Collecting a debt through legal means is a fairly straightforward process for experienced counsel, but the success of the endeavor depends on numerous variables.
Step One: Gather the Necessary Information
It is important for counsel to carefully review the information in the creditor’s possession to assess the best avenues and points of leverage to pursue. To properly evaluate the relative strengths and weaknesses of your client’s claims and any defenses to the claims, you must know all the information about the claim. Therefore, ask your client for copies of all documents relating to the obligation, including, if possible, communications between the debtor and the creditor, internal reporting, title reports, and recorded or filed documents such as Uniform Commercial Code financial statement filings.1
Communications are important; for example, occasionally a debtor makes admissions that will prove helpful in countering defenses or counterclaims if litigation becomes necessary. Additionally, you may discover that your client has made admissions that might negatively affect the claim or even constitute grounds for a debtor’s claim against the creditor. In most cases, a successful collection begins and ends with having an overabundance of information.
com kcarlson carlsondash Kurt M. Carlson, Thomas M. Cooley 1990, is a managing member of Carlson Dash LLC, a full-service law firm with offices in Chicago and in Pleasant Prairie, Wis., and concentrates his practice on bankruptcy, insolvency, and creditor-debtor matters.
com jmcneilly carlsondash James W. McNeilly Jr., U.W. 1981, is with Carlson Dash LLC and focuses on bankruptcy, creditor-debtor, and real estate matters.
Step Two: Determine the Nature of the Obligation
Is the debt secured by personal property, real estate, or business assets? Collecting on a secured debt presents additional means of leverage, because many debtors desire to keep their property. Collecting on an unsecured debt requires heightened creativity to achieve good results, mostly because there is little incentive for the debtor to pay an unsecured obligation.
You also must determine whether any special statutes or regulations apply. For example, laws such as Wis. Stat. chapter 402, regarding sales between merchants, Wis. Stat. chapter 799, regarding mechanics’ liens, and the Federal Perishable Agricultural Commodities Act (PACA),2 among others, may affect the terms of the debt and dictate the collection procedures. If the statutes or regulations are violated, the claim might be invalidated or be treated as an unsecured, nonpriority3 claim. The converse is also true – if you follow the legal requirements, the claim might be treated as secured or as a priority unsecured claim.
Is the debt consumer or nonconsumer? Because of the numerous state and federal laws and regulations governing consumer debts and their collection, there is a huge difference between collecting a consumer debt as opposed to a nonconsumer debt.
Step Three: Determine Whether Default Has Occurred
webXtra: In this video, Kurt Carlson and Jim McNeilly explain the legal process for collecting a debt.
Once you have reviewed all the documents and identified the applicable laws, determine whether the debtor has defaulted. If the terms of the obligation require a default notice, ensure that it has been properly sent (that is, in accordance with the provisions of the documents and any applicable law).
Even if no default notice is required, there are good reasons to send one. First, receiving a default notice might lead to the debtor making arrangements to pay the obligation. Second, such a notice will sometimes elicit a response from the debtor containing possible defenses or counterclaims. Having this information will allow you to either avoid bringing litigation, if the defenses are valid, or prepare responses to the defenses or counterclaims before you bring suit.
Collection Tips and Resources
Collecting Fees from a Client
Before you bring an action to collect fees from a client, consider whether doing so is a good idea. “Suing for unpaid fees can backfire into a malpractice counterclaim, affect your liability insurance, cost you time and peace of mind, and just plain generate bad will.”13
However, once you have decided to pursue a client for fees, the basics of handling the matter are the same as with any other open account. Gather the documents, make sure you have complied with all applicable laws (especially the Rules of Professional Responsibility, particularly those related to client confidentiality, advances of fees and costs, withdrawals from trust accounts, and termination of representation14), send a default notice, and finally, if the matter cannot be resolved, pursue a lawsuit and postjudgment collection.
The primary sources of law governing collection matters in Wisconsin are the Wisconsin Statutes and the United States Code (U.S.C.). A good initial step is to review one or more of the numerous publications dealing with debt collection and related civil litigation in Wisconsin. State Bar of Wisconsin PINNACLE® publishes several, including but not limited to the following: Wisconsin Business Advisors Series, Vol. 4: Collections & Bankruptcy, Annual Survey of Wisconsin Law, Wisconsin Attorney’s Desk Reference, and Wisconsin Judicial Benchbook Vol. II: Civil. An excellent, comprehensive treatise is Wisconsin Collection Law (volumes 12 and 13 of the Wisconsin Practice Series) by Robert A. Pasch.
Additionally, numerous seminars on collection are presented regularly statewide and nationally. The benefits of attendance far outweigh the cost, especially if you factor in the possibility of being the target of a malpractice action or counterclaim because of insufficient knowledge of the practice area.
Finally, consider contacting an experienced collection attorney – many are willing to assist or serve as co-counsel. A good place to begin is the Lawyer-to-Lawyer Directory in the annual Wisconsin Lawyer Directory for a list of lawyers who have agreed to share their knowledge in particular areas of the law with other lawyers through brief telephone consultations. The Lawyer-to-Lawyer Directory also is available online.
Fee Arrangement: Contingent, Flat Fee, or Hourly?
Historically, the standard fee arrangement for debt collection was the contingent fee, with percentages approximating those used in personal injury matters. Clients have begun to understand that they receive the value they are paying for and thus are more interested in working with counsel they know and trust under fee arrangements that provide mutual benefit. While some Wisconsin lawyers still use contingent-fee arrangements for debt collections, many clients are demanding flat-fee agreements, and some attorneys will only handle debt collections on an hourly-fee-plus-costs basis.
The nature of the debt often drives the decision as to which fee arrangement is most fair to both parties. If the nature of the debts being collected allows the attorney to handle a high volume with most of the work being done by staff, fees can be reduced, and all parties benefit.
Because clients are reluctant to “throw good money after bad,” and because the likelihood of you getting paid diminishes proportionately with the results, it behooves you to undertake a cost/benefit analysis including, most importantly, the collectability of the debtor, before proceeding with collection activity.
Step Four: Bring Suit
If the default notice does not lead to payment of the obligation, the next step may be to institute a lawsuit. However, be aware that litigation is not always the best course of action.
First, before you file a lawsuit, make sure to check whether the debtor has filed for bankruptcy, because you may incur significant penalties if you violate an automatic stay (which is instituted upon the filing of virtually all bankruptcies).4 (And continue to check periodically for a bankruptcy filing, if you do bring suit.) Second, ensure that you are bringing suit in the correct venue. Third, make certain to comply with any statutory and case law requirements for pleading. (For example, the Wisconsin Consumer Act requires attachment to the complaint of copies of relevant documents and payment history.5) Finally, make sure to include all meritorious claims and causes of action.
Step Five: Postjudgment Collection
Immediately after obtaining a judgment, docket it. Once docketed, the judgment becomes a lien on all real property owned by the judgment debtor in the county in which the judgment is docketed.6 If there is a possibility the debtor owns property in other counties, docket transcripts of the judgment in those counties. If there is a possibility the debtor owns real property in other states, obtain the necessary documentation to docket the judgment in those states.
Familiarize yourself with both the Wisconsin exemptions and the most common Wisconsin collection methods, such as garnishment and execution.7 Often, the most productive step after docketing the judgment is to take a supplemental proceeding, pursuant to Wis. Stat. chapter 816. At a supplemental proceeding, you are entitled to ask questions about the debtor’s income and assets. Note that in small claims actions, the debtor is required to send the creditor a form financial statement within 15 days after entry of judgment, which may allow you to avoid taking a supplementary proceeding.8 Also consider other remedies, such as a fraudulent conveyance action,9 an involuntary bankruptcy,10 a chapter 128 proceeding,11 and appointment of a receiver12 (particularly when the debtor is a corporation, partnership, or limited liability company).
Collecting a debt can be one of the easiest activities an attorney undertakes or one of the most complicated. Familiarize yourself thoroughly with the applicable laws, make certain your client clearly understands the risk of investing time and money in an activity that might not result in any benefit, and do not be afraid to reach out to more experienced attorneys.
1 Wis. Stat. § 409.310.
2 7 U.S.C. § 499(a)-(s).
3 Unsecured means the debt is not secured by a lien on property. Unsecured obligations are often prioritized, with certain debts, such as taxes, being paid before others. An unsecured nonpriority debt is usually the last debt to be paid in a liquidation proceeding such as a bankruptcy.
4 The easiest way to check for bankruptcy filings is through PACER: www.pacer.gov/. PACER is an online service that allows users to obtain case and docket information from federal appellate, district, and bankruptcy courts.
5 Wis. Stat. § 425.109(d), (h).
6 Wis. Stat. § 806.15(1).
7 Wis. Stat. §§ 812.01-44; Wis. Stat. §§ 815.01-64.
8 Wis. Stat. § 799.26(1).
9 Wis. Stat. §§ 242.01-11.
10 11 U.S.C. § 303.
11 Wis. Stat. §§ 128.01-128.20; Wis. Stat. § 128.25.
12 Wis. Stat. §§ 128.08, 813.16.
13 Thomas J. Watson, The Art of Client Selection (Managing Risk), 81 Wis. Law. 19 (March 2008).
14 SCR 20:1.15, 20:1.16.