Introduction-Why Even Sue?
“Can’t squeeze blood from a turnip” was a favorite saying of my mother. In the commercial context, it is worded slightly differently: “What’s the point of suing them? They have no money.” And it seems an obvious truth.
And is quite often dead wrong.
Indeed, strong arguments can be advanced that in difficult economic times, one must not only perfect the skills of collecting on overdue accounts, but must become more, not less, aggressive to protect whatever chances there may be for eventual successful collection. Some thought will indicate why this is true.
1. While many debtors are in trouble, so are many creditors and there may be less competition still viable to collect the debts owed to you by your debtor. Creditors are as likely to disappear as debtors and you may find yourself as one of the few creditors still chasing the resources of the debtor.
2. The average business or person owing you money is not the usual “dead beat” one finds in all business but usually a good business coming on hard times, often through no fault of their own. These debtors are precisely the type of people you should seek to have a judgment against since they will, ultimately, likely again prosper and pay off the judgment. Remember, a judgment can last decades, earning interest at ten percent annually. We have collected on judgments twenty four years after entered.
3. Many creditors ”give up” and do not bother to promptly and effectively seek judgment. Since judgments are often repaid based on date of entry, it is first come first served and if one is one of the few creditors to obtain the assets either because of recovery of the economy or bankruptcy of the debtor, that judgment may be worth gold. Collection is often a race for scarce resources. To delay your commencement may give the race to someone else.
4. Many debtors, once successful, will not only be prosperous again but wish to maintain as good a relationship with vendors and suppliers as possible and will agree to entry of judgment via stipulation, a relatively inexpensive and efficient method that will allow you to preserve your rights without expending significant sums.
5. Use it or lose it. The statute of limitations on collecting sums due you expires in anywhere from one to four years and if you do not at least commence suit to collect the debt, you may find yourself barred for all time from collection, even if the debtor again prospers.
6. Many taxing authorities require “reasonable efforts” to collect debts before allowing a write off as a bad debt.
7. Accounts Receivable are an asset and lending institutions will give them some value if collection efforts are commenced. One’s own financing may be improved by efforts to collect.
8. Deterrence can work. If your other debtors see you are aggressive in seeking recovery, they may elect to have your company be one of the few companies they keep current. The squeaky wheel gets the grease, as my mother would have said.
9. When a company is having trouble paying its vendors, it often cannot afford the expensive legal cost of defending against your suit. Instead of a prolonged fight costing you a great deal of money, the other side, realizing they cannot afford their own legal defense, may agree on a quick and fair settlement. In a way, their lawyer and his or her cost may be your best friend. See our article “Buying Justice” on that topic.
10. A clear cost benefit analysis of each step of the litigation can allow one to abandon those collections that appear useless and proceed to judgment and collection on those that have a chance of success. See our articles Cost Benefit Criteria in American Litigation as well as Debt Collection-The Tools Available on Enforcement of a Judgment for a full description of the powerful methods of collection available. One can seize and sell a home, attach accounts, or seize vehicles if one uses the tools correctly…and often merely the threat of those actions will result in a payment program worth considering.
11. Collection Agencies are useful for small overdue accounts but, based on pure volume, are not capable in most instances of the type of rigorous and aggressive legal maneuvering that can achieve effective collection. If one wants to test the waters to determine if a debt can be collected, one will have to hire one’s own legal counsel…and the criteria for determining the tactics are outlined in this article.
Steps in Determining Whether and How to Sue.
1. Cost Benefit is the Name of the Game. Vengeance or anger is not why you sue. You sue to accomplish the goals stated above, namely to generate an economic return. Work with your legal counsel to get accurate estimates of costs of each step of the case so that you can, as the case progresses, determine if the risk to rewards assessment justifies further legal action. Do not hesitate to drop the case if the debtor’s situation radically deteriorates or if your own economics do not justify further expense. See our article American Litigation.
2.Use All Your Tools. By use of continued access to your products (for cash) you may be able to encourage a debtor to make payments to you. After all, the debtor may not have any other sources of goods. But that can be coupled with a stipulated judgment which you can enforce if certain payment criteria are not met. Explore such settlements before filing suit and during the legal action, but be prepared to keep the pressure on or the debtor may change his or her mind.
3.Check Out the Other Creditors. This has two purposes. First, if they are far ahead of you, there may be no point in pursuing your own claim. Second, they may have thought of a method you have not considered and you may want to join them on their path.
4.Create Your Overall Strategic Plan with Legal Counsel. Lawyers know how to sue and good lawyers have many litigation tools. However, those litigation tools have to be matched with your own criteria for success and budget and the other means of collection that you may be considering. It is vital to make sure you control and interact with your legal counsel or your cost benefit analysis may become a nullity.
5. If You Are Going to Move…Move Now. In collections, speed is often the name of the game. Dithering only allows other creditors to move more quickly than you and grab scarce resources. Decide quickly and implement your plan quickly.
6. Consider Taxes. Taxes owed by the debtor usually have priority in payment over your debt. If sales tax, income tax, payroll tax or state taxes owed by the debtor exceed significantly the debtor's assets and are overdue, you may want to simply give up the chase.
7.Create Decision Points. Do not just sue. With your legal counsel, make sure you schedule in advance certain points in the litigation to reassess the case with a new cost benefit analysis. For example, once the answer to the complaint if filed but before discovery commences is a good time to analyze the defenses available and the amount of legal effort that seems worthwhile.
8.Be Open to Settlement and Think of Inventive Means to Settle. As annoying as the costs of the case may be to you, it is far more annoying and destructive to the debtor. Unless emotion overcomes thinking, the debtor will be open to any methods to stop the bleeding. Providing security, even pink slips to vehicles, can alter the cost benefit of the case and allow you to consider the benefits of a negotiated settlement. Talk with your legal counsel about security and methods to avoid the danger of bankruptcy court voiding your settlement.
9.Be Patient. A typical court case takes months or even years. Pressure increases constantly and at some point a debtor faces trial which is the most expensive process in the legal action. Often debtors will wait to the eve of trial before settling. In your own planning, assume the case requires full trial and that way you will not find yourself impatient for the results.
It was about five years ago that an Abstract of Judgment we had recorded in 1987 resulted in a telephone call from a title company. The judgment debtor was trying to sell his building and had been told by the title company that in order to close title, he would have to pay off our client who had long retired. The judgment had tripled in the amount due because of the accrued legal interest and the debtor was outraged…our client would get the bulk of the proceeds from the sale. Our client, on his cell phone from his fishing boat on Lake Meade, laughed and told us to “hang tough.” We either get paid or we would use our judgment to foreclose on the building.
Our client had waited all this time while the debtor rebuilt the equity, knowing that sooner or later he would have to be paid off. And he was, about sixty days later.
Laughing, that client once said something to me that perhaps best summarizes what debt collection is all about.
Collecting what is owed you spotlights the character of business people: some turn up their sleeves; some turn up their noses and some don’t turn up at all.