Chapter VIII. Pre-Litigation Strategy

JurisdictionUnited States

VIII. Pre-Litigation Strategy

One of the most important aspects of collecting debt is the company's strategy before entering litigation. The goal is relatively simple: to generate as much revenue as possible. However, numerous factors influence how to generate the most revenue. One customer may be extraordinarily valuable for future earnings; for this customer, maintaining the long-term relationship is more important than any short-term gain. Another customer may be a true pain, and securing the maximum payment now is beneficial regardless of the cost to the customer relationship. One customer may genuinely attempt to catch up on payments, whereas another may be on a straight path to bankruptcy. Pre-litigation strategy is nuanced, but every company can take steps to form cohesive procedures.

A. Creating Procedures and Evaluating the Loan

The first step in pre-litigation strategy is to create formalized, written rules and procedures common to every collection case. Employees should document each activity on every file, especially each contact with the debtor. Should the company enter litigation with the debtor, a paper trail provides strong evidence to describe the factual background for the court and refute any non-meritorious claims raised by the debtor. Also, documented errors by employees can be tracked down and corrected through training, and the paper trail serves to keep employees accountable to the company's standards. Ideally, a company should create procedures for use with all loans as soon as possible.

Once the loan enters default, the paper trail is also useful for evaluating the loan for risk and recovery. Before contacting the debtor about the default, the company should analyze the costs and benefits of recovery efforts. In other words, is the debt worth the effort? The company may consider the outstanding balance, the customer relationship, the risk of reducing the amount owed if it becomes public knowledge, the internal expenditures and opportunity costs of collection, and the external costs of hiring attorneys and vendors to assist. The company may also evaluate the effects if the debtor files bankruptcy. Ideally, the company will draft a plan and its goals for the collection efforts to help employees stay on course.

B. Pre-Negotiation Letters

After analyzing the loan file, many creditors choose to send a pre-negotiation letter to the debtor, which is actually an agreement between the parties.101 The letter serves to confirm the current status of the debtor's obligation, including the total amount due and past-due payments. This prevents the debtor from disputing the amount due at a later date. The letter can also include provisions that waive certain claims, impose confidentiality on both parties, and integrate all prior communications into the agreement.102 The last point — an integration clause — protects the creditor from disputes over prior e-mails or phone calls. Overall, the pre-negotiation letter aligns the parties' expectations and provides a starting reference point for all future negotiations and litigation. Of course, the value of the letter diminishes significantly if the debtor does not sign it. While some debtors may bristle at the thought of signing anything, most debtors can see the value of establishing the amount in dispute up front. After all, aligned expectations can protect both parties.

C. Opening Dialogue wi th the Debtor

The next step is to open a dialogue with the debtor. Above all, the conversation with the debtor should be civil and respectful. Threats only lead a debtor to become defensive and enlist help — in the form of attorneys. Also, judges and juries may already harbor prejudices against creditors; a civil and respectful dialogue can help avoid perpetuating that reputation. A polite creditor need not be spineless, however. A firm-but-flexible demeanor allows the creditor to maintain control of the dialogue while directing it toward a satisfactory reso0lution.

In terms of a resolution, the dialogue's focus is on settlement. While litigation remains an option (barring any issues with statutes of limitations), there is little downside to attempting an amicable resolution...

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