Expert: Regan Shinski - 7/15/2010

Question
We run a tax planning business and we have several individuals who have not paid for the preparation of their tax returns.  Some people have brought us 6 years of tax returns, all at once, we complete the returns and they still do not pay.
What is the best solution?  Small claims court or can we report them to the 3 credit bureaus?

Answer
Hi Danielle:

It is unlikely and cumbersome for a business that does not extend typical credit to directly report to the credit bureaus.  You also have to pay and become members, which often defeats the purpose of reporting which is to increase profits.  It works for volume, but not in cases like yours.

You have two options:

First, you could hire a collection agency.  They will either outright buy the debt or you can hire them to collect it on your behalf.  If they buy it, it will be for pennies on the dollar and if they collect on it, they take a decent percentage (30-50) but you do get funds if they collect.  In either case, THEY should report it to the credit bureaus but you want to make sure that this point is part of any contract you sign with them.

A second option is to sue.  Small claims is the likely venue.  You will have courts fees which you typically have to pay up front but can add to the judgement if you win.  If a judgement is entered again them, the judgement goes on their credit bureau reports.  This is a significant negative mark on their credit - more than a collection account is.  Furthermore, a judgement may allow you to garnish wages, freeze/confiscate bank accounts, place liens on property, and even have the sheriff seize personal property.  You need to check what is allowed in your state as all of these methods are not allowed in all states.  However, if they are, they are powerful collection techniques.

Depending on the amounts, I typically lean towards suing based on the information above.

Good luck, I hope this helps.

Regan