You have a nonpaying client who is ignoring your calls — what next?
As a business owner, you know that nonpaying clients can eat into your bottom line and cause a host of problems. Consider, for example, the following situation:
A relatively new client has hired your business for ongoing services. For the first several months, everything went smoothly. You had a great working relationship with the owners and your invoices were paid right away. Lately, however, the client has been slow to pay. Several invoices are over 30 days past due, and your practice is scheduled to perform more work in several days. The total amount owed is now approaching $8,000. Your contract with the client says you can charge 5 percent interest on payments that are over 30 days late. What do you do?
Many business owners will be faced with some version of this scenario. While most of your time and effort is spent making sure you provide the highest quality services, it is also important to think about protecting your business from nonpayers. This article will provide a suggested roadmap on how to navigate situations like the one above, including why small claims court may be the best option to collect from a nonpayer.
In the situation above, let’s assume your office has already taken the usual steps – you have already confirmed you have the correct contact information and address for the client, made several phone calls asking about payment, and sent several follow-up emails seeking an explanation. No response. Now what?
The first step is a “demand letter” to the client.
This can be done with or without a lawyer. A demand letter should be clear and direct. It should simply list the relevant information, including: 1) the amount owed by the client; 2) the services your office provided for the client and the dates of service; and 3) the payment obligations created by the contract the client signed with your business. Any relevant documents and invoices should be attached, as well. Ideally, the letter will be sent through standard mail and by certified mail with a return receipt, so your office has a clear record that the client received the communication.
In addition, the demand letter should highlight the previous efforts your office has made to communicate with the nonpaying client before sending the demand letter (i.e., “We previously tried to contact you by phone on [DATE], and by email on [DATE]. We did not receive a response from you.”).
Finally, the demand letter should, as the title suggests, list a demand. This can be as simple as setting a deadline for the client to contact your office with a suggested repayment plan (i.e., “Please contact us no later than [DATE] with a proposed payment plan, otherwise we will be forced to consider our legal options.”).
If a demand letter from your office still does not produce a response from the client, the next step may be to get an attorney involved. A more formal letter on a law firm’s letterhead may prompt the nonpayer to take the situation more seriously. The initial demand letter your office sent will provide a useful template. It will also save costs because the attorney will not have to start from scratch.
The second step is to consider filing a legal action against the nonpaying client.
Of course, there are myriad factors that go into deciding whether to formally initiate legal action against a nonpayer, and this decision should not be taken lightly. Some considerations include: 1) whether the client will ultimately be “collectible” if you obtain a legal judgment against the client; 2) whether you are likely to do business with the client again in the future; 3) whether the nonpayer will take countermeasures against you or your business, such as posting a negative review online or filing a complaint about the service your office provided; and 4) what kind of message the legal action will send to other clients/prospective clients.
If you do decide to move forward with legal action, an option you may not have considered is small claims court. In many cases, small claims court can provide a faster, cheaper, and more cost-effective resolution than a traditional lawsuit in a county circuit court.
The first thing to know about small claims court is that there is a cap of $10,000 on your potential recovery of damages from the nonpayer. If your business is owed anything less than $10,000, small claims court may be the right option. Even if you are owed slightly over $10,000, you can choose to file in small claims court rather than circuit court, provided that you limit the amount of damages you are requesting to $10,000. Forfeiting your right to recover any outstanding amounts above the limit may be worth it, given the following benefits of small claims court:
- Simpler procedure; legal representation not required. Overall, small claims court is less formal than traditional circuit court. Small claims court uses standardized forms that are largely self-explanatory and user-friendly. The form to file a complaint in small claims court is called “SC-500,” which can be found online; the form provides instructions for properly completing the form. Likewise, the Wisconsin Courts website publishes several guides to small claims court that provide clear answers to common procedural questions. Thus, unlike circuit court, you can pursue a small claims case without hiring an attorney. Of course, depending on your situation, it may be advisable to hire an attorney, especially because each county has slightly different procedures and the other party may choose to hire an attorney, which could make the case more complicated.
- Efficiency. Lawsuits filed in circuit court may take up to a year (or more) from when the action was filed until it is ultimately resolved. In contrast, a small claims action is usually relatively quick. After your complaint is filed (and properly served on the opposing party), the court clerk will set an answer deadline. This is the date by which the opposing party must file a written response to your complaint. After the opposing party files an answer (assuming they do in fact respond), the court will schedule the matter for a small claims trial, usually for about a month or two later. At the hearing, both parties can present their side of the story and provide any supporting evidence. Typically, the decision-maker present at the hearing (either a court commissioner or a circuit court judge) will issue a decision at the hearing or shortly afterwards.
- Cost. In small claims, the filing fee to initiate an action is about $114.50 (including the electronic filing fee). The filing fee in circuit court is $285.50 (again, including the electronic filing fee). Please note that these fees may change; consult the Wisconsin Courts website for the most current filing fees: https://www.wicourts.gov/courts/circuit/filing.htm. In addition, because small claims cases are typically much short and much less involved that circuit court cases, the costs you incur for an attorney will likely be much lower than a circuit court lawsuit.
- Court commissioners; De Novo review. In some counties, such as Dane County, a circuit court commissioner — rather than a circuit court judge — will preside over your initial small-claims hearing. This is a positive, as commissioners are well versed at guiding inexperienced individuals through the hearing, and quickly getting to the heart of the dispute. If a court commissioner handles your hearing, another possible benefit is the potential to have the decision reviewed by a circuit court judge. This is what is called a “de novo” review, meaning there will be a new hearing before a circuit court judge — a second bite at the apple. However, not all counties have commissioners. If your initial small claims hearing is before a circuit court judge, your only method to appeal the decision will be to the Wisconsin Court of Appeals, which can be a complicated procedure.
On the other hand, small claims court does have its downsides. For example, your ability to recover the money you spent hiring an attorney for the small-claims case is limited. (If the amount you recovered is greater than $5,000, attorneys’ fees are $500; if between $1,000 and $5,000 attorneys’ fees are $300; and if less than $1,000, attorneys’ fees are $100.) This is true even if the contract with your client states that the client must pay all reasonable attorneys’ fees in an action for breach of the contract. In circuit court, however, the court is much more likely to enforce the terms of your contract (where reasonable), requiring the nonpaying client to pay the full amount of the attorneys’ fees you incurred filing the lawsuit.
The bottom line is that your decision whether to take legal action is not a binary decision between a full-scale circuit court lawsuit and letting the nonpayer off the hook completely. Small claims court is an in-between option that may strike the right balance for your situation.
Please note that this article is intended to provide general guidance; it should not be construed as legal advice. Each County in Wisconsin may have different local rules and procedures, and it may be advisable to consult with an attorney about the specific facts of your case.
Kai Hovden is a civil litigation associate at DeWitt’s Madison office and he focuses primarily on intellectual property and labor and employment litigation.
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