Hi Everyone,
It’s Hector and I hope you all had a nice Halloween holiday. It won’t be long now before we go from eating a lot of candy to chowing down on some delicious turkey for Thanksgiving.
In the meantime, I continue to receive wonderful emails from many readers and one that stood out asked about the criteria that one should use to evaluate the viability of pursuing a past due account through litigation. That’s always a tough situation because it often comes down to several factors.
But first, the biggest factors underlying a decision to proceed with litigation are that the debtor has:
- Avoided attempts to communicate on the matter
- Continuously broken promises to pay
- Tried to maneuver out of obligation with unfounded excuses
- Appeared deceptive in all aspects of the transaction
So, with the latter mind, here is my list of items to consider when deciding to sue.
Is the debtor still in existence? — This really is the first step to consider because if the debtor has skipped out leaving no trace of their whereabouts or assets, proceeding with a suit would not be a cost-effective endeavor. Although having a judgment (by default) may make you feel better, not being able to locate or seize assets would only make the judgment as valuable as the paper it’s printed on.
How much is the past due amount? — If you are a very small organization and the debtor has not paid you a couple of thousand dollars, that is a lot of money for you and suing would make sense. However, if you are a large multi-national organization and a customer has not paid, it’s probably just better to write it off and move on.
How old is the past due account? — If the past due account is less than one year and the debtor is still in business, suing makes sense. But as the past due period increases, especially when it starts to go into several years, you risk not only exceeding the statute of limitations, but you may also incur more legal costs to litigate a badly protracted account.
Is the debtor still in business? — This is a crucial point because if the debtor is an ongoing and viable entity, there is some possibility that a suit just might force them to the negotiating table. In some cases, especially where debtors are concerned about being sued, litigation may motivate them to offer installment payments plans or settlement amounts on the debt.
Do you have the debtor’s bank account information? — Unfortunately, for whatever reasons, many creditors don’t have the debtor’s bank account information. This doesn’t mean you can’t sue if you don’t know the bank account — it just makes it harder to locate and seize any possible available cash in an account when you finally get the judgment.
Is there a corporate or personal guarantee? — This can certainly be very helpful if you must go after another corporate entity, the owner of the company himself, or a third party.Simply speaking, it increases the potential for a positive collection outcome.
Are there significant disputes against the product or services sold? — If the creditor has not properly fulfilled its contractual obligations to the debtor, then it’s difficult to justify a suit. Conversely, if the debtor refused to pay because, for example, they ordered 1,000 red balls and only a few where a little off-color, then suing would makes sense. Every company should stand by its products and services as the goal of continuing to provide Total Customer Satisfaction.
Are there already several lawsuits in progress as well as judgments and liens against the debtor? — Prior to litigating, researching if there has been extensive legal action against the debtor would give you a good indication as to whether one more suit would do anything for you. Not too long ago, a creditor wrote to me about a $7,500 claim against a customer that was about one year old. When they did a UCC search on the debtor and found about 20 liens from various financial institutions filed, they decided not to sue. Even if they received a judgment in their favor, chances would have been very low that they would see any monies after the other larger secured creditors’ liens were paid off.
As you can see, there are several factors that one may need to consider when pursuing a debt through the suit process. It’s unfortunate when pursuing a past due account requires going down this road of litigation but in our society, it’s all part of the price of doing business.
Hope all this helps.
Hector
Hector the Collector is a credit collection and human resources advice column by Nancy Seiverd President CMI Credit Mediators Inc. Your thoughts and comments (nseiverd@cmiweb.com) are most welcome!
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