Joe Dye Culik
How Can a North Carolina Business Legally Collect a Debt Owed to It?
One of the most frustrating things about being in business his having money owed to you but not being paid. This is a common issue that almost all businesses have at one point or another, whether they are small businesses, entrepreneurs, franchisees, or startups. If you are a business owed an unpaid debt, how do you go about collecting it through the legal system in North Carolina?
Fortunately, the vast majority of business debtors will pay after receiving a demand letter. Our office sends a standard letter with the balance due, a reminder of the reason it is owed, and a statement of the consequences for not paying the debt. Under North Carolina law, these consequences include things like having a lawsuit filed against you, having the sheriff seize assets such as automobiles or inventory, or having a court order seizure of intangible assets like shares in a corporation. This usually gets someone’s attention.
There are always some business debtors that this doesn't work with, however. For those, a lawsuit may need to be filed.
Which court should the lawsuit be filed in, though? There are three levels of the trial court in North Carolina. There are the Small Claims Court, the District Court, and the Superior Court. Small Claims Court hears disputes of up to $10,000 dollars. District Court hears disputes up to $25,000, and so its jurisdiction overlaps with Small Claims Court, so a dispute of $1 to $10,000 may be brought in either. The Superior Court hears all cases over $25,000.
We usually do not recommend filing in Small Claims Court. Though you may get a quick result, it is very easy to appeal a decision, and then have to essentially restart the process in District Court, which is the court that hears appeals from Small Claims Court.
Which county should you file in? If your business and the debtor are both located in the same county, that is the county that you normally file in period. If your business and the debtor are located in different counties, it’s usually up to you – you can file either where your business is located or where the debtor is located.
It is important to note that if your business is collecting from a consumer, many of the foregoing rules may not apply. The federal Fair Debt Collection Practices Act says that consumers must usually be sued where they reside or where the contract was signed. The FDCPA and the North Carolina Debt Collection Act also have specific requirements and prohibitions related to debt collection which are too numerous to cover the business debts addressed here.
The lawsuit is filed in the county court, and the court clerk issues a Summons. The Summons tells the debtor (who is now a defendant, to boot), that they have to respond within 30 days. Our office usually has the sheriff serve the defendant with the summons and the lawsuit, but you can also send it by certified mail.
Most defendants do not respond to the lawsuit, which usually allows you to have the court enter a judgment against them without further action. The judgment is the legal decision stating that the defendant owes your business the amount you demanded. Sometimes judges will, quite understandably, ask you to provide documentation of how much is owed.
If the defendant does respond to your lawsuit, then you can demand that they produce any documentation they have, make them answer written questions about the debt, or make them sit for a deposition where you can ask them questions under oath. Though some debt cases go to trial, you can also file a motion, called a summary judgment motion, asking the court to make a decision without the time and expense of a trial.
At this point, most defendants will pay whatever they owe to your business. Some don’t however, which is when those threats in the demand letter prove true.
There is intervening step if the defendant is a person, rather than another business. You have to send them another notice before you can start seizing their assets. This is called the Notice of Right to Claim Exemptions. North Carolina law allows people to keep a minimum amount of assets to allow them basic living conditions. The defendant has to send a response to the court identifying everything they own so that you and the sheriff know what you can’t – and what you can – seize to pay their debt.
Finally, you can send the sheriff to collect. The sheriff is given a form called an Execution, which allows them to execute (i.e., seize or collect) the defendant’s money or property. Sometimes the sheriff can identify property subject to collection, or sometimes you may want to engage an investigator to do deep background searches for hidden assets. If you’re having trouble finding anything, you can send written requests for them to identify assets, or you can conduct a deposition about what they have and where it is.
Most of the time, though, somewhere along the way the debtor-defendant will realize that there is no escaping paying their debt to you. They know that it is only a matter of time before they will have to make good.
If you are a North Carolina business who is owed a debt by another business, such as a vendor or a client, contact us at 980-999-3557. DYE CULIK PC is a Charlotte, North Carolina business law firm handling everything from incorporation to litigation for businesses throughout the Charlotte metro area.