It is a common concern for some consumers to have loaned money out to another individual or entity, only to see that party renege on the deal when it is time to pay the loan back. The debtor will invariably place the lender on notice that they are not going to pay the money back via one or more of three time-honored different means: (1) Indifference or lack of communication from the debtor in response to inquiries for repayment by the lender, (2) Representations by the debtor that they don’t have the money, and/or (3) Representations by the debtor that they don’t owe the money given their version of the transaction (ie., it was a gift, there were services rendered in consideration for the loan, it was for an investment that went bad through no fault of the debtor, etc.). When that happens, it is important to bear in mind what the legal system can and can’t do for you if you are such a consumer who has owed money to a less than responsible party.

A. What You Shouldn’t Do To Collect The Money –

1. The Threatening of Criminal Action: Some lenders, especially when the representations used by the debtor in the original transaction lend themselves to a characterization of fraud, will want to threaten the debtor with going to the police or the district attorney unless they are paid back. The problem with this approach is that the threatening of criminal prosecution to obtain money, even if the money is rightfully owed and there was criminal activity engaged in by the debtor, constitutes extortion which is a crime in and of itself.

While a lender shouldn’t hesitate to go to the authorities if in fact they have been the victim of fraud or embezzlement, if civil action against the debtor is contemplated then the reporting of the matter to the authorities should not be disclosed to the debtor. If a criminal action is filed, the debtor will find out about it soon enough. As a practical matter, the district attorney’s office will rarely get involved in prosecuting such cases if the matter can be characterized at all as a private financial transaction between two consenting parties. If criminal action is initiated, it is not a bar to also pursuing the debtor in a civil action, should the lender choose to do so.

2. Referral To A Collection Agency: Some lenders, and usually in an attempt to avoid legal fees, will assign the collection claim to a commercial collection agency. Most collection agencies will take these claims on pursuant to an assignment, whereby the lender is paid a percentage of whatever monies are actually collected by the agency. The problem with doing this is that most such assignments are irrevocable, which means that the lender has lost any further control over the claim because he doesn’t own it anymore, as only the agency does.

Most collection agencies will not initiate legal action against the debtor where the amount involved is relatively small. If the amount is large enough to justify legal action, most agencies will make the filing of a lawsuit the measure of last resort, in an attempt to collect the debt without filing suit and thereby avoiding legal fees. Many collection agencies will do no more than report a negative credit history on the debtor with a credit reporting company, and/or send form letters to the debtor demanding payment “or else”. Other collection agencies may take more aggressive steps, but if they cross the line and the steps can be characterized as harassment or otherwise run afoul of the Rosenthal Fair Debt Collection Practices Act (Civil Code sec. 1788.1, et seq.), then they risk being sued by the debtor, and by extension the lender may end up getting sued as well on the theory that he was the real party in interest or the hirer of the agency in regard to the illegal debt collection practice.

When collection agencies do file suit, the attorney that they choose may have the interests of the agency take precedence over the interests of the lender, and the lender will have no control over how the litigation proceeds or what the case might settle for short of trial.

3. Do Nothing: Some lenders, either believing in the debtor’s representations of trying to

do something down the line or in the belief that the debtor will “do the right thing” eventually, will wait inordinately long before initiating legal action. The problem with doing nothing is that it gives the debtor time to transfer or conceal their assets, or even to disappear, while the clock is running out on the statute of limitations.

The statute of limitations is an absolute defense in any given legal action, and some of the more common statutes that apply to collection cases include the following:

Breach of Written Contract – A lender has four years to sue for breach of a written contract (C.C.P. sec. 337), with the four years starting to run from the date that the obligation became due and payable.

Breach of Oral Contract – A lender has two years in which to sue for breach of an oral agreement (C.C.P. sec. 339). The problem with oral contracts is that the debtor may have a different version of when or if the obligation was actually due, such that the statute may start running from some other date than that which the lender believes is controlling given his version of the transaction.

Open Book Accounts/Accounts Stated – Most prevalent in the commercial credit context, this is where a debtor is sent a regular bill on an acknowledged indebtedness, usually arising out of a series of different or continuing transactions. If a true open book account or account stated exists, then there is a four year statute of limitations (C.C.P. secs. 337, 337a), calculated from the date that a payment was last made or when the debtor last acknowledged the indebtedness.

Fraud – If the loan was procured through fraudulent misrepresentations or deceit on the part of the debtor, then there is a three year statute of limitations [C.C.P. sec. 338(d)], calculated from the date of discovery of the fraud.

Conversion – Sometimes a debt situation arises when a debtor acquires the personal property of the lender and either disposes of, transfers, or destroys it. In such a situation, there is a three year

statute of limitations [C.C.P. sec. 338(c)], calculated from the date the lender discovered the loss. The bottom-line on all statutes of limitation is that the law protects the vigilant, and that the longer the lender waits to avail himself of legal action, the more difficult it may be to successfully collect on the case.

B. What You Should Do To Collect The Money –

1. Make A Demand: Once the obligation is due and the debtor has failed to satisfactorily explain when payment will be had, a written demand for payment should be made, giving the debtor a specific time frame in which to either pay or work out a deal if legal action is to be avoided. Written demands made by a lender’s attorney are apt to be more persuasive than a written demand coming only from the lender.

2. Make A Deal: If the debtor responds with an offer of installment payments or payment sometime in the future, then some sort of security or leverage should be demanded in order to give an incentive for making good on the deal. If the original transaction was an oral agreement, then this would be the time to put it in writing, including an attorney’s fees clause should legal action be initiated thereafter. A provision for the payment of interest can also be considered. Promissory note forms can be obtained from a stationery store, but it is advisable to at least have an attorney look the form over before it is signed, or even have an attorney prepare a more formal legal document that would better fit the circumstances of your situation.

Better yet is to have the note secured by a deed of trust of real property. Another avenue is to utilize the Confession To Judgment Procedure (C.C.P. secs. 1132, et seq.), whereby if the installment plan isn’t satisfied then the lender can automatically obtain a judgment by submitting a written Confession To Judgment signed by the debtor and his attorney directly with the court. The Confession procedure will ordinarily require the services of legal counsel for both the lender and the debtor, however, to make sure the specific requirements of the code are satisfied.

3. File A Lawsuit: If the filing of legal action is necessary, the lender must make a choice as to which court he is going to file in. Lawsuits must be filed in the county where the transaction occurred, or where the debtor resides or otherwise does business in.

Small Claims Court – Suit for up $7500.00 can be brought in small claims. If the actual amount owed is greater than that, then the lender can opt to waive the difference and sue for just $7500.00, in order to avoid the expense of retaining an attorney and to obtain the advantage of securing an early trial date, which is usually within 30 days from filing the action.

In small claims the parties cannot be represented by an attorney, although they can consult with an attorney about how to present their case. If the lender loses the case, then that is the final end of the case. If the debtor loses the case, he can appeal it, which will result in another trial in front of another judge. At that stage, either party may retain legal counsel to represent them if they choose to.

Limited Jurisdiction Court – Formerly called municipal court, Limited Jurisdiction Court can award damages up to a maximum amount of $25,000.00, not including costs of suit. The rules of evidence are less formal than Unlimited Jurisdiction Court, such that the testimony of witnesses may be presented by written declaration, so long as the witness is within 150 miles from the courthouse and written notice of the declaration is provided to the other party at least 30 days prior to trial. Trial will ordinarily be set 9 to 12 months away from the date of filing the action, depending upon which court and county the case is filed in.

Unlimited Jurisdiction Court – Unlimited Jurisdiction Court can award damages in excess of $25,000.00. The rules of evidence are more formal than Limited Jurisdiction Court, such that the legal costs associated with prosecuting an Unlimited case are generally more expensive than those

incurred in a Limited case. Trial is ordinarily set a year from the date of the filing of the action, at least in Orange County, or longer in other counties such as Los Angeles.