When customers don’t pay: going to court
When all other strategies fail to get a debtor to pay up, you may need to take the dispute to court. Here’s what you need to know about going to court.
This article assumes that you’ve already considered or participated in alternative dispute resolution methods such as mediation or arbitration, and that you’ve issued your debtor with a letter of demand. (Both of these avenues of chasing payment are covered in the first two articles in this series).
There are two main courts that preside over commercial disputes: the Small Claims Court or Tribunal, and the Commercial Court in your State or Territory.
If the outstanding debt is below a certain amount (the amount differs in each state or territory but is generally $6,000–$10,000) the dispute is classified as a Small Claims case, and the sitting fee is lower.
Small Claims involve some paperwork where you (the plaintiff) must make a Statement of Claim and serve it to the debtor (the defendant). If your debtor doesn’t offer defence, you can apply to the court for a default judgement. If your debtor does mount a defence, the process will then go to a pre-trial review, where both parties have a chance to settle out of court.
"The main advantage of litigation is that if you win, you can legally enforce the judgement and recover the debt."
If that doesn’t work, the case will go to a hearing, at which the court will make a judgement that is legally binding.
What if they still don’t pay?
If your debtor still doesn’t pay, you can legally enforce the judgement. Actions include:
- Garnishment, where you can apply to obtain money from the debtor’s bank account or wages
- Writ for levy of property, where you can apply for a Sheriff to seize and sell some of the debtor’s property
- Winding up, where you can apply for a court order for the assets of a debtor company to be sold to pay the debt
- Bankruptcy, where you can apply for a court order that allows you control of a debtor’s financial affairs to a trustee. The trustee can then use some of the debtor’s assets to pay the debt.
For larger debts, there is a Commercial Court in each State and Territory that will hear the case. The basic steps of the litigation procedure are pretty much the same, however you are more than likely to want professional legal representation, and the costs add up. Make sure your representative has all the documents required to mount the case, including the letter of demand.
Pros and cons of litigation
The main advantage of litigation is that if you win, you can legally enforce the judgement and recover the debt.
The drawback is the expense of doing so and the cost, not just in financial terms but the time, effort and opportunity cost. You are also unlikely to resume business with this debtor. However, factor in to your decision that without payment, you won’t have a business, so don’t shy away from claiming money that’s rightfully yours.
Have you used legal action to chase up a bad debt? Please share your experiences of going to court below.