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Dzimm

Debt Collection Advice

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So I am in a situation where a small dog daycare owes me $500 for labor because I built some 4ft walls to separate the rooms.  This work was done about a year ago and so far I have only been paid back for materials cost.  

 

The problems I have are that the agreement for payment and work to be done was over text message so not a formal contract but a contract non the less?  I'm also not actually a business, my girlfriend used to work there and I agreed to do it because I could use the money and had the knowhow and tools.  The other big issue is that the agreement was made with the previous owner of the business, which has now been sold to the groomer.  The groomer was and still is aware of this debt.  There were a bunch of other debts that the PO didn't tell the groomer about though so they had a shady sale. 

 

What I want to know is what are my options for collecting the debt?  Send a collection notice? Lawyer? 

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I am a CPA, not an attorney.  That said, here are my first questions:

 

How did to old owner operate the business: corporation, LLC, or sole proprietor?

 

How did the sale of the business occur:  was it a "stock" sale, or was it an "asset" sale?

 

Depending on the answers to above questions will determine IF you can collect and FROM WHOM you can collect.

 

(My first thought is you have to go to the old owner.)

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In addition to what Tim wrote, consider the cost of collection. The debt is $500. It'll probably cost you $250 to $350 to get a lawyer to write a letter, which the owner of the business will ignore anyway. For a lawyer to take it to court, figure on giving him/her a retainer of at least $5,000.

 

IMHO, the best way to go would be small claims court. The rules vary depending on the state, but you should be able to find the rules and the forms for your state on-line. You don't need (and probably can't have) a lawyer for a small claims action. You'll pay a nominal filing fee (last time I did it the fee was $25, but that was 20 years ago). But whether or not you can even pursue the claim depends on the answer's to Tim's questions. The new owner may or may not have assumed the previous owner's outstanding liabilities.

 

One last thing about small claims court. I've had to take two clients to small claims court over the years. One paid up. One ignored the judgment. The next step is to turn it over to a sheriff (in my state -- possibly some other entity or agency in your state). In my case, the sheriff screwed me. He was supposed to go into the deadbeats office and seize their office equipment. Instead, he negotiated (without any authorization, permission, or legal basis) a repayment schedule. Which the deadbeat signed and then ignored, but the sheriff still wanted his fee ... from me. When I complained to the state agency that supposedly oversees the sheriffs' activities in these matters, they blew me off.

 

What I'm hinting at is that small claims court is probably your best recourse, but don't go into it thinking it's a slam dunk. And get the answers to Tim's questions before doing anything.

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In my experience the best way to collect this debt is to kindly, but persistently remind the new owner of the debt. Send them a nice reminder every month. It is unfortunate that the new owner was unaware of the debt, but that is the risk of purchasing a business, you get the good and the bad. You will spend more than $500 on an attorney. In my non-expert opinion, a text message would suffice as a contract if you still have it.

 

I had a young talent agency business just before the Great Recession and overnight all of our clients went belly-up. We owed our artists thousands, but none of our clients were solvent enough to pay. We had to pay every artist out of own pockets using credit advances. We were extremely patient with our clients and after 18 months we received every penny we were owed, even from one guy who was a total jerk. It was grueling, but it worked for us. There were lots of people raging for their money from our clients. Most of them only got a portion of their money because they ended up in line in bankruptcy court. We worked with them and were patient, so they worked with us. 

 

There is no guarantee this will work, but most small business owners understand your situation. Even offer payment terms if necessary, like $100 a month. If it does not get resolved, try small claims court. Don’t wait too long.

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In my experience the best way to collect this debt is to kindly, but persistently remind the new owner of the debt. Send them a nice reminder every month. It is unfortunate that the new owner was unaware of the debt, but that is the risk of purchasing a business, you get the good and the bad. You will spend more than $500 on an attorney. In my non-expert opinion, a text message would suffice as a contract if you still have it.
 
I had a young talent agency business just before the Great Recession and overnight all of our clients went belly-up. We owed our artists thousands, but none of our clients were solvent enough to pay. We had to pay every artist out of own pockets using credit advances. We were extremely patient with our clients and after 18 months we received every penny we were owed, even from one guy who was a total jerk. It was grueling, but it worked for us. There were lots of people raging for their money from our clients. Most of them only got a portion of their money because they ended up in line in bankruptcy court. We worked with them and were patient, so they worked with us. 
 
There is no guarantee this will work, but most small business owners understand your situation. Even offer payment terms if necessary, like $100 a month. If it does not get resolved, try small claims court. Don’t wait too long.



I agree with this is a great method. I think you should contact the new owner and sit down and discuss the situation. A text may fulfill the role of a contract. In this particular case, the new owner may even come after the previous owner if any debts were improperly or not disclosed at all, it may be possible that the new owner can sue. Anyways, it may be better to sit down with the new owner and discuss matters in a civil manner. Then proceed with Small Claims if an agreement can’t be reached. If I would like to discuss this more, but, I’m preparing a bankruptcy petition as we speak :(

Disclosure: I’m not a licensed attorney.


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Get the answers to Tim's questions before you do anything else. The entire question of whether or not you can collect from the new owner depends on the answers to those questions.

 

Real life example:

 

I'm an architect. In particular, I'm an expert in building codes and construction contracts and claims, and for many years I was a construction arbitrator for the American Arbitration Association. A couple of years ago a client for whom I had done work fifteen years ago called me up and asked me to serve as an expert witness in a lawsuit he was filing against an out-of-state architect. I agreed to meet with him to look at the documents and hear the story. He's a mechanical contractor. He took a job as the mechanical subcontractor for a design-build contractor who had a project to renovate a building at one of our state's National Guard facilities. There were major deficiencies in the construction documents, and it cost my client well over a million dollars in extra work to get things finished to the military specifications.

 

My client was suing the architect to collect the extra costs. I agreed that the documents sucked, and inside of fifteen minutes I identified some major points that supported my client's position. BUT ... I pointed out to him that he didn't have a contract with the architect, he only had a contract with the developer. I told him he needed to be suing the developer, who could then "implead" the architect in a chain of privity of contract. My client said he had already signed a waiver with the developer, and that his (my client's) lawyer said they could sue the architect.

 

So we went through the whole dog and pony show. I spent hours going through the contract documents, and I wrote a lengthy report. A mechanical engineer (a good one, whom I knew) did the same thing. Both the engineer and I sat through full day depositions. Then it went to trial. The judge dismissed the case because my client didn't have a contract with the architect. Exactly what I told him from the outset.

 

So ... you need to know if the new owner bought the outstanding liabilities of the old business. If not -- you should be going after the previous owner rather than the new owner. And the unfortunate reality is that, regardless of which owner you go after, your chances of collecting are small.

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2 hours ago, 87MJTIM said:

I am a CPA, not an attorney.  That said, here are my first questions:

 

How did to old owner operate the business: corporation, LLC, or sole proprietor?

 

How did the sale of the business occur:  was it a "stock" sale, or was it an "asset" sale?

 

Depending on the answers to above questions will determine IF you can collect and FROM WHOM you can collect.

 

(My first thought is you have to go to the old owner.)

It's sole proprietor and I would assume just an asset sale as it is like 5 employees and the owner of the business in a rented building.  

 

Honestly this business is an absolute mess.  The sale was very shady as in some credit card debt was hidden,  the previous owner decided to make a bunch of personal purchases on the company card right before the sale and didn't disclose the new purchases and wouldn't pay them back to the new owner, and the legal name of the business is different than what it currently has on signage and goes by (they changed it due to confusion with another daycare's name in the same town) and never changed it on the paperwork side.  Is that even allowed? 

 

Edit: would the new owner verbally saying they would pay the debt to a few different people mean anything?  

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36 minutes ago, Dzimm said:

It's sole proprietor and I would assume just an asset sale as it is like 5 employees and the owner of the business in a rented building.  

 

Honestly this business is an absolute mess.  The sale was very shady as in some credit card debt was hidden,  the previous owner decided to make a bunch of personal purchases on the company card right before the sale and didn't disclose the new purchases and wouldn't pay them back to the new owner, and the legal name of the business is different than what it currently has on signage and goes by (they changed it due to confusion with another daycare's name in the same town) and never changed it on the paperwork side.  Is that even allowed? 

 

Edit: would the new owner verbally saying they would pay the debt to a few different people mean anything?  

 

Since the prior owner operated as a sole prop., you could go after him personally.

 

Unless he operated out of his house (or still owns the building the new buyer operates in), a mechanics lien may not attach to the building you performed your work.  The owner of the building did not contract with you.

 

The fact that the PO ran up bills/debts is of no concern for the buyer.  The buyer is under no obligation to pay the PO's bills.  (Truth be told, if I were the buyer, I would tell you go back to the PO.)

 

The buyer's verbal promise to pay the debt is as good as the paper it is printed on.

 

As Eagle said, your best bet is to take him to small claims court.  Be prepared with your documentation of the work you performed, your cost of materials, and your time.  Have your girlfriend available to support you, if necessary.

 

Or...

 

As many people before you have learned (I am on the list), use it as a learning experience.  Next time, write up a contract/agreement of what you will do.  Have him sign it.  Request a deposit before you start work.  Some states limit deposits to a % of the contract (33%).  Check local law before you write.  Demand payment upon completion.

 

If I collected on all the work I've done the past 20+ years that didn't pay, I could purchase a new JLU Ruby!

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Dzimm,

 

My suggestion is to go to your local small claims court and read their rules and requirements.  Find out how much filing fees are.  Find out how much it costs to have the first owner served with papers.  Then decide if it is worth the effort to try and collect.

 

Personally, I would just write it off as a learning experience.  But that is me.

 

In California, you first have to write a "demand letter", wait 30 days (?) then file in small claims.  The Marshall's office will serve the papers for a fee.  Then tell your story to the judge.  If the debitor does not show up in court, you win by default.  But that still leaves you with the problem of collecting.  Collecting can be done, but it takes more time and energy to identify his assets, etc.

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I'll check out small claims and see what the requirements are.  I'm going to try to sit down with her because I haven't had a face to face yet.  If that fails, send a demand letter and hope that's the end of it.  

I'm thinking the same as you guys, it's a learning experience and it will probably remain that way because my time and effort in court probably isn't worth it. 

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It's not just your time and effort. There are costs involved. If your state requires a demand letter (mine does, I had forgotten about that), you should send it registered mail with return receipt requested. Or maybe certified, return receipt. Either one will cost you a few $$. Then there's the filing fee in small claims court. A few more $$. Do you work a regular job? Small claims court hearings are conducted during the court's normal working hours, so if you have a job you'll have to take a day (or at least half a day) off from work to attend. The notice of the suit has to be served in the manner prescribed by the law of your state. That might be registered mail, but it's more likely an agent of the court. Sheriff or marshal, depending on what your state calls for. There's a fee for that service.

 

Then you may win a judgment. But if the defendant blew off your informal requests for payment, then blew off the demand letter, then didn't pay up upon notice of the lawsuit, he/she will more than likely ignore the judgment. Then you have to pay a sheriff/marshal to take the next step, which is to serve a copy of the judgment and either take payment on the spot or impound personal property. That's going to cost you.

 

You're out $500. If it costs you $250 plus however many hours of your time to MAYBE net another $250 out of the process, you have to ask yourself if it's really worth doing.

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Depending on your state.....county.....

 

If you are not a licensed contractor, no mechanic's lean and in some states you would not even have the right to small claims. Just putting that out there. 

 

 

FWIW- You waited too long. I get paid when I'm done and don't ever F with my money. 

 

But, we all eat a few, guess it's your turn. 

 

 

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In CA, anything involving money under 5K is usually handled in small claims court.  A $15 filing fee and no lawyers (legal advice OK, but no lawyers in court) you have to plead your own case.  Quite often they'll put you into "mediation" where you go into another room with a court mediator to work out the details...and if it's all agreed on...that's the agreement that the court uses.

 

I realize you're not in CA.  However, you need to have had some kind of contract, written OR spoken.  The beef is with a former owner so the current owner isn't liable.  You just need a dis-interested person to serve papers.  Not a sheriff or  professional process server...could just be a friend or acquaintance.  If the judge ( or mediator) believes you you get the judgement.  But the judgement is just that.  There's really no enforcement of the judgement.

 

I rented a house to a guy that worked in the local lumberyard, nice guy, hard worker, came with references from a guy I knew.  Turned out that the guy was a part time tweaker.  Then became a full time meth head, got his kids taken away from him and his wife, beat his wife up and ruined my house.  Two days after I got a "judgement' from the court, he split town and went to Reno, where he was promptly arrested and spent eight years in prison.  Ha Ha, I never got a dime from the guy. 

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