We win 99.9% of our collection lawsuits, either by default or after the debtor defends the lawsuit. Winning the lawsuit and getting the judgment is the first step in the process, and then we need to collect.
Default Judgment Process
It takes a minimum of 4 months to get and record a judgment, and it happens this fast only if there are no complications and everything occurs promptly. We call this a “Default Judgment” because the debtor does not fight the lawsuit and lets us get the judgment by default.
Once the attorney receives the file and cost advance, it will take them 2 to 4 weeks to prepare and file the lawsuit. Then it has to be served on the debtor, which usually takes another 2 to 4 weeks but can take longer if the debtor is never at the location when the process server arrives. The debtor then has 30 to 45 days to respond.
If the debtor does not respond to the lawsuit (file an “answer” or defense of the client’s lawsuit), the attorney can file for a default judgment, which can take 2 to 4 weeks. The court will issue a judgment in as little as 2 weeks, but sometimes it takes 3 months (or even longer in rare circumstances). Once the judgment is issued, the attorney needs to record the abstract and file liens which can take a week to 2 months.
So, if it goes extremely smoothly, it is done in 4 months, and if there are issues and delays, it can take 9 months to get a default judgment. If the debtor fights the lawsuit hard, which happens in less than 1/3 of our cases, it can take 18 months or longer before you have a judgment.
Delays and costs from struggles serving the debtor
The most common issue is having difficulty serving the debtor with the lawsuit. The court will not award a judgment until we can prove the debtor is aware of the lawsuit and had the legally mandated amount of time to respond. Service problems arise when the debtor’s business is located in a secure building where we can’t gain access, or is being operated from an unknown location. We can also serve the debtor at the owner’s residence, but we can encounter similar difficulties in these situations too when the process server cannot get to the debtor’s door (locked gates on rural properties, locked doors in large condominium or apartment buildings).
Sometimes our clients have to pay the process server hourly to do a stakeout, usually at the owner’s residence, trying to catch them coming or going. As you can imagine, we might have to do this multiple times, which can get costly when paying $40 to $75 per hour.
We usually do not have to do a stakeout if the debtor is a registered corporation or LLC. In those situations we can file for ‘substitute service’ with the secretary of state. This can cost an extra hundred or two hundred dollars, but is a more direct approach than a stake out. After completing service with the secretary of state, when we have the default judgment hearing, the judge will want to see written evidence that we first tried to serve the debtor multiple times at the business and home locations before doing substituted service. In these situations, the client will most likely need to advance from $100 to $250 more just to get service completed.
On some occasions, if we are having serious troubles serving the lawsuit we may recommend that we cease the litigation process. If we can’t find an operating company then we have to wonder if we can collect once we get a judgment. Or, even if we know the company is in business, if we don’t know where they bank or where they get their revenue, it means we don’t know how to collect when we get the judgment. During the judgment collection process, we can do a debtor exam to force the debtor to tell us where their money is. But we have to be able to serve the debtor to force them to show up for the debtor exam. If we can’t serve them with the lawsuit, it makes us question if we can serve them during the judgment collection process.
It is very easy for a debtor to initially defend the lawsuit. They do have to hire an attorney, but it could cost $500 to $2,000 to have the attorney file an “answer” to the “complaint” (i.e. defend the lawsuit). It does not take much time to just say that the debtor denies our client’s allegations and at that stage they do not have to offer any evidence to support their position that they don’t owe the money.
A defended lawsuit means there will have to be a trial so the judge can hear testimony from both sides and make a decision. Depending on the jurisdiction, the trial can be scheduled to occur within a few months or more than 1 year later. There is virtually nothing we can do to change the timeline, except in California where we can file for a pre-judgment writ of attachment.
Earlier in his career, when Dean Kaplan was hired as an interim CFO by venture capital companies for one of their investments, he frequently paid attorney’s a few thousand dollars to simply delay the lawsuit and trial date as long as possible. He was paid to ‘buy time’ for the company to raise additional capital or generate more revenue so that it could take care of its debts. While not necessarily ‘fair’ to creditors, this is a legally acceptable tactic and Dean had a fiduciary obligation to shareholders to take whatever action was in the shareholders and stakeholders best interest given the then-current circumstances. This same strategy can be taken by any debtor who gets sued so it is a risk for clients that the litigation process will take 1 to 2 years.
We find that less than 5% of our collection litigation cases actually end in a trial. In over 50% of the cases that initially get defended, the debtor either voluntarily agrees to a settlement or payment plan, or subsequently decides to not spend more money to fight the lawsuit and eventually we get a default judgment long before the trial date.
Even in those situations where the debtor keeps defending the lawsuit all the way to the trial date, at the very end they may choose to not pay for and put up a defense at the trial and we get a default judgment at that time. Below we provide an overview of the main steps during a defended lawsuit.
Discovery or Interrogatories
If the lawsuit is defended, then there will be a hearing at which the judge will set dates for various steps to be completed and then the trial date.
Usually the first deadline is related to each party having to ask the other side for documentation that supports their position. Frequently called “Interrogatories” in many jurisdictions, our attorney will prepare a list of questions for the debtor to answer with existing documentation. This list will be based on the defenses raised by the debtor in the answer to the complaint. The debtor’s attorney will do the same and our client will need to provide the requested information.
We usually have a very limited period of time (3 to 4 weeks) to respond to discovery requests (interrogatories). We usually will have to provide all documentation associated with the dispute. This typically will include all communication between client and debtor and can even include client’s internal communication regarding the matter (although this is rare). The evidence we want to present to the judge at trial then needs to be provided to the debtor during this discovery process if it is requested.
In about 3% of our litigation cases, (typically disputed matters where $50,000 or more is owed) we may recommend that the attorney conduct a deposition of a key person working for the debtor company. This gets expensive, as we need to hire a court reporter so that the debtor has to testify under oath and knows their answers are being recorded. Without a court reporter, the debtor can just lie and then when asked in court just deny that’s what he said during the deposition. The deposition process can cost $500 to $1,500 per person deposed in additional costs that the client has to pay.
Our client may also have to appear at a deposition to answer the debtor’s questions. This too is very rare (probably less than 1% of cases).
Some venues have a mandatory mediation policy. While the mediation is not binding, the goal is for the mediator to negotiate a compromise so that the matter can be resolved without a trial. The mediation can cost $500 to $1,500 and often the client will have to pay for all of those costs.
Eventually all the pre-trial steps are completed and the trial date approaches. The client will need to provide the names of all potential witnesses at the trial and arrange to have at least one person appear if required. We have never had a case where more than one client representative had to appear but this is possible in large, highly contested matters.
The attorney will do final prep during the last 2 to 4 weeks before the trial date. This may include talking to witnesses on the phone. Not all trials will need a witness. If the documentation is 100% solid and clear and the debtor’s defenses are frivolous, a witness may not be required. We find that witnesses have to appear in less than 2% or our cases. Often all they have to do is testify the information being presented to the judge is accurate. But if the debtor appears and testifies, our witness may need to contradict what the debtor says. It is very easy for a debtor to make up verbal communications so the client’s witness may need to refute this.
Getting the Judgment
Often the judge will not make a decision at the end of the trial and we have to wait 2 to 6 weeks for their ruling. We have never lost, so eventually the judge informs the attorney that judgment will be granted. Sadly, it can take another 2 to 6 weeks to get the proper paperwork from the court system and then it has to be recorded which can take another week to a month. Once all of this happens, we can then start the court ordered judgment collection process.
Given the cost and time required to get a judgment and then collect, we strive very hard to avoid litigation. But, if it is the only way to collect your money and we believe there is a high probability of actually collecting, then it is worth doing as it typically has an excellent return on investment and it prevents people from taking advantage of your business. Please see the Judgment Collection Process below on how we collect once we have the judgment.