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When you have outstanding invoices that aren't getting paid, it can cause serious damage to your bottom line. You can’t invest in new initiatives to expand your market share. Worse case scenario, it may wipe you out completely – and you can say goodbye to passing on the family business to your kids.

But deciding whether or not to sue a customer for unpaid invoices is an incredibly difficult decision.Something you can lose sleep over without the right help and advice. Because just because they owe you money, doesn’t mean a lawsuit is always a good idea.

From court costs to a painfully slow litigation process and damaging relationships, chasing bad debt in court comes with its own set of challenges. And when all is said and done, there’s no guarantee you’ll get your money back.

So if you’re in this position – you have an aging account holding your business back, and the delinquent customer isn’t going to pay any time soon – how do you know whether or not to sue?

Consider the cost and ROI

You have to evaluate the situation from a financial standpoint. In other words, what is the return on investment of commercial collection litigation? This can be calculated using the following formula:

Consider the cost

Maximum Net Return x Probability of Collecting = Expected Judgment Value

Figuring out net return is a matter of taking the amount you’re owed and subtracting legal fees and court costs. But calculating the likelihood of collecting is a lot trickier.

Evaluate the likelihood of getting paid

Will you get paid?

Here are some questions to ask to help you assess the probability of successful collections efforts in court and a litigation settlement:

  • Is the company still operating?

  • Will the company probably still be operating and in business after a judgment is passed and the judgment collections process begins?

  • Is there the possibility of a counter claim? If so, how would that impact the cost of the lawsuit and the likelihood of winning it?

  • Does the company have other financial issues, such as tax liens, secured creditors, judgments or bankruptcy protection, that would make collections more difficult?

  • Does the business owner have any financial issues, such as tax liens, foreclosures, medical- or divorce-related issues, or bankruptcy protection?

  • Does the owner have assets or income that could satisfy a judgment?

  • Can you locate the owner so you can serve legal paperwork?

Unfortunately, there are some situations where you can't collect without going to court. But before calling your lawyer, answer the questions above so you can gain a better sense of whether or not you can really win a lawsuit against a delinquent customer.

If you’re not sure, then work with your lawyer to answer them. They should be able to conduct research to help you learn as much as you can about the debtor company and better evaluate the situation. They will then be able to advise you about the likelihood of recovery – so you can make the best business decision going forward.

However, keep in mind, when it comes to commercial collection lawsuits and litigation settlements, some law firms charge a higher contingency rate, or don’t operate on a contingency basis at all. They also require you to pay in advance all out-of-pocket expenses associated with a lawsuit. So just make sure you get a quote if you think litigation is a viable alternative you want to explore.

And if you haven’t already, you may instead want to consider calling in a commercial debt collections agency.

They can develop a full financial profile of the debtor company, discovering hidden assets and crucial business information along the way to help you determine whether or not your customer has the resources to pay. In the event litigation is a potential next step, they can also pre-qualify your case and determine any liabilities before a suit begins – so you can avoid additional losses and get back to business.