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It is well-known that litigation costs and business failures have been rising. Today, bankruptcies are at an all-time high, but even more startling is the increase in businesses that simply lock their doors and walk away. Adding to the problem are companies that were operating in the black, but now show too much red ink. The results of this is an increase in companies that are paying their bills slower, asking for extended payment plans, paying their preferred or secured vendors first, then picking and choosing who to pay and who not to pay. Statistics show that the average credit ratings of companies are declining and their “will to pay” is keeping pace. Adding to their burden is an aggressive move by the IRS and state authorities through increased audits resulting in (not anticipated) tax due with tax liens placed upon their business. Adding to the credit grantor’s misery is the fact that debtors are more educated today about who to pay, when to pay and who not to pay at all. This trend can be tracked to the source, which is the public media, social, advice from their attorneys or peer-based experiences. Too often we see debtor companies invite and use litigation as a means to an end. Debtor companies know that if litigation action is taken against them, they have a number of options and tactics they can use to their advantage.Debtors and their attorneys know that when suit is filed, they can use various stalling tactics allowed by the court systems. Debtors can buy as much as 18 months or more before they seriously are forced to make a payment decision. Their tactics include the following: ●avoiding service ●disputes that need validated ●continuances ●motions for discovery ●demanding witnesses ●no show at trial resulting in default judgments with no revenue recovery pursuit These tactics, in many cases, are intended to test your litigation policy and resolve allowing you to make errors that they can use to their advantage. Many debtors know, since they are in business themselves that companies set a suit threshold before they will consider filing suit based on what the creditor believes is a balance size that justifies litigation. Not knowing what it is but having knowledge of its existence gives them the advantage of waiting out collection agency phone calls, letters and threats of potential litigation and will wait to see if and when it happens. Depending on the balance, many know for sure that suit will not be forthcoming so the bill remains unpaid. Debtors who have a poor credit rating have the advantage. What more can you do to me? So why should I pay? The problem here, if you are an unsecured creditor, is that they will pay their secured creditors on time and neglect your bill opting many times to simply find and switch to a competitor who will grant them credit or operate C.O.D. when needed. They have no sense of urgency. Nothing intimidates a potential debtor more than complete and thorough credit risk investigation prior to adding them as a customer. It is a physiological fact that impacts their thought process from the beginning. Having a weak policy or one that allows a company with poor predictive pay patterns to order on terms sends a message that advantage can be taken, at will, if needed. Let’s face it - the court system is overworked, crowded and has become more pro-debtor. Cases for debt payment are being pushed out farther into the future by judges due to defendant requests for more time as a means to advance more pressing cases. This tactic is very effective simply because it elevates the plaintiff’s costs, time and interjects uncertainty in decisions by the plaintiff and forces the plaintiff to consider their return on investment. It forces credit granters to ask themselves, what will be the cost to pursue the debt and defend against a counter suit? What are the odds of the plaintiff winning? What are the odds of the defendant winning? What will I gain at the end? Is the cost simply worth the time and return? In some cases the answer is yes, but in other cases, no. This tactic is a very effective method of getting the case pulled at the plaintiff’s request due to the cost involved and time constraints on under staffed departments. Court systems are stopping the practice of allowing phone witness depositions and forcing the plaintiffs to produce a specific witness in person, not allowing your collection agency to represent you or to use anyone available at your company. Defendants and their attorneys subpoena specific people as a “must” attend. If the plaintiff sends a witness, many times the defendant’s attorney will ask for a continuance forcing the witness and company to spend more money to the point that the return on investment will not be worth the effort. Too many times we have seen the litigation process advance, costing the plaintiff substantial time and money only to result in a settlement at the last minute, virtually within the courthouse just prior to hearing the case. Many of these settlements accepted are the same amount or slightly higher than what was offered in months previous during the collection phase of recovery. The advantage for the defendant is that they have successfully bought the time to plan the repayment on their terms. The disadvantage to the plaintiff is that they have spent more money and time through litigation costs and increased attorney contingency fees for obtaining the settlement. When litigation is successful, the advantage to the defendant is that in many cases they can get a court ordered payment plan better than what was offered during the collection phase of the process. An additional advantage is that they will not stick with that plan and the Plaintiff and their attorney must keep spending time and money to pressure the defendant to make the scheduled payments. Debtors know, especially if they have a poor credit rating, that a default judgment is nothing more than a legal document stating they owe the money. Something you and they already know. The advantage for the defendant is that judgment enforcement is costly and many plaintiffs will not pursue the enforcement due to the additional costs. It is reported by many of our clients that their chosen attorney is remiss in pursuing enforcement because their client will not pay more for the enforcement and they will not want to incur cost out of pocket to do so. They simply decide to pursue better case options. In this scenario the defendant gets away without paying. Today more than ever, a change in the status quo of litigation policy and procedures is needed. [ Related:When is Litigation the Answer? ]
It seems like a straightforward enough question. Any receivables manager should be able to answer it with a quick glance at a report or two. Unfortunately, the number at the bottom of the page is a lot like the tip of the iceberg. It’s what you don’t yet see that may end up doing the most damage.You’d be hard pressed to find a company not taking a long hard look at their credit and collection policies, and for obvious reasons. Shorter terms, lower balances, additional and more thorough credit references are just a few areas we’ve all tightened up on the front end. Working accounts sooner, with a more uniform and accelerated escalation process is becoming a new doctrine for collection managers on the back end. So if we’ve tightened up requirements on the front end, and we’ve taken in some slack we previously extended to our slow payers, where should we look now? Even the most diligent credit manager or analyst would be hard pressed to consistently and accurately read the future. Your best customer two years ago could very well be succumbing to the same financial hardships so many others have. And, unlike the one time, hit-and-run customer, your instincts will likely be to extend some leniency their way if they do slide a little. Unfortunately, the slide could be more rapid than anyone expects. So instead of relying on a credit application from ten years ago and a previously solid payment history, why not take an additional step to protect your interests? An annual credit risk assessment of your active customers can provide insight and allow you to make more informed and appropriate decisions based on their current financial health. Some clients run a complete portfolio analysis for all customers annually and even run their “B” and “C” tiers of customers quarterly. On more than one occasion, the trending information they’ve received has allowed them to probe a bit further before green lighting a large order. And in some cases, the order size or terms can now be adjusted to reflect the updated potential risk factors. Accessing the various databases and information needed to come up with useful results would likely be cost prohibitive for most companies to do themselves. However, in some cases, the cost of programs such as these can be zero. More often than not, the results of a credit risk assessment hold at least a surprise or two.
A lawsuit is generally the last option that should be chosen in trying to resolve a dispute. This question of whether to file the lawsuit enters the mind of many people who are upset with a bad product or service, or breach of an agreement. In order to answer this question and make a decision, one must consider the following factors:Calculation of expected recovery, if the lawsuit is won, is based on the best case and worst case scenarios. Expectations may not be realized. Not all damages may be recoverable. In case of breach of contract, the aggrieved party’s emotional distress is not compensated; loss of income, plus time spent, while involved with a claim or suit is not compensated; interest may or may not be recoverable. In most instances interest is only recoverable if provided for in a credit agreement or contract. Your attorney’s fees are probably not recoverable unless provided for in the credit application or contract. The amount of actual recovery in a lawsuit is unpredictable. Legal fees may be based on an hourly rate or contingency fee basis. An hourly rate depends on a lawyer’s experience, relationship with a client, desire to have repeat business, or volume of client’s business being given to that lawyer. Lawyers charge for each minute of their time spent on the case. Billable time can include, every telephone call to and from a client or any other party related to the client’s matter; meetings, legal research, writing of letters and briefs, time in court (which may be charged at a higher rate than for the office work), preparing legal documents, travel time or depositions (interrogations of parties and witnesses) are recorded and then billed to clients. Expenses connected with the case may reach such a level that further litigation may become counterproductive. Typical file expenses may include fees paid to the court for filing a suit; the sheriff for serving a party with a complaint and summons; a private process server or private investigator for finding a defendant or ascertaining a party’s criminal or financial background; interpreters for translation of documents or interpreting the testimony of a witness or a party speaking a foreign language; experts for giving professional opinions; copying of documents and photos, cameramen and photographers for videotaping and picture taking; court reporters for their attendance time and preparation of transcripts of the proceedings; and attorneys for transportation and lodging (for out of town meetings). On the other hand, a client does not incur such monthly charges if an attorney agrees to take the case on a contingency fee basis. Contingency fee means that an attorney is participating in the claim recovery, if any, on an agreed percentage. As a rule, such percentage fluctuates between 20% and 50% of the amount of recovery. An attorney may advance costs and expenses of litigation to be repaid upon settlement or adjudication or a claim. However, a client remains ultimately responsible for expenses under any of the above-discussed methods of payment. There are many organizations and individuals who are willing to serve as a mediator, counselor, or a judge in a private or out-of-court proceeding. Sometimes it is less costly and faster to resolve any dispute through such intermediaries than to litigate in courts. Mediation involves a semi-formal or informal process of introducing evidence by parties. Parties may bring witnesses or documents to support their views and may hire attorneys to represent their interests at the hearings. Arbitration may be accomplished through government or private organizations, such as American Arbitration Association (AAA), JAMS, Endispute, and many others. Former judges or experienced attorneys hear the evidence and make binding decisions. The rules of the AAA or other adjudicating bodies are different and less restrictive than the rules of evidence adhered to by the courts. [ Related: From the Desk of Attorney Don Leviton: Resolving A/R Disputes ] After a long and victorious litigation, a winning party secures a judgment from an adjudicating tribunal. This piece of paper may or may not materialize into actual funds being transferred to the winner. Collection on a judgment is a separate legal process. Sometimes one may never recover the award if a judgment-debtor declares bankruptcy which would isolate that party from claims of creditors, including the judgment-winner or judgment-creditor; a judgment debtor dissolves its corporation and, adding insult to injury, opens a new company under another name; all assets of a judgment-debtor are under other parties’ names (relatives, friends, corporations, or business associates) and, therefore, that party becomes judgment-proof. If a business takes the protection of a corporation, LLC, in some instances the individual owners may be ultimately liable for their corporate debts, if it can be proved that the corporation or LLC is just a shell for the individual owners.This can happen where the owner uses the same checking account for personal and corporate debts, or there is no adherence to corporate formality.Most states require that corporations, LLC etc, follow certain rules such as holding annual meetings, keeping corporate minutes, resolutions, etc.This process of piercing the corporate veil is possible, and must it must be done in the courts. It can be a time consuming and expensive process. Litigation is a slow moving process which may take months and, in most cases, years before reaching the trial stage. After filing a complaint there can be many delays caused by the judicial system and frustrating the parties. There are many reasons for delaying the proceedings, including an attorney that continually asks for continuance of a deposition or trial because of the attorney’s family emergencies or conflict of schedule; a party which has to be deposed or answer interrogatories is out of town; an expert witness is unavailable on the scheduled deposition or trial date; the file was recently transferred to another attorney who had no chance to prepare for trial; the suit was filed in a wrong venue and, must be transferred to another court; service on the defendant was improper and, thus, must be properly repeated again; a judge assigned to handle the case has left for vacation, or is sick, or temporarily transferred to another court, or is still busy with the preceding trials; a new defendant has been added and, consequently, time is needed to conduct written and oral discovery associated with that defendant. An opposing party’s financial, intellectual and legal wherewithal may affect a decision to initiate litigation. The opposing party’s ability to sustain a prolonged judicial process, the quality of their attorneys, and legal defenses may either encourage or stop the filing of suit. Often people desire to punish an opposing party or change the law and, therefore, want no recovery. There are political, moral or social causes which prompt such a decision. Litigation is time consuming for the participants. A party must appear at depositions and at a trial. The trial may continue for at least a few days or even weeks. Preparation for a deposition and the deposition itself can take one or more business days. Mandatory arbitration, which in some states is part of a court-based judicial system, also will take about a day. Consultations and meetings with attorneys, as well as answering interrogatories (opposing party’s questions) and requests for production of documents, take many hours of business time. Loss of business time is translated into a loss of income. Besides court appearances and testifying under oath at depositions, arbitration and trial, each participant is thinking and worrying about the case outcome at all times. Such incessant consumption of energy and emotional involvement may increase the daily stress of a person. Such psychological and mental drain takes a toll over the course of time. Trust in the attorney’s abilities and rapport with that attorney are essential for cooperation, decision making and communication efforts. Experience in litigation of the matters at issue is important. One may present his own case in any court but the judges usually resent this “pro se” representation because “pro se” litigants are not familiar with the court and evidence admission rules. In small claims courts where the amount of recovery does not exceed a statutory limit set up by the legislature, for example $2,500 or $5,000, a plaintiff may not need an attorney. A complaint filed in court may trigger a counterclaim by a defendant against the plaintiff for another act related to the complaint. For example: a complaint by a company for payment for goods sold and delivered may trigger a client’s counterclaim or defense of warranty or defective goods. That is why a review of one’s own vulnerable points and background is needed in order to ascertain the level of risk in that regard. Any past wrongdoing may come to light in the court proceedings. In case a lawsuit is lost, the losing party will still have to pay legal fees to his own legal counsel, unless there was a contingency fee agreement, plus file expenses, and the court costs of the opposing party. If a contract provides for payment of attorney’s fees of the prevailing party, then these fees also must be paid by the losing party. Name, reputation and prestige may also be affected by that legal loss. Disclosure of trade secrets may be forced upon a party by the court. Besides the court system, there are many other tribunals which may help an aggrieved party. In general, any problem may be addressed to the governmental agency responsible for or regulating that area of conflict. For example: the State’s Office of the Attorney General may help victims of violent crimes, antitrust violations, consumer fraud by businesses and individuals, etc.; a state’s Department of Insurance may be asked to secure payment from insurance companies vexatiously and frivolously delaying payment; and the Department of Labor may impose sanctions on employers in their disputes with employees. A party may appeal the trial court’s judgment to a Court of Appeals which may affirm, or remand the case back to the trial court for further proceedings, or to reverse a judgment. An appeal process may take a years. In case of reversal with remand, a trial can repeated. Costs will be increased proportionally. In case the trial court decision or judgment is affirmed, a losing party may try to appeal to the State or the U.S. Supreme Court but the chances of a commercial case being heard by the Supreme Court are very low. A prevailing party is accumulating interest on the trial court award. That interest is set by a state statute. In Illinois, for example, judgments earn annual interest at nine percent. Knowing all the deficiencies and advantages of the judicial system and practical aspects of the litigation process should help any person or legal entity to make a decision to settle, arbitrate, or adjudicate any claim. Sometimes a letter from an attorney or third party mediator may bring the parties to an amicable resolution of a dispute. It is not justice, but the fair and economic compromise of the parties’ positions that is the goal of such resolution. Information in this article is provided as a matter of information and education only. It is not intended to provide legal advice or counsel. Do not take action in specific cases without full knowledge of the facts, and competent legal advice from your attorney.
Debt collection can be a taboo subject. There’s a lot of misinformation about debt collection floating around the internet, so we’re here to set the record straight. Here are the 8 biggest myths about debt collection busted:Other companies hire debt collection agencies to collect for them, called third party agencies. Or, they sell their debt to a collection agency, meaning the original creditor no longer owns the debt. Either way, the collection agency is contacting you for a reason and you cannot bypass them. The good news is, however, that most collection agencies make it as easy as possible to pay back a debt. Most offer several payment options, like an online payment portal or a payment plan. When a debt goes into collections, it has most likely already negatively impacted your credit score. When you refuse to work with a collector, it can cause further damage. It’s best to pay your bills on time and avoid collections altogether, but if you are contacted by a collector, just cooperate and pay or explain your situation. It’s a collector’s job to resolve debt, so they are most likely willing to work with you and figure out some options for how you can pay the debt. Avoiding collection calls will only make the situation worse and damage your credit score. Plus, collectors can help by giving you options to repay your debt. It’s best to cooperate with collectors and try to explain your situation. According to Investopedia, the Fair Debt Collection Practices Act (FDCPA) is “a federal law that limits the behavior and actions of third-party debt collectors who are attempting to collect debts on behalf of another person or entity.” In short, the FPCPA protects debtors from abusive, unfair or deceptive debt collectors. However, the FDCPA only protects consumer debtors, not commercial debtors. Although there are currently no federal laws controlling commercial debt collection, most states have statutes which govern commercial debt collection. While some agencies don’t bother with smaller amounts, others specialize in collecting smaller amounts of debt because it can add up over time to create good revenue. There’s no way to tell if a debt will go into collections or not. Basically, anything can go into collections and harm your credit score. It’s best to just pay what you owe. Debt collectors’ jobs are to resolve debt, not just collect it. They will work with you on payment plans, recommend programs to get out of debt. So, if you’re contacted by a debt collector, see what your options are and what they can do to help. Most collection agencies operate on a contingency-fee basis, meaning if they don’t collect, you don’t pay. Others will charge a flat fee. When you hire a collection agency you are hiring experts who can increase their sales by collecting more money for their customers. If you choose a good collection agency, you won’t lose customers. This would only be the case if the agency uses illegal tactics to collect debt, like threats or harassment.
To determine the value of receivables written off to bad debt, you must first evaluate your current litigation policy. More specifically, the receivables that do not meet your litigation threshold. It is these accounts that have basically received a “free pass” from additional collection steps when the collection agency fails to recover. Since they were too small to sue, it is reasonable to say they have never heard from an attorney, nor felt the impending consequences or pressure to pay. Businesses are challenged daily to prioritize their cash flow and make tough decisions, like when do I sue to recover revenue and what balance size is it worth suing? [ Related:When Is Litigation the Answer? ] This “on the job training” prepares them for the collection calls they receive. Most know that if they hold out long enough, and the balance size is marginal most likely the collection agency will go away. They are educated enough to know that due to the balance size, they will never hear from an attorney. A typical balance threshold for suit is $15,000+ based on client surveys. However, due to the rising costs in litigation, bankruptcies, and unsatisfied judgments, many companies are increasing the threshold to even greater than $25,000. This policy creates a “sweet spot.” The “sweet spot” is balances that range from $1,000 to $14,999.99 representing accounts written off as too small to sue.The answer is this: Cases that have fallen into the “sweet spot” may have value. The value is determined by credit scoring and asset scrubbing, then placed with our law office contingency collection program. As written earlier, these debtors have never heard from an attorney, so placing them with our law office for collection calls will recover revenue thought lost. The method we use to maximize your return on investment in time and to ensure the revenue return is to score the written off cases. Scoring will enable you to determine those that have money to pay and are still in business. After all, since they are still in business after a year or so, it is obvious they could pay but have decided not to. For years, I have been recommending this action to clients and all have profited by this policy. Statistics show that “sweet spot” recoveries range from 14% to 24% depending on the nature of your portfolio. Every company could benefit from increasing their cash flow. This is a great way to start!
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