Litigation or Third-Party Collections: How to Decide

When administrative collection is exhausted, the choice is between continuing outside the courts or filing suit. The decision is economic before it is legal: litigation costs money, takes time and guarantees nothing. Suing everything is as inefficient as suing nothing.

What separates the two paths

Criteria for choosing

Stay out of court when:

• The balance is small relative to the cost of filing
• There is a commercial relationship worth preserving
• The customer shows capacity and intent to pay
• Your documentation has weaknesses
• Trade reporting and demand letters have not been tried

Move to litigation when:

• The amount justifies the cost and the wait
• Documentation is solid: signed agreement, purchase orders, proof of delivery, personal guarantee
• There are locatable assets, or a guarantor with assets
• The customer ignores every attempt to engage
• A statute of limitations is approaching
• There are signs of asset transfers

Minimum viable balance

Set a policy threshold above which litigation is considered. Below it, the path is settlement, a pressure tool or write-off. The floor comes from a simple calculation: estimated costs, fees, internal time and a realistic probability of collection.

Preparing the file

Success in court depends on what was organized before:

1. Signed credit application and terms
2. Purchase orders
3. Invoices and signed proof of delivery
4. Personal guarantee, if any
5. Documented collection history
6. A broken settlement agreement, if one exists

Proof of delivery is the document most often missing and the one that most often decides the outcome.

When the customer files bankruptcy

A different situation: you no longer choose the path. Immediate steps:

• Check whether your claim appears in the schedules, at the right amount
• File a proof of claim before the bar date
• Identify your claim's classification — secured, priority or general unsecured
• Stop shipping on terms and evaluate prepaid only
• Watch for preference exposure: payments received in the 90 days before filing can be clawed back
• Consider reclamation rights on goods delivered shortly before the filing, which have short deadlines

Credit extended after the filing has different treatment from pre-petition debt. That is why continuing to supply is a decision to make with counsel, case by case.

Placing with an agency

The middle path between internal effort and litigation. It makes sense when the volume of aged accounts is large and the internal team is busy with current receivables. Contract points to watch: contingency rate, exclusivity, duration, reporting obligations and conduct standards — the agency's behavior creates exposure for whoever hires it.

Writing it off

Taking the loss is a legitimate administrative decision, not a failure. Usual criteria: cost of continuing above the recoverable amount, no locatable assets, company dissolved, all avenues exhausted. The accounting treatment is in allowance for doubtful accounts.

What to take from this

Choose litigation on amount, documentation and locatable assets — never on principle. Organize the file from the moment of sale, set a dollar floor in policy, and treat a customer bankruptcy as its own process with deadlines that cannot be recovered once missed.