Every small business owner must one day decide what to do with unpaid customer bills. Deciding whether to sue a customer is a difficult decision. For one, it may simply not be worth your time if the customer is insolvent. And depending on the industry your business is in, you may need to carefully weigh how suing customers will be perceived in the community. Some Oregon industries are very small communities, and even Portland is a very small “big city” in Oregon. And for some business-to-business transactions, appearing to take a tough stand on collections might actually lead to more payments from other customers. But if you do decide to sue customers for unpaid bills, it’s wise to take stock of the situation first.
If Your Customer is Insolvent
Remember, there’s no point in suing someone with nothing to lose. If your customer is insolvent with no assets, it’s probably not worth your time to sue them for unpaid bills. A business or individual that isn’t paying your bills also isn’t paying someone else’s bills. And a business that isn’t paying any of its accounts is soon to be out of business, whether through dissolution, bankruptcy, or an asset fire sale depending on the circumstances. The same can be said for an individual customer with no personal assets or other creditors: Chapter 7 bankruptcy wipes all unsecured debts clean.
Do your homework before filing and look for other judgments ahead of you or pending bankruptcy filing to decide if filing a lawsuit is worthwhile.
Understand Your and Your Customer’s Contract Rights
If you have a written contract for the services you’ve provided (hint, hint), then you most likely have a mediation or arbitration clause that governs disputes. Arbitration Services of Portland, Inc. is a favorite amongst Portland area small business contracts. If you don’t have an arbitration clause, and the dispute is $50,000 or less, you’ll end up in court-annexed arbitration anyway. Arbitration awards are binding (if contactually agreed upon), and an arbitration award may be registered as a judgment and enforced accordingly.
Small Claims Court Can be the Path of Least Resistance
If no written agreement provides for alternate dispute resolution, small claims court is an Oregon small business’s best friend. If the amount you’re owed is $10,000 or less, you can pursue small claims in the appropriate county. Small claims is much faster than suing through the formal county circuit court and can be done without an attorney (although consulting with an attorney prior to filing is always a good idea, especially if you’re new to the process). Bear in mind, though, that your defendant has the option to remove the case to circuit court for a jury trial if the amount in question is more than $750. A business entity in Oregon will need an attorney if the case is removed to circuit court.
Both small claims court and circuit court filings will require a filing fee, and you must serve the defendant. If the defendant is an out-of-state business or individual, you may have to file suit in their home state unless the terms of your contract provide for Oregon venue.
A Judgment is Only a Piece of Paper
Reiterating the discussion about insolvency above, a judgment is only a piece of paper. There are no debtor’s prisons, and not all judgment debtors will pay immediately. In the case of non-voluntary payment, your judgment still has to be enforced before you can recover any money owed. So, if your customer is insolvent, you’re out of luck for the time being. Judgments are valid for 10 years, and can be renewed, but the odds are your insolvent customer will go through a bankruptcy or dissolution before then. Judgment liens automatically attach to all real property located in the county where your judgment is registered, and garnishment of wages and bank accounts are options as well. An attorney or court clerk may issue a garnishment, and I recommend consulting an attorney before beginning any enforcement of your judgment.