Debt Collection in Texas

There is no minimum amount to start a legal action, but case value is an important consideration when deciding if the expense of collection warrants a demand letter, a lawsuit, or both. If the lawsuit is filed, the amount in issue determines where to file a legal action.

In the United States generally, there are courts in each state as well as a federal court system. In Texas, courts are established within the 254 counties making up the state. Within each county, there are several levels of state trial courts where commercial debt collection actions could be filed. For example, Houston is in Harris County, Texas. Within Harris County, there are “Justice Courts” which may hear cases where the “amount in controversy” is up to $20,000,  “Constitutional County Courts” (or “County Courts at Law”) that may hear cases where the amount in controversy is up to $250,000, and “District Courts” which may hear any case (including those that could have been filed in Justice Courts and County Courts) without limit on amount in controversy.

Although most commercial debt collection disputes involving unpaid invoice claims are unlikely to reach this level, Texas now also has a specialized “Business Court” to handle certain types of large cases. The Business Court may hear disputes where the amount in controversy exceeds $5,000,000 and relate to “corporate governance disputes,” including internal affairs of organizations, securities/trade regulation claims, breaches of duty by owners/managerial officials, and actions under the Texas Business Organizations Code. The Business Court may also hear cases where the amount in controversy exceeds $10,000,000 (e.g., high-value construction contracts).

United States Federal District Courts also exist in each state. Some states have only one federal district, but Texas has four, further divided geographically into the Northern, Southern, Eastern and Western Districts. Each District is further divided into Divisions. For example, the Southern District of Texas has seven divisions, including the Houston Division which includes Harris County. Generally, a debt collection action may be filed in a federal court if the parties are “diverse” from each other, i.e., where one party is a foreign entity or a citizen of a foreign state and the other party is a citizen of one of the United States, and the amount in controversy is greater than $75,000.

When assessing amount in controversy in state or federal court, the focus is on the principal amount of the debt, and typically excludes other types of recovery, i.e., interest, statutory or punitive damages and penalties, and attorney’s fees and costs.

Regardless of amount, commercial debt collections are “civil actions.” Those require a statement of the claim filed by the creditor (the “Plaintiff” suing) setting out the basis of the claim (a “Petition” in Texas state court, or a “Complaint” in federal court), a response from the debtor (the “Defendant” being sued) with its defenses and its own claims if any, rules for requesting action by the court through “Motions” and ultimately a resolution by a judge or jury allowing or denying claims, and awarding damages if appropriate. 

Even if the demand did not result in resolution and a suit is filed, most cases resolve by private settlement between the parties before a court makes a final determination. Having a firm trial date will often lead to a settlement, but the time from filing the initial claim to a court-issued resolution varies widely depending on the nature and size of the case. Typically, Justice Court cases on a simple failure to pay an invoice for goods or services delivered or provided may be decided in 60 to 120 days, utilizing streamlined processes. Formal rules of procedure and evidence do not automatically apply to Justice Court proceedings. Discovery is allowed but the expense of doing it may not be warranted if the claim is small enough to be filed in Justice Court. The parties may be represented by lawyers, but do not need to be represented. This includes corporate entity parties, who may be represented by an employee, member, officer or partner of the entity, even if not a lawyer. The shorter time to resolution is not guaranteed by rule, but instead is a function of the less-formal Justice Court process. However, a case with a low amount in controversy but complex legal issues may take longer.

If the case is more complex or there are greater damages in issue, County and District Courts provide a more formal structure, apply the rules of procedure and evidence, and allow time for discovery. An individual party may represent him or herself, but an entity client in these courts must be represented by a lawyer. When requested, in claims of $100,000 or less including penalties, interest, costs and attorney’s fees, there is an “expedited actions” process that limits discovery and requires the case be set for trial initially within less than a year from filing, with shorter limits on trial time (8 to 12 hours per side). However, a court with hundreds of cases on its docket may be unable practically to have a trial on an expedited schedule, but fees and expenses may be minimized because of discovery limitations.

If not expedited, Texas County Court and District Court cases may involve extensive discovery (including depositions of parties, exchanges of documents and written questions and answers between the parties, and requests for non-party documents) as well as motions to the court for rulings on a variety of legal issues. These include motions for “summary judgment” where the parties ask the court to decide any claim or defense before trial. These can be useful in commercial collection actions where there is clear documentation of goods or services being delivered or provided, but payment has simply not been made. However, if the commercial relationship is longstanding with multiple credits and debits, there are disputes over the quality of goods provided or a service rendered, or the Defendant has claims for damage based on these issues, it can take months to prepare the motions and for the court to make a ruling. In these cases, it may take between one to two years to conclude a case, or even longer.

Federal courts have their own rules of procedure and evidence which can be similar to state court rules but the federal rules apply to federal cases without question. Generally cases in federal court follow the same pattern for pleading, discovery and motions before trial. Like Texas state courts, Federal courts may also have significant backlog, and a similar time to conclude cases as in state court. However, federal courts are also well-suited to resolving complex legal issues and substantial damages, particularly where the parties are from different countries, and where there are issues of foreign law to be decided and applied.

There is no mandatory requirement specifically requiring a warning or “demand” letter before filing a lawsuit. However, there are practical and legal reasons for sending a demand under Texas law.

The statute of limitations in Texas for suit on a contract is four years from when the claim “accrues” (e.g., the date when a payment was due but not made), or in some circumstances from when a claim is “discovered.” Other claims which may arise from a commercial relationship may have a shorter two-year limitations period that follow the same accrual and discovery rules. Unless there is no time to send a demand letter because a claim is close to the statute of limitations (or strategically it matters to be the first to file suit without notice), it is a best practice to send a demand before taking formal action. Practically, a well-organized and supported demand letter from a lawyer may prompt serious settlement discussions that may ultimately result in payment without a lawsuit.

Legally, demand letters may be required to satisfy contractual pre-conditions to suit requiring an informal attempt to settle disputes before proceeding formally. Under Texas law, certain claims require demand either as a pre-condition to recovering certain types of damage or before suit can proceed. In the collection context, a demand for payment must be made more than 30 days before filing suit in order to recover attorneys’ fees under Texas law, which allows recovery of reasonable and necessary attorneys’ fees incurred in actions to recover damages for services rendered, labor performed, materials furnished, freight charges, sworn accounts (those based on a systematic record of charges and credits) or based on oral or written agreements. When other business relationships break down, the facts underlying a failure to pay invoices may also implicate the “Deceptive Trade Practices Act” (often shortened to “DTPA”) which requires demand be made 60 days before DTPA-related damage claims may be included in a suit.

The best way to recover debt is to keep it small to begin with. When a payment is missed, communicate with the customer or counter-party immediately to remind them of the payment due and to understand if there are other circumstances which are keeping the customer from paying and negotiate payment arrangements accordingly, and potentially cease doing business with the customer until they are able to pay.

Creditors should always maintain detailed records of all communications making up a commercial course of dealing. An obvious example is providing goods or services by a contract with provisions for default and collection. Practically however, many commercial relationships are not reduced to formal agreement, but instead proceed on requests for goods or services, an agreement to provide those on some basis, documents showing the goods or services were supplied and when, and then demand for payment. Each link in that chain should be maintained, organized and the letter and spirit of the deal followed, so that when the creditor has performed and payment is not made, the creditor is able without much additional effort to prove the elements of an enforceable contract, prove full performance, and support its damages.

The procedure for a foreign creditor to begin a collection action is no different than for a domestic creditor on a domestic debt. The foreign or international nature of a creditor or the claim may create unique issues about foreign law, obtaining evidence outside Texas or the United States, or admitting evidence in a foreign-language, but those issues affect elements of proof, not the threshold issue of ability to commence a lawsuit or the procedure applicable to the lawsuit. There are however things a foreign creditor should understand about Texas lawsuits before commencing one.

If demand has been made (or not) and a debt remains outstanding, a foreign creditor can commence an action in either Texas state court or a United States District Court against the debtor by filing an initial pleading and paying the filing fee (e.g., currently $350 to commence an action in Harris County, Texas, and currently $405 to commence an action in a United States District Court). However, the debtor must be subject to jurisdiction in Texas, meaning it is either a resident of Texas or has sufficient contacts with Texas to give a court authority over that debtor.

Foreign creditors must understand they will also then be subject to the jurisdiction of the court where the action is filed, specifically as to claims from the debtor related to the subject of the original lawsuit (i.e., a creditor who files a lawsuit in Texas to collect on an invoice is subject to jurisdiction on claims the creditor owes money to the debtor based on the transaction in issue). This does not mean a foreign creditor is subject to jurisdiction in Texas over any other claim by the debtor unrelated to the collection unless there is an independent basis of jurisdiction.

At minimum, a creditor must have documents to show an original contract or other agreement on the underlying obligation creating the relationship the debt arises from. A creditor must also have documents showing goods or services were ordered and delivered or rendered, and that a request for payment was made or payment was otherwise required but not made or received. If there is a course of dealing, the creditor must have proof of payments made and corresponding credits in order to document the amount sought is correct and all credits have been applied.

In addition to these core documents, a creditor should also have correspondence between the parties regarding the debt, prior demands and responses to the demands, and any prior agreements to pay or accepting responsibility for a debt (including payment guaranties).

As mentioned above, any document offered as evidence must be properly authenticated, but foreign documents in English or documents in a foreign language may require additional steps to complete authentication, and be properly translated into English by qualified translators.

If demand is made with a deadline for response, the debtor should be given that time to respond. For certain types of notice (e.g., recovery of attorneys’ fees, or demand under the DTPA), a specific time delay is required by law. If a positive response is made, use that time to engage in good faith negotiation to reach a resolution.

If the time to respond has passed but nothing was received, consider whether a second demand should be given, or if it is futile to demand again and instead attention should be given to a decision to write off the debt or prepare to file an action. This can include final organization of documents, segregating documents to prevent archiving or automatic deletion of documents that would make it more difficult or impossible to prove the debt, or interviewing witnesses to preserve their recollection of events, To the extent the creditor can, it should monitor the debtor’s activities, or be sensitive to communication from others who know the debtor or are in the industry about attempts or plans by the debtor to relocate, liquidate, or take other actions that may impact the creditor’s ability to recover.

There are multiple interim remedies available to creditors asserting breach of contract claims to preserve evidence and assets while litigation is pending. These remedies are designed to preserve the status quo while a formal case proceeds. These measures include:

• temporary restraining orders and preliminary injunctions to prevent destruction of evidence
• attachment or garnishment (pre-judgment seizure of debtor’s property for the court to hold pending resolution of the claim)

These are generally termed “extraordinary remedies” because they are outside the usual course and must be based on specific, detailed evidence, not mere conjecture or unsubstantiated beliefs, that such remedies are required to prevent harm. Typically, creditors must demonstrate immediate and irreparable injury if the measures are not taken and a likelihood of success on the underlying claim. In addition, creditors must typically post a security bond in excess of the amount sought in the event damage is caused by a remedy granted but is ultimately found to have been issued in error. These remedies must be used with caution because they are expensive to obtain and may trigger creditor liability.