As you hang up the phone, it hits you — they are not going to pay.
It may be a distributor, a contractor, client or even someone you considered a friend, but after all the excuses, all of the promises, and a stack of broken deadlines, you simply don’t believe they will ever make good on their debts to your business.
This leads to a simple question: Are you going to sue?
Before you sue a client or customer for non-payment, think hard about the cost of litigation, consequences and the likely outcome. As Nolo.com explains, “Your first step in collecting an unpaid bill should be to send a statement or a collection letter requesting payment of the invoice … When it comes to collecting debts, the squeaky wheel usually gets paid first.”
However, if standard attempts to collect a debt fall short, here is what you need to consider.
Is the debt collectible?
Does your debtor have the money—or will they have the money in the near future—to pay you should you win a lawsuit. Getting a legal judgment against a person or company is no good if they’re never going to be able to pay. On the other hand, an aggressive litigation move may successfully squeeze money out of someone who can be intimidated into paying you instead of another creditor who is more passive.
Will they file for bankruptcy?
Closely connected to the first point is the threat of bankruptcy. Many, many general business debts can be “discharged” (i.e. voided) in bankruptcy, leaving you, the creditor, with nothing. Sometimes, however, creditors who have properly secured their positions can come out ahead of other creditors who have done nothing to protect themselves. A good lawyer will tell you if you’re one of them.
Will you win?
Obviously, you can’t collect if you have no right to be paid. Many times your right to be paid is clear. But there can be some legal wrinkles, depending on your business, your state, and especially the amount of time you have waited to sue. Make sure this is cleared up before you make any legal moves.
Will they counter sue?
You are at the greatest risk of being sued just after you sue someone else. In fact, most court rules require a debtor to file any claim against its creditor at the outset of a lawsuit, so initiating litigation might lead to some blowback. Make sure you haven’t done anything that the debtor could claim has injured them. If you’re worried about some sort of frivolous counter-claim against you from a malicious debtor, make sure you get a good lawyer — it may be possible to knock out such lawsuits at an early stage.
Will a lawsuit impact your reputation?
If your field is small, think before you sue over small amounts. If you get a reputation as a quick litigation trigger-puller, it may hurt your business prospects later on.
Can you afford litigation?
Sometimes lawsuits can be quick, cheap and effective; a debtor may realize you aren’t bluffing and pay up right away, or may fail to properly contest your claim, leaving you with an automatic victory. But if the debtor has a real problem with your performance, and is willing to pay a lawyer to fight, you may be looking at tens of thousands of dollars in legal costs and years of litigation. Analyze your situation clearly—you don’t want to be left with peanuts after expending big bucks to pay your lawyer.
“If a customer or client has not paid you, after repeated attempts to collect payment, your final option before suing should always be another attempt to obtain payment. This can be accomplished by sending a final demand letter to the customer or client demanding that payment be made. It is surprising how often the final letter is successful. Sometimes it just takes one more demand to receive payment” (AllBusiness.com).
The litigation path can be difficult, expensive and uncertain. But sometimes it’s the only good option. Find a good business lawyer, ask them what your chances are, and make a decision based on a rational analysis of the pros and cons; not by consulting your feelings, acting on anger, or relying upon impulse. Doing so will maximize your chances of turning a bad situation around.
This article has been edited and condensed.
Matthew C. Mickelson is a sole practitioner attorney in California at the Law Offices of Matthew C. Mickelson, helping small businesses collect money owed to them. He has successfully collected hundreds of thousands of dollars from debtors, and practices in state, federal, probate and bankruptcy court. Connect with @mattinla1 on Twitter.
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