TO SUE OR NOT TO SUE
When should a creditor undertake the expense, effort, and aggravation to initiate litigation against a non-responsive debtor? This is a question that plagues all creditors and an area within which the professional debt collector must develop an intrinsic feel. A highly experienced debt collector will have literally thousands of similar cases to act as a guide and assist him in advising clients in this regard.
Regardless of the experience level of the collector, nobody can predict the outcome of the cases. Even the collector with the best judgment will recommend litigation in many cases where no recovery will be forthcoming. Consider, for example, in 1995 and 1996, in excess of $7 billion was placed with commercial collection agencies. Of this amount, approximately $3.5 to $3.6 billion was never collected and literally tens of thousands of lawsuits were filed on which little or nothing was ever realized. In 1995 and 1996, our Legal Department’s collection rate was approximately 24 percent. This compares favorably to agencies in general.
However, consider 10 separate cases of an average size of $5,000 which are forwarded for litigation. Assuming up-front costs on each file of $400, the creditor will be required to invest $4,000. Should our historical recovery rate hold true, the creditor should receive gross recoveries of approximately $13,000 representing 24 percent recovery on the principal plus a similar recovery rate on the advanced costs. After attorney fees and commissions, the creditor should net a recovery of approximately $8,500 or $850 per case. This is a 113 percent return on the original $4,000 investment.
To assist in the economic analysis, we encourage clients to consider the foregoing example and look at recoveries and return on investments over a range of cases. It is the average recovery rates over time that will determine whether the cases are being properly analyzed and whether the overall investment associated with litigation is having a positive return to the creditor.
Although no two cases are identical, we suggest some general guidelines for consideration. These suggestions are as follows:
i) Avoid filing suit on cases of less than $10,000 where there is a strong threat of a counterclaim.
ii) Take a skeptical attitude in cases where all parties (VML and attorney) have been completely unable to establish a dialogue with the debtor.
iii) Hesitate to litigate contested cases (even without counterclaim threat) where witnesses are no longer available (i.e., left employment of creditor).
iv) Take an aggressive attitude on cases where debtors have made numerous payment promises and where there is a written acknowledgment of the indebtedness.
v) Take an aggressive attitude where debtors have had a number of cases filed or initiated against them with few, if any, judgments.
vi) Take an aggressive attitude on debtors that own or have an interest in real estate.
There are literally hundreds of other factors that can come into play. We encourage you to work closely with your collector and collection counsel to review the merits of initiating litigation. Again, the analysis must be directed at trying to meet or exceed the historical recovery rate and to insure that creditors are receiving an adequate return on their time and investment associated with the litigation process.