Counter claims are very rare in collection litigation, but they can have serious costs so that is why we have to warn clients of this possibility with every case.

Legitimate Counterclaims Are Rare

Less than 1% of our litigation cases have counterclaims filed which result in our client having to pay more money to the attorney representing our clients.  Part of this is by design as we generally avoid law suits when counterclaims are highly likely and have some merit.  And part of this is the simple reality that while debtors threaten to file counterclaims all the time (just like they threaten to file bankruptcy if we file suit), the reality is that they very rarely do either.

In the last 15 years, our clients have only had to pay more than $1,000 to defend a counterclaim 3 times.  In each case, the cost was less than $2,500.  While counterclaims could be extremely expensive, we’ve avoided this so far.

Defense of the lawsuit is NOT a counterclaim

A counterclaim is not the same as the debtor defending the lawsuit.  A debtor defense is to simply say “we don’t owe the money for this reason”.  Since we only sue when our clients truly are owed money, these defenses are typically done just to delay when the debtor has to pay and therefore also potentially help them negotiate for a discount in exchange for voluntary payment(s).

Counterclaim Explained

A counterclaim is essentially a new lawsuit (within the existing lawsuit by our client against the debtor) by the debtor against our client for damages (costs) allegedly caused by our client against the debtor.  Here are some hypothetical examples:

  • A construction company files a lawsuit for unpaid invoices. The debtor files a counterclaim for the costs incurred because the construction did not complete the job on time and for alleged poor quality of some of the construction.
  • A website design firm sues to collect on unpaid invoices. The debtor files a counterclaim saying the website was launched months late and without certain functionality, causing the debtor to lose months of revenue and profits.

Counterclaim Costs

The collection litigation attorneys we hire on behalf of clients charge hourly for the defense of counterclaims.  The reason is that they have no other way to make money for the extra effort they have to put into the case.  The attorney can earn a contingency fee by collecting money.  But if they defend the counterclaim and the judge eventually rules in our client’s favor, we don’t actually collect any money so no contingency fee can be earned.  Defeating the counterclaim just means the client doesn’t owe any money for damages to the debtor.  So to get compensated for this effort the attorney charges hourly to defend counterclaims.

The attorneys we use typically charge between $200 to $450 an hour for counterclaim defense.  We will get you a quote when there is any evidence that a counterclaim is possible or has been threatened.  The cost of a counterclaim defense could get large very fast – to $5,000 or $10,000 or $25,000 – $50,000 or $100,000 depending on the severity of the matter and the veracity of the debtors claims.  So while in 99.99% of our collection litigation cases this is a very remote possibility, it is a risk.

The biggest deterrent to a debtor aggressively pursuing a counterclaim is that it is going to cost them a lot of money for their attorney and expert witnesses to prosecute the counterclaim.  While they may claim they can get their attorney to work on contingency basis, that is extremely unlikely.  Determining damages is a complex matter requiring extensive financial analysis.  That alone can cost $5,000 or $50,000.  It will cost a couple thousand dollars extra in attorney fees just for the initial counterclaim versus a simple defense of the lawsuit.  To keep the counterclaim alive, the debtor will soon be looking at spending $5,000 or $10,000 and that’s when they tend to get serious about using money to settle the client’s lawsuit instead of paying an attorney.

However, if your customer has a legitimate counterclaim, or if they can easily make a counterclaim argument that will take a lot of effort to prove is false, we encourage our clients to be very cautious when considering litigation.

The Counterclaim Reality

Counterclaims seem to get filed in 5% of our collection cases despite being threatened 1/3 of the time.  In 90% of the counterclaims that have been filed, they are so frivolous that the attorney we use does not even charge a fee to prepare the initial defense of the counterclaim allegations.  It seems that once this defense is filed, the debtor no longer wants to pay their attorney to keep pursuing the counterclaims because of the cost.  At that point we are either just pursuing our lawsuit against the debtor or a resolution is reached.

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