As an attorney, one of the questions I’m often confronted with is whether a claim (money owed) is worth starting litigation, or in layman terms, is it worth “taking it to court.” There are a number of ways to factor an answer to this inquiry.
Of course, the higher the amount, the better, as litigation is expensive and unpredictable. One of the cornerstones of Levelset’s foundation is to reduce our clients’ likelihood of having to litigate when they are not paid. In many cases the persons taking credit from our clients know that they will not have to go to court over claims that are less than $5,000.
It simply costs too much to hire an attorney to chase these small dollar amounts. This is yet another reason why a lien being properly used as a security device can be so powerful.
Which Claims are Worth Taking to Litigation
I threw out a random number above, $5,000. This may be a trivial amount to some. The more accurate answer is that it all depends on the situation. Each claim of non-payment on credit, whether it be in the construction industry or not, depends on a number of factors such as the solvency of the debtor, the security underlying the claim (personal guarantees or liens are examples), the jurisdiction, and most importantly whether attorney’s fees and costs can be recouped. Attorney’s fees and costs in most circumstances are difficult to get and the general rule (American Rule) is that they are not recoverable.
Another, equally important, factor as to if the claim is worth litigating is simply the amount. I have a general rule that pretty much any amount over $20,000 dollars is worth the gamble of filing suit.
As always there are exceptions to this rule and many times litigants want to go to court merely on principle. This is not a good business plan. To take the average suit from start to finish, including trial and all appeals can easily cost even the most frugal client north of $50,000.
Many times litigation ends with settlement long before trial. This usually happens when both sides get tired of paying lawyers and settle on an amount that they can both live with and move on.
Many say its a broken system and I tend to agree. Those who know how to utilize it will be the most successful.
How A Better Credit Policy Can Mitigate Claims
There are lots of tools which exist to help businesses avoid litigation. There are alternative dispute resolutions such as Arbitration and Mediation, but these are last ditch efforts to merely steer off litigation rather than prevent the problem to begin with. Good credit policies start with the intake of good information upfront.
Although potential clients may be turned off by providing credit information, your good clients will not hesitate.
Potential clients who frown at giving up credit application information are the ones that businesses need to stay away from. Once you have a solid application for credit in place, then the better clients will fall into place. Then if you limit how much exposure you have by limiting lines of credit, it will help to starve off the larger deficits from crippling a business.
What Tools Exist To Help Collect
Finally, having the right tools in place when it comes time to collect is paramount. One of the best tools out there is the Mechanics lien. It is very powerful but its also very elusive.
The requirements are stringent when it comes to pre-lien notices and to the actual timing of filing. Businesses extending credit in the construction industry need to be aware of these facts and seek out the information keep the lien a usable option.
We here at Levelset have tools to help. Otherwise you can consult a local attorney who can give you advice on how to keep the lien security available.