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Debt Collection

Dear Mary, I have a small business, and a year or so ago I loaned a friend some money. Things are tight and I really need to get paid back. We’re no longer friends and I’ve sent him letters demanding the money back, which have been ignored. Is my next step hiring an attorney?

There are two main kinds of collection claims—consumer claims and commercial claims. A consumer claim is your everyday use of credit for home or personal use. Pretty much everything else is a commercial claim. Claims may be secured or unsecured.

Before an attorney will take your case as a creditor in a debt collection action, the attorney is going to want to know if it’s a reasonable claim, if it makes financial sense and if it’s ethical for the attorney to proceed. To make this decision, the attorney will consider the following three issues:

1) The nature of the debt. What kind of transaction occurred? How much was borrowed and how much remains outstanding? What was the security, if any? What is the interest rate and what are the finance charges?

An attorney should take the case only if it’s within the statute of limitations and if the action would result in an enforceable judgment in the foreseeable future. Does the defendant have a legitimate defense? You may believe that someone owes you money, but this area of law can be complicated.

2) Collection efforts. What requests for payment have been made? Have you already tried to negotiate partial or full payment? If they agreed to a payment plan, was it in writing? Have any partial payments been made? Be careful not to harass a debtor. The penalties for breaching debt collection law can exceed the debt.

3) Status of the creditor. Your potential attorney will want to know if you are authorized to do business in California and whether you’re the original creditor or whether you were assigned the debt. If the defendant just filed for bankruptcy or skipped town, an attorney might pass on representing you. A “paper” judgment might not be worth the paper on which it’s printed.

Once an attorney has decided your claim’s viability, they’ll have to determine whether it makes financial sense to take your case. An attorney may charge you an hourly fee, a flat fee, a contingency fee, or some combination of those fees. At best, an attorney might estimate the time a case requires, but it is impossible to know for certain.

The attorney will consider the size of the claim, the age of the claim, whether the claim is disputed, and whether the debtor has any assets. The size of the claim is really the main factor in deciding the fee arrangement. The larger the claim, the more likely you will want a lower contingency fee. A larger claim may be less collectable though, because it’s more likely that the debtor will defend a large claim. Consider that your debtor might also owe large sums to other creditors.

There’s a big difference between a debtor who has no money and a debtor who simply refuses to pay. Investigate whether the debtor has assets or any ability to pay the debt over time. Payment plans can be the perfect answer to many debt issues.

I tell my clients all of the time—litigation is extremely expensive. Consider the real cost of bringing a case when deciding whether to litigate. Writing off the loss may be the best answer – Sometimes it’s not worth throwing good money after bad.

Mary Luros is a business law attorney with Hudson & Luros, LLP, in Napa, and can be reached at or 418-5118. The information provided here is not intended as legal advice, nor does it form an attorney-client relationship with the author. The author makes no representations as to the reliability or accuracy of the above information. In a perfect world we wouldn’t need disclaimers — or attorneys.

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