To Sue or Not to Sue; The Five W’s of Legal Collections

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February 27, 2014 by Jim C.

The debt collector will exhaust all avenues of voluntary payment prior to making the decision to litigate to enforce collection of a debt. In some cases, litigation is just not a practical or economical solution and the debt likely will never be collected. In many cases though, the decision to sue or not (to sue) a claim is predicated upon the decisions made by the creditor at the time the debt was created. Generally, the creditor does not go into a credit transaction thinking he/she will need to litigate to collect the debt, and therefore, does not adequately insure against a loss. Whether or not the debt is backed up by a written instrument (aka-contract), most of the time the creditor gets paid back. The percentage of revenue for the average creditor that is deemed to be “bad debt” is well under 2%. In most cases, the creditor has factored a percentage of loss into the “bottom line” profit, so the saying goes: “There’s no such thing as an unpaid debt”. This means that the creditor raises the price of goods/services to reflect a certain level of loss due to credit potentially gone bad. When this occurs, the creditor has a decision to make: Should I: a) start a small claims court action; b) lawyer up; or c) refer to collection agency professional. There are pros and cons of all three choices, and there is also a fourth choice of writing it off and doing nothing. Most creditors will not opt to write off a debt and do nothing due to their emotional involvement in the transaction, and when the word gets out that a creditor does not pursue a bad debt the problem exacerbates itself when other consumers with weak credit morals find out about this.

You can deduce that of the 3 other options, two will go (more or less) straight into a litigation status, with the collection agency being a step by step approach to debt recovery. The debt collector generally earns a commission upon collection and does not wish to spend any more than it takes to motivate payment from the debtor. It is much less costly to collect a debt on a voluntary basis without legal intervention, regardless of which option the creditor chooses. I have found that in most instances where the creditor takes a debt into small claims court a judgment is awarded in favor of the creditor, but that judgment does not get paid. In a very high percentage of these cases the creditor doesn’t properly prepare the case prior to filing a lawsuit. This is where we need to examine the five W’s of legal collections: Why, What, Who, Where, When.

Why: “Why hasn’t the debtor paid as agreed?” You should try to answer this or uncover an answer by contacting the debtor to demand payment. Maybe you won’t be successful in your efforts to contact the debtor, but then you can assume there is no legitimate reason as to why the debt remains unpaid. Had there been a reason the debtor should have communicated that during the attempts you made to communicate. If a reason is uncovered you possibly may be able to avoid legal action and resolve the debt through a dispute resolution process without the time and cost of a court action. This is something a collection agency would do prior to litigation.

What: “What is owed?” What is the exact amount of the debt including all payments and/or adjustments made to the balance. If you are adding any amount to the original balance it must be agreed to in writing between all parties to the transaction. This would include any finance charge or interest that is over and above the statutory rate. Credit grantors often falsely think that stating a rate of interest on a printed invoice is contractual between the parties when either one was unaware of it or didn’t expressly agree to it at the time the debt was incurred.

Who: “Who is it that owes you the debt?” Information is key in successful legal collections. You need to know the full names of all parties to this credit transaction. In a state where there are marital property statutes the spouse can be held liable even though they may not have been a party to the transaction. This could be the case where the debt incurred is considered to be incurred in the best interest of the family/marriage. Such a debt may be a medical bill for a family member or a utility bill to heat the home or an auto repair bill for the family vehicle(s), etc. Many creditors will sue only the party they dealt with at the time business was transacted. This could be a mistake when you try to enforce collection of a judgment. If the debtor is a business you must know the full legal name of that business and how that business is organized: (Sole proprietorship, Corporation, Partnership, etc.)

Where: “Where should the debt be sued?” Proper venue is required in a court action. The written contract may state where any legal action can be undertaken. If this isn’t stated, then you will need to take action in the county/state of the debtor’s primary residence. If you operate a business near a county or state border you will need to prepare to litigate in different venues based on the circumstances of each debtor. Other than county of residence, litigation may be commenced in the county where good/services were purchased if a signature was obtained from the debtor. Filing suit in the wrong venue (state/county court) could be costly to you when the judge dismisses your claim due to this reason. If this is done intentionally, the court could take action against you, as could the debtor.

When: “When was the debt incurred?” Each state has a legal timeframe in which you can bring a court action to collect a debt. You must know that time frame so that you file your case before it expires, or you don’t file a lawsuit on an uncollectible debt. This time frame is known as the “Statute of Limitations”, whereby the debt is termed as “Outlawed” when the statute has run on the debt. In Wisconsin, the term is 6 years from the date of service or last payment. Thereafter, the debt is considered legally uncollectible and must be written off.
Proper litigation can be undertaken when these W’s are known. Each state, and in some cases each county within the state may have its own set of rules that must be followed in a court action. The court filing fees are set by statute so generally the same statewide with minor exceptions. You pay a filing fee to the appropriate court to file your case, the court issues a summons and complaint and serves the defendant(s) with notice of this case. A court date is set and the case is heard by a court commissioner or a judge (elected official). Where a case is disputed by the defendant a new date is set for a full hearing. During this timeframe the parties try to settle the dispute to their satisfaction, and if successful the case is dismissed. The parties may agree to a repayment plan in writing and a “Stipulated Dismissal” is filed with the court. Another likely scenario is the defendant may not appear in court and the plaintiff (creditor) will receive a favorable (default) judgment entry for their claim. The judgment, when docketed in the court records, becomes a lien on any real property owned by the defendant(s).

This is where it is important to sue all parties to the transaction and use their correct names. This holds true where you sue a business entity too. If you sue “Jim’s Burger Joint” but the business’s legal name is different you have taken a useless judgment. Business(es) like individuals may own real property and a correctly entered and docketed judgment will become a lien on title. An incorrectly entered judgment doesn’t become a lien on anything and can’t be collected from the party (or business) that owes the debt. It’s like suing the wrong party and a waste of your time and money.

Other legal remedies to collect a court judgment could include supplemental hearing or citation to discover assets so as to uncover assets that may be attached to pay the debt. Bank accounts, employment, stocks/bonds, accounts receivable, real estate owned, etc. State statutes will dictate what assets are available to the judgment creditor. Quite often, wages earned up to a certain percentage are legally attachable to satisfy the judgment debt. If a debtor has other withholdings such as child support, or if the debtor receives government assistance, they may not be subject to a wage garnishment. Where possible, these factors need to be investigated and confirmed in advance of litigation.

It is important to do your homework and gather information before you decide to litigate so that your potential for a successful outcome is enhanced. Just like building a home, the foundation must be solid if the house is to stand for any period of time. In the debt collection arena our foundation is INFORMATION. This is what will determine your success in recovery of bad debt.

Jim Cox is vice president and co-owner of United Credit Service, Inc.

Founded in 1950, United Credit Service, Inc. is a full service revenue cycle management and debt collection agency in Wisconsin providing highly effective, customized one on one management and recovery solutions for our business partners. We offer pre-service collection solutions as well as traditional back-end collections. Visit our website at http://www.unitedcreditservice.com or call 877-723-2902.

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