The first rule of accounts receivable collections is return on investment. Sure, you want to get paid as a matter of principle, but you also need to look at it practically. This article will discuss the issues of cost and collectability in deciding whether to sue for unpaid receivables.
Ask If A Suit For AR Collections Will Be Cost-Effective
Start with 2 basic questions: What will suing for your receivables cost you? And how much are you trying (and likely) to recover?
Legal fees can be hourly-based or contingency-based. If you’re paying a lawyer hourly, you’ll normally invest more in a big case than on a small one, and might not invest in a small case at all. Similarly, if your collection attorney’s working for a contingency fee, he’ll normally spend more time on a big case than on a small one, and might decline a case with limited value.
Ask If A Judgment For AR Collections Will Be Collectible
Before you invest in a lawsuit , ask whether a judgment would be enforceable. Meaning, whether the customer has assets to satisfy it. Key factors include whether it’s still in business, whether it has other judgments against it, and whether you can sue the owners personally.
If the customer’s out of business, a judgment will be harder to collect. And the more judgments against it, the more creditors may be after the same assets.
But if the customer’s still operating, you have a much better chance of collecting. Open businesses mean open bank accounts, which suggests there’s money to pursue. And even if there are other creditors, the most aggressive is usually the one that collects.
Also, if you can sue the owners personally, like on a personal guarantee, it gives you more assets to go after, and gives them more incentive to pay you.
At the end of the day, AR collections are about your return on investment. Anticipating the likely costs and recovery should help you decide whether or not to sue.
For more information on AR collections, or if you’d like to discuss a specific collection issue, call me at 856-667-1669 or contact me here.
This material is for informational purposes only and should not be construed as legal advice. No person should rely on this information without seeking the advice of an attorney.