Legally Speaking: Debt Collection
Throughout the past seven columns, methods of debt collection have been discussed. Liens, bond claims, demand letters, and other various tactics have been covered in order to give a contractor or subcontractor the basic knowledge necessary to at least adequately prepare for debt collection. This last article will cover a final word on bond claims, a few miscellaneous methods of recovery, and then some final advice regarding recovery of outstanding debts.
Bond ClaimsRemember, a suit to perfect a bond claim (fully discussed in the last issue) under Federal statutes and most state statutes, must be filed within one year from the date of last work on the project or within one year from the date that the owner of the project issues final payment to the general contractor. The second instance could conceivably be several years, but arguably, bond rights will still exist.
Miscellaneous StatutesMost states have statutes that allow for recovery of interest and other costs in the event that a general contractor fails to timely pay a subcontractor. For instance, in North Carolina, in most public contracts other than with the Department of Transportation, statutes require that the general contractor be paid in full within 45 days after the project has been accepted by the owner or certified by the architect. If the general contractor is not paid, interest at a rate of 1 percent per month begins to accrue on the 46th day. A similar statute requires a contractor to pay subcontractors within seven days of the subcontractor completing work under the contract, or a phase of work under the contract. If the contractor does not pay the subcontractor by the seventh day, interest at the rate of 1 percent per month begins to accrue on the unpaid balance.
Some states may have statutes that provide for a recovery of attorneys’ fees and court costs for recovery of unpaid debts. Each state has different laws and statutes, and it is important to check with an attorney in your state to determine your legal rights and remedies.
Small Claims CourtMost states have a court designed to hear minor claims involving petty disputes or disputes involving dollar amounts less than $5,000. Typically, a small claims action can only be brought in the county where the defendant is located. Small claims court is designed to be quick and inexpensive, and it is a proceeding that a non-attorney can handle with relative ease. If the amount owed to your company by a general contractor or other entity is less than $5,000, investigate your state’s small claims court.
Company Contracts, Estimates and Purchase OrdersIn creating your company's contracts, estimates and purchase orders, include language to benefit your company in case of debt collection. Such language includes a statement that interest will be collected on all past-due accounts. Another item to include is a time deadline, such as “30 days” for the paying for all amounts owed. A statement that “in the event that the debt must be collected by legal counsel, all attorneys’ fees and court costs will be sought from the debtor” should also be prominent in your business documents. Just because it is included doesn’t mean that you will definitely recover these costs. The recovery of most of these items will be at a judge’s discretion. However, it certainly does not hurt to include the demand for them. There may be certain instances where the interest and attorneys’ fees are recoverable.
Many subcontractors require signed statements and personal guarantees from the contractor/owner before they do business. These signed statements of personal guarantee essentially allow an individual to be held liable for the debts of his or her corporation.
Final WordIn debt collection, be pro-active. Sitting back and waiting to be paid, as the time that payment was actually due gets farther away, is not going to result in collection.
Constantly monitor your projects. Note lien and bond claim deadlines. If it is a public project, it is likely a payment bond is present. Get a copy of the general contractor’s bond on the project. Lots of persistence and hard work will literally “pay off” in the end.