Unpaid invoices can quickly spiral into a huge financial crisis. You could send payment reminders over and over, make collection calls or even withhold goods and services. However, these techniques are not always effective.
At this point, filing a debt collection lawsuit may be the only option left. But how do you know if pursuing debt collection will benefit your business in the long run?
Consider the factors at play
Deciding whether to take legal action depends on several factors, including:
- The debt amount: Generally, it might be more cost-effective to hire a collections attorney for larger debts. The threshold varies, but debts over a few thousand dollars are often significant enough to justify legal action. For reference, Kentucky small claims courts accept claims of up to $2,500. You do not need a lawyer to file a claim, but you might need one for larger amounts.
- Likelihood of recovery: If the debtor has a history of nonpayment, it might not be worthwhile to pursue legal action against them.
- Case complexities: Taking the case to court may be necessary if there are any complexities in your case, such as the debtor disputing the validity of the debt.
Other things to consider are the statute of limitations for collection, the business relationship at risk and internal resources available to take legal action.
Evaluate potential costs
Consider costs like legal fees, court costs and potential finances you can lose while handling the case. If these expenses are significantly higher than the debt owed, filing a debt collection suit can be a sound financial move.
Think about the potential benefits
Aside from getting your money back, what are other benefits you can expect? This could be cash flow improvement, reduction of bad debt and even deterrence that encourages other clients to make timely payments in the future.
Collecting debt via legal proceedings is not the easiest option, but it may be the best one in some cases. By taking the steps above, you can determine if taking legal action is the best financial move for your business.