A lot of litigation is about collecting debts. The defendant promised to pay money and then they didn’t. Courts provide a mechanism to collect on debts when debtors do not pay voluntarily. This allows organizations to extend credit, knowing that they have some recourse if the debtor defaults. And it provides a safe alternative to the way that loan sharks enforce loans through violence. But it still requires work and technical skill, and it doesn’t always result in recovering the amount due.

Why should you read this post about debt collection?

I owe you money and you want to know what I expect you to do.
You’re curious what happens when people don’t pay their bills.
You want to know why the letter “b” is in the word debt and are hoping that this post answers that question. (It doesn’t, but this post does).

Image credit: https://en.wikipedia.org/wiki/Global_debt#/media/File:Usa_national_debt_20_April_2012.JPG

Creditors Can Only Collect Money the Debtor Has

A major reason why some people don’t pay their debts is that they don’t have the money. True, some people are crooks that want to cheat others. And others are just plain unreasonable. But many people would love to pay their debts, if only they had the money, which they don’t.

Suing people with no money is often useless. Even if you win and get a judgment, the judgment may be worthless if there are no assets to collect. That is why people with no assets are called “judgment proof.” A creditor could wait to see if they obtain assets later on, or garnish their wages, or look to see if they transferred their assets to others. But often, there may not be anything to justify the time and expense of the debt collection process.

To avoid this situation, it is important to make sure that creditors only extend credit to people who are likely to have assets to collect. Many people take collateral and register a secured interest in the collateral to make sure that it can be used to satisfy a judgment. Or they may hold on to specific money or property to make sure that their debts will be paid. Or they may require the debtor to take on insurance or have a guarantor so that, if the debtor defaults, an insurance company or guarantor can pay the amount due.

There are Accelerated Procedures

Readers of this blog know that American lawsuits have numerous procedural steps that may cause litigation to go on for years. But many courts have expedited procedures for debt collection since the issues may be narrower than in many other kinds of disputes.

In New York, a creditor who is collecting on a promissory note may start a lawsuit through a procedure called Summary Judgment in Lieu of Complaint pursuant to CPLR 3213. Instead of filing a complaint, the petitioner can skip past the answer and discovery phase and go straight to the summary judgment phase, presenting evidence of an unpaid debt, and unless the respondent can demonstrate some dispute of fact, the petitioner may get a judgment.

Also, New York provides a cause of action for “account stated.” Unlike a traditional breach of contract claim, a plaintiff in an account stated claim may allege that she sent an invoice to a customer, who did not timely dispute or pay the invoice. That alone may be sufficient to support a judgment. This is why it is important for customers to promptly challenge invoices they dispute or risk liability for an account stated claim.

Debt Collection Costs Money

Even with accelerated procedures, debt collection costs money. Someone needs to prepare the papers and hire a process server to serve them on the defendant. There may still be court appearances and, even if you get a judgment, someone needs to find the defendant’s assets and execute the judgment.

As a result, it may not make economic sense to sue to collect on small debts. Small claims court exists to help people settle small disputes, but if people do not pay voluntarily, it may cost thousands or tens of thousands of dollars to collect a debt. Spending that much money to collect a few hundred dollars means a net loss for the creditor.

This is why many creditors sell their debts to professional debt collectors, who call and mail people to collect on debts, or who make reports to credit agencies, rather than go straight to court. This is also why people put fee shifting provisions in contracts, making the debtor responsible for the creditor’s costs in collecting the debt.

Large institutions, however, have to collect debts. Utility companies and credit card companies, for example, routinely collect hundreds of dollars from people who do not pay. They make it work economically because they can employe one lawyer to handle a large number of nearly identical claims at once; this way the marginal cost of each is low. People who go to calendar call days at a county court may see the same lawyer representing a utility company appear numerous times, collecting debts from account holders who did not pay their bills.

It Can Get Complicated and the Creditor Itself May Become the Subject of Allegations, Investigations, and Proceedings

Just because a creditor thinks a case is straightforward, however, may not mean that the debtor agrees. The debtor may have a complicated story about why she did not pay: the goods were defective or the creditor engaged in fraud. Claims like these may turn a simple debt collection case into a complicated lawsuit about the debtor’s allegations.

Further, consumer protection statutes govern how debt collectors can collect on debts. Notably, the Fair Debt Collection Practices Act governs how debt collectors can speak to debtors and prohibiting abusive and harassing tactics. Violating these laws may subject debt collectors to a government investigation by agencies like the Federal Trade Commission and to private lawsuits.