debts can significantly impact your bottom line. That’s where understanding the process of debt collection and the legal avenues available to recover unpaid funds becomes essential.
Beginning to recover unpaid debts can be overwhelming. At the Hyland Law Firm LLC in Overland Park, Kansas, we help clients walk through this ordeal, explaining the ins and outs of the debt collection process so that business owners can act efficiently, recover what’s owed, and remain compliant with federal and state laws.
What Is Debt Collection?
Debt collection is the process of pursuing payments from individuals or businesses who have failed to fulfill their financial obligations. While some debts are collected informally through payment reminders and negotiations, others require more formal and legal action. There are generally three stages in the collection process:
Pre-collection efforts
Third-party collections
Litigation and enforcement
Understanding each step and when to escalate the process can make a significant difference in both your recovery rate and your legal risk. Being proactive and informed helps you avoid common pitfalls and makes sure you're taking the most effective route for your specific situation, protecting your business’s financial health while remaining compliant with debt collection laws.
Internal Collection Efforts
Before contacting a third-party collector or filing a lawsuit, it’s wise to attempt recovery through internal means. These early steps often preserve the client relationship and can lead to faster resolution with minimal cost. Additionally, showing that you've made good-faith efforts to collect the debt can strengthen your position if legal action becomes necessary. This may include:
Sending payment reminders: Automated systems can trigger reminders at 15, 30, and 60 days past due.
Personal outreach: Sometimes a polite but firm phone call or email from your accounting department is all it takes.
Negotiating a payment plan: If the client is experiencing temporary hardship, they may be willing to pay in installments.
Offering settlement discounts: In some cases, offering to accept a slightly reduced amount in exchange for immediate payment can be a win-win.
Documentation is critical. Keep records of all communications, promises made, and attempted payment arrangements. These records may be used later if legal action becomes necessary. Organized documentation also helps your attorney or collection agency assess the situation quickly and accurately.
Sending a Formal Demand Letter
If internal efforts fail, the next logical step is to send a demand letter, often drafted by an attorney. This formal communication serves as a final opportunity for the debtor to settle the matter before legal action begins. It also demonstrates that you’re following a professional and structured approach to collections. A well-crafted demand letter outlines:
The amount owed
The basis for the debt
Any interest or late fees accrued
A deadline to pay or respond
A statement that legal action will be taken if payment isn’t made
Demand letters often carry more weight when they come from a law firm. They show that you’re serious about pursuing the matter through legal channels, and they sometimes prompt reluctant debtors to pay to avoid court. For help drafting a legally sound demand letter, contact a law firm.
Hiring a Collection Agency or Attorney
When a demand letter doesn’t work, or if you prefer not to manage the process internally, you may consider hiring a debt collection agency or a lawyer who focuses on collections. Both options have their advantages and limitations, and the right choice often depends on the nature of the debt and your long-term strategy for recovery.
Collection Agencies
Collection agencies typically work on a contingency basis, meaning they only get paid if they successfully recover funds. This can be an attractive option for businesses looking to minimize upfront costs. Agencies also handle the legwork involved in reaching out to debtors, including phone calls, mailed notices, and even reporting delinquent accounts to credit bureaus.
However, collection agencies may be limited in the actions they can take, particularly when it comes to legal enforcement. Additionally, some collection agencies are known for using overly aggressive tactics, which could harm your company’s reputation and customer relationships if not carefully vetted.
Attorneys
Attorneys, on the other hand, offer the advantage of being able to take the matter directly to court. Legal representation not only increases the pressure on the debtor but also shows that you’re fully prepared to use the judicial system to pursue what you’re owed. Hiring an attorney may involve legal fees, but many lawyers offer contingency or hybrid fee structures.
Ultimately, whether you choose to work with a collection agency or an attorney depends on the size of the debt, the debtor’s responsiveness, and your willingness to invest time and resources into the process. Each approach has its place in a well-rounded debt collection strategy, depending on the individual situation.
Filing a Lawsuit
If your informal and formal collection efforts fail, you may need to file a lawsuit in civil court to recover the debt. This process involves several steps and can vary depending on the amount in question and the debtor's location. Pursuing legal action should be a carefully considered step, as it often requires time, documentation, and resources.
Jurisdiction
Determine the appropriate court. For smaller debts, this may be small claims court. For larger or more complicated matters, it may fall under district or circuit court jurisdiction. Filing in the wrong court can result in delays or even dismissal, so it’s crucial to get this step right. Jurisdiction is typically based on the amount of the claim and the location of the debtor.
Complaint and Summons
Your attorney will draft a complaint stating your claim and file it with the court. The debtor (defendant) will be served with a summons and given a set amount of time to respond. The complaint outlines the nature of the debt, the amount owed, and the relief being sought. Proper service of the summons is essential; failure to serve the debtor correctly can invalidate the case.
Response and Discovery
The debtor may admit to the debt and pay, deny the debt (leading to a trial), or ignore the summons, which may result in a default judgment. If the case proceeds, both sides engage in discovery, exchanging documents and evidence. Discovery may include written interrogatories, depositions, or requests for production of documents.
Judgment
If you win your case or the debtor fails to respond, the court will issue a judgment in your favor, legally confirming the debt and the debtor’s obligation to pay. A judgment is a powerful legal tool that opens the door to enforcement actions. However, a judgment doesn’t automatically result in payment; you may still need to take further steps to collect the amount owed.
Enforcing the Judgment
Winning a judgment is only part of the battle. Enforcing it, i.e., actually collecting the money, is the next challenge. A judgment gives you the legal right to pursue collection, but it doesn’t mean immediate payment. Many debtors may still resist or delay payment, requiring you to take additional legal action to enforce the court’s decision.
Wage Garnishment
You may be able to garnish a portion of the debtor’s wages directly through their employer, depending on the laws of your state. Garnishment orders must be approved by the court and served on the employer, who is then legally obligated to withhold a portion of the debtor’s paycheck. There are typically limits on how much can be garnished.
Bank Levies
Courts may allow you to freeze and collect from the debtor’s bank account. This process usually involves obtaining a court order and serving it to the financial institution holding the debtor’s funds. Once served, the bank may be required to freeze the account and remit available funds up to the judgment amount.
Property Liens
If the debtor owns real estate, a lien can be placed on the property. This doesn’t result in immediate payment but must be resolved before the property can be sold or refinanced. Over time, interest may accrue on the lien, increasing the total amount owed. Filing a lien also puts public notice on the debt, which can motivate the debtor to settle in order to clear their title.
Asset Seizure
In some cases, a sheriff may be authorized to seize non-exempt personal property to satisfy the judgment. This could include vehicles, business equipment, or other valuable assets. The process usually involves a writ of execution issued by the court, followed by coordination with local law enforcement.
Each of these methods requires legal filings and must comply with both state and federal regulations to avoid liability for unlawful collection practices. Failure to follow proper procedures can result in sanctions, dismissal of enforcement efforts, or even countersuits. Work with an attorney experienced in post-judgment enforcement to be sure you stay compliant.
Speak With a Debt Collection Lawyer Today
Unpaid debts are an unfortunate reality in business, but they don’t have to be a financial death sentence. By understanding the full scope of debt collection, you can take control of the situation. At the Hyland Law Firm LLC, we help businesses in Overland Park, Kansas, as well as the Kansas City Metro area and beyond, with debt collection issues. Contact us today to improve your odds of successful recovery.