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Debt collection agencies and small claims court procedures are common questions that organizations face. Both options are reliable for recovering unpaid debts in the U.S. According to Experian, U.S. consumers owe a total of $17.57 trillion in debt as of the third quarter of 2024. The increase in total debt levels is attributed to inflation rates. However, each debt tells a different story.
In this article, we will closely examine how small claims court procedures and debt collection agencies function in debt recovery. We will also determine which option is best for you based on your organization’s debt types and age. Let’s delve deeper into this to achieve financial stability for your business.
Small claims court addresses civil disputes involving smaller amounts of money, and the 500-507 of Part V of the Rules of Civil Procedure govern such cases. The claim amount cannot exceed $10,000, excluding statutory interest and court costs, but it does include attorney fees.
Small claims processes typically occur independently between the parties without legal representation. Consequently, the legal proceedings are less complex for small claims than those in regular trial courts.
If you are a creditor, you must first understand the rights of debtors when filing lawsuits. In various cases, debt settlement and negotiation can help you avoid court altogether.
It is frustrating to go to court to collect on delinquent accounts. In 2023, fewer than 100,000 small claim cases were filed in the nation’s most populated states. Therefore, a stepwise approach to resolving small claims ensures streamlined debt settlement.
Here is a step-by-step process to respond to small claims lawsuits:
The first step is to review the documents for inconsistencies. A good practice is to check whether the debt is legitimate and within the statute of limitations. A debtor can also file a “Notice of Intention to Defend” within 15 days to avoid a default judgment. If you fail to file the notice and do not appear at the hearing, the court can enter a judgment against you without a hearing.
Before taking any legal action against the debtors, it is important to send a final demand for payment, which also shows that you have made efforts to resolve the issue before court proceedings.
Debtors have the option to negotiate and mediate for small claims cases. In the case of small claims, you can talk directly with the other side without the involvement of a neutral third party for negotiation. On the other hand, mediation is another option that can successfully reduce the initial amounts if there is an ongoing relationship with the other side.
If negotiations fail, the next step is to visit a small claims court and complete the necessary paperwork to file a lawsuit. The fees for a small claims case typically range from $35 to $150.
The final step is to create a clear timeline for the debt hearing. Lawyers are typically not needed for small claims cases; however, legal advice can be beneficial in such situations.
If you are dealing with overwhelming debt and seeking financial freedom, Shepherd Outsourcing Collections provides expert debt collection support tailored to your needs.
A debt collection agency acts as a mediator between creditors and debtors. Its primary role is to recover past-due funds or defaulted accounts.
Here are some of the roles of debt collection agencies in detail;
Also read: Key Factors to Consider When Hiring a Debt Collection Agency
Debt collection and small claims court proceedings are worth considering. Both options are suitable for debt recovery. Let’s explore the differences between them in the table below.
Creditors may find filing a small claim lawsuit feasible for small unpaid debts. However, if there is no substantive dispute or a debtor is not cooperating with the creditor, they can hire debt collection agencies for their operations.
The Fair Debt Collection Practices Act (FDCPA) is the primary federal law governing debt collection practices and prohibiting debt collection agencies from using unfair and deceptive practices to collect debt. In addition, on November 30, 2021, the Consumer Financial Protection Bureau's (CFPB’s) new debt collection rules govern how debt collectors can communicate with your debtors.
According to CFPB, debt collection agencies must provide a validation notice which must include the following information:
In addition, the Fair Credit Reporting Act (FCRA) covers how debts are reported in credit reports, and there are state laws that provide unlawful actions of debt collectors. Therefore, choosing a lawful debt collection process is important to remain compliant with standards and regulations.
Selecting a debt recovery strategy depends on factors such as debt volume, age of the debt and debt recovery resources.
Here are some prominent ways for debt recovery:
Direct communication with the debtor is the best solution when informing about a debt. A letter stating the amount owed and necessary credentials can help creditors with debt collection processes.
Debt collection agencies specialize in debt recovery and take a certain percentage as their fee upon successful debt collection. However, they can use untrained staff for collection procedures.
When creditors are unable to reach an agreement with debtors, it’s best to resolve debts in court. However, court proceedings can be lengthy, and there is no guarantee of a definite win.
Every debt situation is unique, and avoiding legal procedures can streamline the process and reduce unnecessary harassment. However, small claims cases are only applicable for debts under $10,000, and managing multiple delinquent accounts requires the use of debt collection agencies.
Debt recovery is a systematic process that depends on the nature and size of the debt. Small claims court procedures provide a reliable solution for debts under $10,000 and involve a simpler process than regular trials. Debt collection agencies can streamline the financial operations of organizations managing multiple delinquent accounts. Although hiring a debt collection agency can be expensive, it offers professional management and convenience, while small claims courts save you money and time.
If you are unsure whether to file a small claims case or appoint a debt collection agency, Shepherd Outsourcing Collections can be your best choice. Our experts assist you in creating a roadmap and strategizing best practices to tackle unpaid debts. Contact us today to explore tailored solutions that meet your financial needs.
1. What types of cases are appropriate for small claims court procedures?
Small claims courts generally address disputes involving amounts under $10,000, which often consist of unpaid invoices, personal loans, and other debts. The process is relatively straightforward and typically focuses on simple financial matters.
2. How much do debt collection agencies charge for a single case?
The percentage charged by debt collection agencies depends on the type and age of a debt. Typically, they charge between 20% and 40% of the total amount recovered. However, the percentage may vary for each debt.
3. Is it necessary to hire a lawyer for small claims court?
Ideally, there is no obligation to have a lawyer for small claims court proceedings. However, consulting a legal advisor can assist you if you are unfamiliar with court procedures or during disputes.
4. How long does it take to resolve a small claims case?
In most cases, small claims cases are resolved within two to four months, assuming there are no appeals or complexities. However, the timeline largely depends on court backlogs and the state.
5. Can I recover my debt if a debtor refuses to pay following a court judgment?
Winning a small claims case can grant you a court judgment. However, additional steps are necessary for enforcement, such as wage garnishments or asset seizures. A debt collection agency can assist you in these situations.
©2024 by Shepherd Outsourcing.