Most likely, at some point in your business field, someone will owe you money. You can still be waiting for payment after going through the collections process. You might decide that suing the defendant in small claims court is your only option for getting this money. But reality frequently differs greatly from what is portrayed in the most alluring courtroom scenes.
A lawsuit for debt collection can be severe, intricate, and time-consuming. If the dispute isn’t resolved amicably and you proceed to litigation, you’ll face more costs, a higher contingency fee, and perhaps even more worry and annoyance. Preventing an escalation of the situation is the best line of action. Here are three tactics to consider before you take a significant loss or prosecute a client for non-payment.
1. Know About Alternative Options
Many people believe that litigation is the only option available when it comes to debt recovery. However, there are other choices that are just as successful as taking a client to court.
- Settlements
Settlement is a wise move when the insolvent business is about to file for bankruptcy or close. Customers are able to get some of the outstanding debt back this way before it’s too late. Remember that a settlement only makes the debtor responsible for a percentage of the entire amount owed, necessitating a reduction in the creditor’s demand.
- Voluntary Payment PlanÂ
An additional alternative to think about is a voluntary payment plan. The debtor settles their outstanding balance in installments, which enables businesses to recover their money without incurring further fees from litigation and frequently more quickly than suing and obtaining a judgment.
2. Be Aware Of How Long The Process Takes
Before entering the litigation process, you should be aware of how long the process takes.
a. Default Judgment – It can take up to four to six months to obtain a default judgment when the debtor does not contest the litigation. When there are problems and/or delays, it sometimes takes nine months or longer. Most courts are much more overloaded as a result of the pandemic. New York’s lower courts are still delaying the issuance of rulings and setting trial dates.
b. The Serving Process – Serving the debtor with official notice of the case is one of the most frequent problems clients run into during the litigation process. Until the client is formally informed of the litigation, no judgment can be granted in the case. People, therefore, run away and hide to avoid getting the filing. Until there is proof that the company is aware of the lawsuit, the litigation process will continue to drag on. The process typically takes six months or longer from the day the complaint was filed if we have to serve the organization through the Secretary of State.
c. The Delay Game – Debtors will instruct their attorneys to postpone the trial as long as they can. It is a generally established technique that might take up to a year to complete, despite being unfair to the creditor. Before or after the judgment is issued, this puts pressure on the creditor to accept less than the whole amount.
d. Judgment – The court normally issues the final Judgment two to six months after the trial. The formal judgment collection procedure can then start, which could take months or years.
3. Determining Expected ROI
When deciding whether to sue a customer for debt, consumers should evaluate their projected return on investment (ROI). But how are you going to achieve that?
Before beginning the legal procedure, make a list of your prospective expenses, turnaround time, potential return (amount of debt paid back after contingency fees), and the possibility of receiving the return. Using an expected value equation, clients can determine if investing in a lawsuit against a debtor will yield a worthwhile return. To calculate the expected value, we normally take into account 3 options: 0 return, 100% of principal, fewer charges and fees, and a settlement amount. For each option, we give a probability. There is minimal financial motivation to file a lawsuit if the predicted ROI is marginally higher or lower than the sum that was received.
Bottom Line
Although it may be tempting to file a lawsuit against a customer right away to recover any outstanding debt, this is not how the legal system actually operates. It costs money and requires a lot of patience to sue using a contingency lawyer, and there is no assurance that the debt will be collected.
Before filing a lawsuit against a client, weigh your options, the time commitment, the cost of fighting the case, and the expected return on investment. Give us a call if you want to talk about whether it’s appropriate to sue your client or not or if you want to talk about alternatives to suing a client. We’re pleased to go over the benefits and drawbacks with you so you can decide what is best for your situation.
FAQ
1) How long does it take to sue a client for unpaid debt?
The legal process can be lengthy and may take several months to years. Even in straightforward cases, obtaining a judgment can take 4-6 months or longer, and delays such as serving notice or court backlogs can extend the timeline significantly.
2) What challenges can arise during the litigation process?
Common challenges include difficulty in serving legal notice, intentional delays by the debtor, and prolonged court proceedings. Debtors may avoid receiving notices or use legal tactics to delay the case, which increases both time and cost for the creditor.
3) How do I decide if suing a client is financially worth it?
You should evaluate the return on investment (ROI) before proceeding. This involves estimating legal costs, time involved, probability of recovery, and the final amount you may receive after fees. If the expected return is low, alternative options like settlements or payment plans may be more practical.
4) What should I consider before suing a client for unpaid dues?
Before taking legal action, you should assess whether the debt is clearly documented, legally enforceable, and worth the time and cost involved. It’s also important to review contracts, invoices, and communication records to ensure you have strong evidence to support your claim.
