Thanks to the silver screen, many people believe they have a solid understanding of our court system and the judicial process. But what is often depicted in the most captivating courtroom scenes is far from reality. A debt collection lawsuit can be serious, complex and time-consuming. If the case isn’t settled and you move to litigation, you’re looking at additional expenses, a higher contingency rate and possibly added stress and frustration.
The best course of action is to settle the matter before it escalates. As we close out our books for 2021 and look at the amount of unpaid debt, here are three strategies to think about before you take a considerable loss or sue a client for non-payment.
From Traditional to Alternative
When it comes to debt collection, many people assume the only course of action is litigation. But there are alternative options that are equally as effective as taking a client to court.
One alternative is sending a client a stern letter from a lawyer, threatening to go to court over the unpaid debt. Sometimes this is enough to convince debt holders to negotiate a settlement. This option can provide fair results in a fraction of the time, allowing you to get back to business faster.
- Understanding Settlements – Settlements are an alternative to suing a client. It allows clients to reduce out-of-pocket costs and contingency fees and receive a fixed amount of compensation quicker and more efficiently. Settlements are also a good option when the indebted business is about to file for bankruptcy or close its doors. This allows clients to collect a portion of the outstanding debt before it becomes impossible. Keep in mind, a settlement only holds the debtor responsible for a part of the outstanding debt, forcing the creditor to accept less than the original amount owed.
- Voluntary Payment Plan – Another option to consider is a voluntary payment plan. The debtor pays off their outstanding debt in increments, allowing businesses to collect their money without the added costs of litigation, and often faster than suing and getting a judgment. While both businesses and the indebted company can benefit from this option, it comes with risks. There is no assurance the debtor will make all the payments. Their company can go out of business or simply refuse to pay. If a business closes debt payments, there is no way to collect the remaining payments due. However, the money received prior to the business closing most likely was more than would have been obtained if litigation was filed, as the case would probably still be waiting for trial. If an indebted company stops paying on an agreed plan, you can still sue for the remaining balance.
Quite a Long Time
Before entering the litigation process, be aware of how long the process takes.
- Default Judgement – A default judgment, where the debtor does not fight the lawsuit, typically takes up to four to six months to receive. Sometimes, it can take as long as nine months or longer if there are issues and/or delays. Due to the pandemic, most courts are even more backed up. The lower courts in New York still are not issuing judgments or scheduling trial dates.
- Defended Lawsuit – A defended lawsuit typically takes nine to eighteen months or longer to reach a trial date. Debtors often spend a few thousand dollars to defend the lawsuit just to get this extra time before the day of reckoning, then don’t actually defend it and a default judgment is issued.
- The Serving Process – One of the most common issues clients face during the litigation process is serving the debtor official notice of the lawsuit. A judgment cannot be awarded to the case until the client officially knows about the lawsuit. As a result, people hide and sneak around to avoid receiving the filing. The litigation process will continue to drag on until proof the company is aware of the lawsuit. If we must serve the entity via the secretary of state, the process often takes 6 or more months from the time the complaint was filed.
- The Delay Game – Debtors will advise their lawyers to delay the trial as long as possible. While unfair to the creditor, it is a widely accepted practice that can drag out over a year or more. This puts pressure on the creditor to accept less than the full amount, either before or after the judgment is issued.
- Judgment – It typically takes a two to six months after trial for the court to issue the final judgment. At that time, the formal judgment collection process can begin, and that can take months or years.
Bottom line – It can take three years or longer to sue and then collect an unpaid debt from a client. Knowing this, the settlement or payment plan alternatives are often the better business option.
The Best ROI
Contemplating your expected return on investment (ROI) is an excellent determinate for clients considering suing a customer over debt.
How do you do that?
Write down your potential costs, time, possible return (amount of debt paid back after contingency fees) and the likelihood of getting the return before starting the suing process. Clients can estimate if their investment into suing a debtor will garner a meaningful return by using an expected value equation. We typically consider 3 alternatives: 0 return, 100% of principal less costs and fees, and a settlement amount, and assign each a probability to come up with the expected value. If the expected ROI is slightly higher or less than the awarded amount, there is little financial incentive to sue.
If the debtor is in business, not insolvent, and refuses to pay, then contingency based litigation typically is a good investment. You can compare the expected value of litigation to other options like settlement and a payment plan to decide if litigation makes sense when the debtor is offering limited cooperation.
Last Piece of Advice about Suing a Client
No doubt it’s tempting to immediately turn to the option to sue a client to collect any unpaid balance, but the way we often imagine how the legal system works is far from reality. Suing using a contingency attorney takes some money and lots of patience – with no guarantee of collecting the debt.
Before suing a client, consider alternative options to litigation, the amount of time it takes, how much you’re willing to sacrifice to fight the process and your estimated ROI.
If you want to discuss whether it’s right to sue your client or not, or discuss alternatives to suing a client, give us a call. We’re happy to walk you through the pros and cons and help you make the right decision for your business.
For additional information about suing a client, view our infographic here.