debt collection lawsuit

When is the Right Time to Take Legal Action Against an Uncollected Debt?

Taking legal action or filing a debt collection lawsuit is a last resort when handling a home furnishings credit account. Even when an account falls significantly past due, you’d rather work together with the client to bring the account current. That isn’t always possible, however, and debt collection lawsuits are unavoidable in some cases.

But when is the right time to take this aggressive step? Let’s take a closer look.

Following an Established Process

Before you even think about taking an account to court for an uncollected debt and filing a debt collection lawsuit, you will need to work through your entire collections process step-by-step. This process should be well-established in your business and followed consistently by the whole credit department. Some of the steps likely to be included in your process are –

  • Contacting the account to confirm receipt of the invoice and resolve any discrepancies
  • Following up on the first contact to request payment and provide notice of potential late fees
  • Send a revised invoice with payment demand and late fees added
  • Put the account on credit hold
  • Discuss options with management regarding collections or legal action

Given the potential for this matter to land in court, it’s essential to carefully document each step as soon as the account falls past due. That documentation will also provide consistency throughout your team if multiple people work with the account to bring it current.

 Consider the Pros and Cons

It’s easy to get caught up in the frustration of not being paid for the goods you have provided to a customer. You may feel like taking legal action quickly or filing a debt collection lawsuit to track down the rightfully owed money but consider the various pros and cons of a lawsuit before taking this step.

On the plus side, nothing gets attention like a lawsuit. It’s one thing to make a couple of phone calls asking for a payment, but it’s another thing entirely to file a debt collection lawsuit in court. That action is sure to immediately get the customer’s full attention, and you might even be able to settle the debt quickly after they are notified of the suit.

If you are successful with your suit, you may have the ability to use a lien to enforce your judgment. This makes debt collection lawsuits a powerful tool for collecting money, although the details of how this enforcement works will vary from state to state.

Now, for the downsides. First, legal action is not free. You will incur significant costs when using a debt collection lawsuit to collect on an unpaid debt. So, you can toss out this method for small accounts. The cost of the process is not worth what you will get in return, even if you are successful. Sending smaller past-due accounts to a collection agency that will pursue the debt in exchange for a percentage of the amount collected is likely your only viable option.

Also, you need to consider the damage to the relationship with this customer. Suing a customer is a big deal, and the harm to this relationship may be irreparable. Weigh the potential for future business against collecting the current debt to decide whether to proceed.

Setting a Deadline for Action

Even if you desire to maintain a positive relationship with all your customers, there comes the point where it is necessary to act on delinquent accounts. 90-days past due is a standard marker for businesses to either use collections or legal action to pursue payment.

However, you are not obligated to start the process when the 90th day arrives, so you are free to establish your own in-house rules for how these accounts are managed. For example, you might decide that you are comfortable waiting until 120-days if there is some contact with the customer along the way.

You’ll be walking a fine line here, as providing some leeway will build goodwill with your customer and leave open the possibility that the account will be paid in full. On the other hand, giving too much leash could make it harder to collect anything on the debt. Look at the history of your past due accounts to see if payments ever come in after the 90-day mark when trying to establish your own rules for collections and legal action.

What Happens if a Debt Collection Lawsuit is not Responded to?

If the customer, for some reason, doesn’t meet the filing deadline, you can ask the court to enter a default judgment. Sometimes, the court will award the amount the you, the creditor, requests in the default judgment, some courts will review the papers carefully to make sure the amount is justified, and still others might require the creditor to present evidence before awarding any money in a debt collection lawsuit.

Is Small Claims an Option?

It’s also worth mentioning that you may use small claims court as an affordable way to use legal action on a past due account. The costs of a small claims case should be far lower, making it a viable option for accounts that aren’t large enough for a traditional suit. However, every state has a dollar amount limit for small claims court, so some of your accounts won’t be eligible for this solution. 

How FMCA Can Help

Part of what FMCA does is the legal forwarding of claims. When FMCA has an account that we are working collections on, we recommend that the member forward the claim to an attorney when we conclude that that is the next best course of action. FMCA has built relationships with attorneys and firms across the US over the past 60 years.

FMCA endeavors to forward the claim to an attorney that we know when possible, and we continuously work to get the best rate that we can for our members. The account remains with FMCA; however, our commission drops down when we forward an account to an attorney.

FMCA then works with the attorney and coordinates information between the member and the attorney. Each step in the process (the member working the account, sending dunning letters, placing on hold, etc., sending an FMCA 10-day final demand, placing the claim with FMCA for collections, us working the claim, to the account going legal) is an escalation of pressure on the debtor. Before going legal, we have a great tool that we offer. We have access to a national network of private investigators.

Offering $75 private investigator on-site visits from a national network of private investigators to a debtor location. The investigator takes pictures, hand delivers a demand notice, and sends a report to FMCA provided to the Member. This is a powerful and economical tool to use when deciding whether to forward a claim to an attorney when all other efforts have not been fruitful. Often, this tool gets the debtor’s attention and brings about a successful recovery without an attorney’s involvement.

Once the decision is made to go legal with an account, that does not always mean that a suit will be filed.

In continuation of escalating the pressure on the debtor, the attorney will make a demand for payment. A demand from an attorney often gets a non-communicative debtor to come to the table. At that point, the attorney fees will be their contingent commission on funds they collect and not the addition of suit fees that can sometimes be an additional 10% on top of the attorney’s commission. If, however, that fails, then a suit is the following recommendation.

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To learn more about how FMCA can benefit your home furnishings business and your career, please reach out today for more information. We are excited to meet you!

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