Deciding When to Sue – or not.
Thomas Gillespie – President – Access Receivables Management – Forbes Article 2/22/2021
Does your organization consider litigation when all other efforts fail? Debt collection has changed over the years. In years past, litigation was a step in the process that was undertaken very quickly by most commercial and consumer creditors. Today, litigation tends to be a step that is taken after all other efforts have failed or is not taken at all. Our company has numerous commercial and consumer clients that do not consider litigation at all. Sometimes, it is a cost versus return issue, and sometimes it is a concern for reputation. The fact remains that if you are attempting to collect consumer debts or commercial debts, your process may need to include a litigation step. Each creditor must decide for themselves what makes sense.
Why You Should Consider a Litigation Step In Your Process.
If your collection program has no ramifications for debtors if they do not pay, many of them will not pay. It is not uncommon even when you prove a debt is owed to hear the response, “Sue me. I am not paying this bill.” In commercial collections, it is not uncommon to hear this objection frequently because if the debtor owes a large amount of money, delaying that payment is like getting a free loan from the bank. Once the account enters the litigation process, it can take a year or more for a final resolution. If your debts are against consumers, the creditor’s collection attorney is typically filing many lawsuits at the local courthouse and obtaining default judgments when debtors do not show up for court. These default judgments can then be executed based on identifying employment and garnishing wages or identifying bank accounts and other assets that can be levied or have a lien placed.
When To Consider Litigation
If the balance is over a few thousand dollars, you have documentation to prove the debt is owed, the debtor has the means to pay and the debtor is ignoring your demands for payment, litigation is a step to consider. If you work with a third-party collection agency, the agency will often conduct a pre-legal investigation of assets and recommend accounts for litigation once it has worked the accounts internally for at least 90 days with no response or refusal to pay.
Costs of Litigation
There are several costs to consider when filing lawsuits. These include the fee to the attorney and a filing fee with the court. There can also be miscellaneous legal costs such as for depositions, sheriff fees, process server fees, and even contingent and noncontingent suit fees charged by the attorney. If you are using a third-party collection firm with a full-service legal department, it will estimate those costs upfront and help you manage them. Attorneys will be paid out of their fees. Sometimes, an agency will even front the costs for a larger share of the fees on the back end. When considering your legal program, the fees are a big part of your decision process. If your average balance account is under a few thousand dollars, reporting accounts to the credit bureau may be a more cost-effective final step for nonpayment than litigation.
Appearing in Court
If a debtor answers the complaint filed by the attorney, additional costs could accrue. A witness may need to appear for depositions or as a witness at trial. Currently, in some states, depositions are being held via Zoom. That eliminates travel and lodging costs if your debtor resides or has business in another state. Again, this is a point to consider when deciding whether litigation is the next step. Some courts require original documentation, though that is becoming less of an issue today. Can you provide copies of contracts and documents to prove your debt is owed? If not, you should not go to the expense of litigation because you have no solid documentation on which to build your case.
Working Directly with An Attorney Versus A Third-Party Debt Collector
If you think a debt might need to go to litigation, you can choose to work directly with an attorney or first work with a collection agency. An attorney has one collection pitch: Pay within 30 days, or you will be sued. That is their business. Their first demand letter implies litigation by the mere fact that they are a law firm. They cannot threaten to sue your debtors and then not sue accounts that still go unpaid. That would be considered deceptive practice. A third-party debt collector can exhaust several different options and utilize litigation as a final step if the debtor is uncooperative. A collection agency may be able to report the debt to the credit bureau at no additional charge to you and attempt different collection approaches to resolve the debt quickly without litigation. That being said, litigation is still a viable tool in the arsenal that may have to be utilized when all efforts fail.
Conclusion
Litigation is an important step in the collection process. If you do not have that step in your collection process, a debtor may simply refuse to pay, knowing you are not going to follow through. I believe that most people and businesses want to do the right thing. Sadly, that is not always the case, and there are times when stronger steps are required to collect the money that is rightfully owed. In the end, you provided goods and services to the debtor. You deserve to be paid in full.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.