5 Simple, Escalating Steps to Collect a Bad Debt
If someone puts you in this uncomfortable position, don't be troubled. There are five steps you can take to significantly increase your chances of getting every dime back from the deadbeat.
1. Remember, It's Just Business
The person you lent money to will try desperately to make this a personal issue. He or she will whine about losing a job, running into unforeseen financial trouble or -- when all else fails -- blaming you.
The person who welched on the debt will continue to make this a personal issue as long as possible. Fiddlesticks. Don't fall for it and don't even participate in any conversation that is personal in nature with respect to this unpaid debt.
Your job is to focus squarely on the business side of this issue and let the personal side of the equation go. Let the borrower know that you are prepared to go to any length to retrieve your money -- even if it includes filing suit and leaving a stain of his or her credit report that can only be removed by paying up.
2. Gather Your Evidence
If you have a written agreement, you are in great shape. But you don't need a signed loan agreement to have an enforceable contract. Some transactions need to be in writing, but as long as you both agreed what you would do (loan money) and what you would receive in exchange (your money back, with or without interest), you have a binding contract.
If you don't have a written agreement, assemble all emails, letters or notes from calls that spell out the agreement. Hopefully you'll find documents that support how and when the other party was supposed to pay you back. If not, you may find it difficult to prove he or she violated the payment terms -- even if you prove the money was a loan and not a gift.
3. Demand Payment in Writing
Regardless of how much or how little documented proof you have, send a registered letter demanding payment. In your letter, recount the terms of the agreement. Spell out when you made the agreement, how much the loan was, how the payments were to be made and when they were to start. And if the other party agreed to pay interest, make sure you detail that information as well.
When closing your letter, make sure to be very clear about what you want and when you want it. My suggestion is that if the borrower breached the contract, you should demand payment in full within 10 days of receipt of your demand letter. Keep your emotions out of it. Stick to the facts and only the facts in your demand letter.
4. Call a Lawyer
If the other party fails to respond within 10 days with your check, have an attorney write another letter. A letter from an attorney makes most people's blood run cold. It might cost a few hundred dollars, but if the loan is substantial, it is well worth having a lawyer send the next letter for shock and awe. In the letter, your attorney may remind your debtor that you can and will sue, turn the debt over to a collection agent and make sure the failure to pay is recorded by the credit bureaus. These thinly veiled threats might just be enough to get your money back.
5. Start Small Claims and Credit Complaints
If after all this, your borrower doesn't cough up, take off the gloves. You do that by suing in small claims, district or superior court. Where you sue depends on how much money is involved and how much you are willing to spend to collect. The solution of choice is small claims court because it is very easy and inexpensive, and you don't need an attorney. However, small claims courts have limits varying by state, from $2,500 to $25,000, with many exceptions.
You may be able to lodge a complaint with a credit bureau without suing, but that's not easy to do. Still, it's nothing to worry about. Once you win your judgment in court, it will be next to impossible for the other person to clean up his or her credit report without paying you first.