When Is It Time to Take Legal Action on a Debt? A Practical Guide to Escalating Collections

As every creditor knows, there comes a point in some collection efforts when traditional methods aren’t enough. But when is the right time to stop collection activity and consider legal action?

Pursuing a judgement is not a decision to be taken lightly, it requires a careful, strategic approach. Here is what you need to know before heading down the legal path.

What Does Legal Action Really Mean in Collections?

Legal action typically involves hiring a lawyer and filing a lawsuit to obtain a judgement, a court order that formally recognizes a debt. Once obtained, this judgement can be enforced through methods such as:

• Wage garnishment
• Bank levies
• Property liens

However, not all debts are worth litigating, and not all debtors are collectible—even with a judgement in hand.

What You Can’t Collect Through Legal Action

One of the most important limitations to understand: retirement funds like IRA’s and 401(k)s are protected from garnishment. So, if a debtor’s only assets are retirement accounts, legal action may not result in recovery.

Also, judgements don’t last forever. They can expire, typically in 7-20 years depending on the state, although many can be renewed. This makes timing and follow-through essential.

Is This Judgement Worth Pursuing?

Before moving forward with litigation, consider the following factors:

• Debtor’s Age: Is the debtor nearing retirement? Are they likely to have income in the future?
• Current Employment: Are they working, or do they have a steady income?
• Earning Potential: Even if unemployed, do they have career history, education or skills that suggest future earnings?
• Asset Ownership: Do they own property or valuable assets that a lien could attach to?
• State Laws: Garnishment limits and judgement renewal terms vary widely. Make sure you know what’s enforceable in your jurisdiction.
• Insurance: Does the debtor have applicable insurance that could cover part or all of the balance owed?

Pre-Litigation Vetting is Key

This is where strong collaboration between your collection agency and legal counsel comes into play. Pre-litigation vetting ensures:

• You don’t waste time and money on uncollectible debt
• All relevant account and consumer information is reviewed
• The strategy is in line with local laws

Empathy Still Matters

Legal action doesn’t mean throwing compassion out the window. In fact, empathy is one of the most valuable skills a collection attorney can have. Understanding a debtor’s circumstances can lead to more productive conversations – and often better settlement outcomes.

Sometimes, simply obtaining the judgment creates the pressure needed to incentivize a resolution. It becomes a bargaining tool rather than a battle.

What’s the Recovery Rate in Litigation?

On average, the recovery rate for accounts that go through litigation hovers around 25%. Although this is not a substantial amount, it may make sense for high-balance accounts or situations where the debtor is clearly collectible.

Factors That Impact Recovery Rates:

• Type of Debt: Medical and education debt may differ in collectability from credit card or commercial debt
• State Laws: Wage garnishment limits, exemption laws and duration vary by state
• Debtor Profile: Employed debtors with attachable wages or assets are more collectible
• Amount of the Debt: Higher balance accounts often justify legal action and are more likely to be pursued more aggressively.
• Legal Strategy & Follow Up: Attorneys who actively enforce judgements (ex. Garnishments, liens) often recover more.
• Insurance: In certain cases–especially involving accidents, property damage or services rendered—and insurance policy may be available to cover some or all of the debt. If insurance coverage applies, it can significantly improve the chance of recovery, especially if the debtor is otherwise uncollectable.

The Bottom Line

Litigation can be costly and slow. If you are considering legal action, partner with an experienced collections attorney who can:

• Vet the debt thoroughly
• Advise on state specific laws
• Approach debtors with the right mix of firmness and empathy

Litigation should always be the last resort—but when done correctly it can be a powerful one.