A small business client went out of business and is now refusing to pay the balance of the contract. What can I do now, and is there any way to avoid this situation in the future?
Assuming you did everything you could to negotiate the balance due, unless the company has filed for bankruptcy protection, small claims court is your best bet. You don’t need an attorney for this; it is very easy. Many jurisdictions have the forms online and instructions for filing. The maximum amount of the claims handled by small claims court differs by jurisdiction, but is typically $5,000. You will want to reference and attach your contract to your filing. In the section where you describe your lawsuit, say something like this:
[Customer] entered into contracts with [Security Company] for security alarm installation and monitoring at [location(s)]. The contracts are dated________, _______, ________, and __________ . The term of each contract is for ____ years, with $___ due per month under each contract; giving a $____ total monthly payment due for all contracts.
[Customer] paid under the contracts for _____ months, but stopped paying on ______, ___ months before the contract terms expired. [Customer] is therefore in default under the terms of the contract with [Security Company].
The terms of the contract provide that [Customer] is obligated for ______ of the remaining term of the contract if it defaults on its payments under the contract. [put in the contract language]
[Security Company] has sent [Customer] invoices and has tried to work out this issue with [Customer]. [Customer] has refused to pay the balance owed to [Security Company], which totals $ ____ for all contracts.
Unfortunately, bad debt is a part of doing business. One potential protection—if you can get it—is a personal guarantee from the business owner or other willing party (the “guarantor”). To do this, you will need to add a second signature line to your customer’s contract. Above it, it should say something like: “The undersigned personally guarantees Customer’s performance under this Agreement.” Have the guarantor sign it. Then, in your small claims case, you can go after the guarantor personally, not just the business.