Has the Need for Collection Litigation Increased or Decreased Over the Last Several Years?

Written by: Brad Magill, Esq., Managing Lawyer, The Collection Law Group

Having spent the last 20 years or so in the commercial collection arena as a commercial collection lawyer, I can attest to the fact that the collection landscape has changed over the last several years. Our philosophy is to always adhere to a core principle of a collection first mentality. This means we only use litigation as a last resort in the collection process and focus initial collection work on collecting amicably without the need to litigate. This collection first mentality is actually best for all parties including collection lawyers, collection clients and collection debtors. 

Why is this the case? Well, although as lawyers we are trained to litigate when necessary, litigation is time consuming for lawyers, clients and debtors. In addition, litigation is more expensive for clients and debtors, and it takes a much longer time to collect via litigation than it does via an amicable settlement without litigation.  

Before delving into whether the need to litigate has increased over the last few years, it is necessary to understand why collections lawyers are successful in collecting in general.

Typically, ethical collection lawyers only want to take on collection matters after clients have exhausted all internal collection efforts. This includes clients sending numerous demand letters via email and regular certified mail. This also includes the client making numerous phone calls to the debtor to try to collect what is due.

So why is it that collection lawyers are successful at all in collecting after their clients have exhausted all collection remedies. The answer is that prior to collection lawyers getting involved with the matters, debtors often do not believe there will be consequences to their conscious decision to ignore the demands of clients. 

The Cambridge Dictionary defines consequences as “a result of  a particular action…often one that is bad or not convenient. I would further define consequences as “a result of  a particular action or inaction…often one that is bad or not convenient.  

So, what is different when a file is sent from internal collections to a third-party collection law firm? The difference is we tell debtors exactly what we would like to do and exactly what we will do if the debtor does not comply. More specifically, in a very professional and unemotional matter, we tell debtors our primary objective which is to settle the matter without litigation. However, we also tell debtors if the matter is not settled within a reasonable period of time, we will move the matter into litigation and the matter will be resolved by a court.  So, the difference is we impose real or perceived consequences on debtors. Those consequences are: settle the matter or be sued.

Does this methodology work all the time? No, it only works when the debtor has something to lose, meaning assets to protect.  Another way of saying this is our method works when the debtor has assets (cash, accounts receivable, real estate, investments, etc.)  to protect from being foreclosed upon based on a judgment being imposed on those assets and then having those assets sold or liquidated to satisfy the judgment. In most  cases, liability on the part of the debtor is clear (they owe the money being sought), so defending a lawsuit when the debtor knows they are in the wrong makes no sense. The bottom line is imposing perceived or real consequences on a debtor who owes money and has assets to protect pretty much works all the time.

So why I am writing this article entitled “Has the Need for Collection Litigation Increased or Decreased Over the Last Several Years?” The answer is things have changed over the last several years and I call it the COVID mindset. What is the COVID mindset? It is a mentality that was created during COVID and has continued after the COVID pandemic has been minimized. The mentality is that companies and individuals will be given a break on their debts because of the dramatic impact that COVID had on the economy and on their businesses. So, debtors now feel in a lot of situations they should be given a break and should not have to pay their debts like they did several years ago. Although this mentality may stall the collection process, it does not stall the ability to collect via litigation. The reason is debtors realize consequences will be encountered if they have assets to protect and do not address the outstanding indebtedness. 

In essence, effective collection lawyers say what they are going to do and do what we say! Despite our approach, debtors do not always feel they need to resolve a matter without litigation for a variety of reasons that include: the Covid mindset that they should be given a break and the belief that they will not actually be sued, so why settle? The only way to counter this mentality is to actually litigate and impose a real consequence on a debtor. It is my opinion that it is because of this debtor mentality that the need to litigate has increased over the last several years.

Below is an actual real case study examining the above principals.

Case Study 1 – Independent Contractor 

This case study involved a client was an independent contractor located in Herndon Virginia (“Creditor”) who performed digital media consulting services for a company based in Nashville, TN (“Debtor”). The Debtor and Creditor entered a written consulting agreement and Creditor performed services for Debtor for several months with no payment issues. In August 2023, the Debtor stopped paying the Creditor’s invoices and the file was sent to our firm for collection. The amount outstanding at that point was approximately $30,000. 

The collection lawyer involved in this matter tried to reach out to the Debtor via email and phone numerous times with no success.  We then discussed with the Creditor that due to the lack of response from the Debtor, the next step was to initiate litigation. The Creditor agreed to initiate litigation so we told the Debtor the matter needed to be resolved in a week or else litigation would ensue. 

Low and behold the Debtor reached out to us and agreed to a six-month payment plan to pay what was due at the rate of $5,000 per month. We entered a formal re-payment plan which was executed by all parties. When the first payment was due, we reached out to the Debtor and the Debtor went silent. There was no payment and no communication, so we followed through with what we said we were going to do if the matter was not resolved within the timeframe outlined. We filed a complaint against the Debtor in Nashville. Within one day of the Debtor being served with the complaint, I received a call from the Debtor’s lawyer asking to settle the matter. I told the lawyer based on the actions of the Debtor the only way the matter could now be resolved was a lump sum payment of the total amount due of $30,0000. After much back and forth, the Debtor agreed to a lump sum payment of the $30,000 and the matter was resolved.

So why did the Debtor pay the full amount due in a lump sum after hiring a lawyer to defend him and ignoring the six-month payment plan, we had in place?

Well, that is a difficult question to answer since we cannot get into the Debtor’s head, but one can only surmise one or more of the following:

• The debtor thought they deserved a break from paying what is due like the breaks they received during COVID.

• The Debtor did not believe we would do what we said we would do which was to initiate litigation and impose a consequence.

• The Debtor thought they could get away with not paying a Virginia based company when they were based in Tennessee.

Regardless of why the Debtor did what they did, the point of the above case study and the above narrative is that debtor’s feel emboldened today more so than ever not to pay their debts and this creates an increased need for litigation.    As outlined in this article, the best way to counter this emboldened perspective is to try very hard to settle matters amicably without litigation, but if that fails, creditors need to file lawsuits to collect what is due when debtors have something to lose. And what do they have to lose?  The taking of their assets to satisfy a judgment! This is a true consequence that will at the end of the day resolve a collection matter.

 In summary, commercial collections are getting harder as debtors continue to be willing to ignore amicable collection efforts both from internal collectors and third-party collectors. My suggestion is to not fret about this reality, but simply be ready to impose real consequences on debtors (the liquidation of their assets) when they do not do the right thing and have assets to protect.

About Brad Magill

Brad Magill is a lawyer and a CPA. He has spent the last 20 years of his professional career in the commercial accounts receivable management and commercial collection arena. Mr. Magill is not only a lawyer but a seasoned commercial debt collector and experienced business manager. Mr. Magill performs collection work on behalf of clients and also manages all collection litigation activity.