Pre-Litigation Business Debt: When to Settle Before a Lawsuit
Just like individuals have debt, so, too, do businesses. At times, the business may have trouble repaying its obligations, which can lead to collection efforts from creditors.
In the pre-litigation stage, creditors may issue demand letters and make collection phone calls to try to recover the amount owed. This is a common occurrence for things such as unpaid invoices, commercial leases for vehicles or equipment, or outstanding loans.
Pre-litigation refers to collection efforts that are done before any official lawsuit is filed to recover the debt. Typically speaking, negotiations are done in this stage, and payment plans can be worked out.
In this article, we’ll dive into more specific details about pre-litigation business debt and when it’s best to settle before a lawsuit.
The Cost of Jumping Straight to Litigation
According to Michigan’s Business Court Act, a business dispute can be any action in which all or some of the parties are business enterprises that involve outstanding obligations. This is what determines whether a potential lawsuit would enter typical civil court or business court.
In most cases, it is best to settle an outstanding business dispute outside of court, in the pre-litigation phase. That’s because a lawsuit can be a time, productivity and financial drain on the business.
Filing a lawsuit could involve court costs, legal fees and expenses for the discovery phase. Not only that, but many commercial cases in Michigan can take between one and three years to fully resolve, taking into account potential appeals.
Key Benefits of Settling Before a Lawsuit
So, what are the main benefits of settling a business debt dispute before a lawsuit is filed?
For one, it leads to a speedy resolution. Instead of having to wait through the court process, the parties can work out an agreement that’s agreeable to both parties.
There is often tremendous cost savings associated with settling outside of court, as mentioned above. Even if the parties decide to go through business mediation or the Alternative Dispute Resolution (ADR) process, it’s still typically much less expensive than what it would cost to pursue litigation.
Settling outside of court also preserves confidentiality. All court records in Michigan are public record, so your “dirty laundry” will be aired for everyone to see.
Finally, agreeing to a pre-litigation resolution can also help to preserve business relationships. There’s often a chance to continue on in a business relationship following pre-litigation debt than there is after a lawsuit has been concluded.
Signs It’s Time to Pursue Pre-Litigation Settlement
If you’re trying to collect a business debt but haven’t had success, you might be wondering when it’s time to pursue pre-litigation settlement.
One good sign is that the debt in question has continued to age without any resolution. This will be on a case-by-case basis, but debt that has aged 90 days or more would be a good fit.
If the debtor is showing financial distress, but the total debt amount that they owe is in the mid-range, then it also may be a sign to pursue pre-litigation settlement. This will give both parties an opportunity to be happy with the outcome.
Along those lines, if the parties have ongoing business dealings, pre-litigation settlement would be preferred. In other words, if you’d like to continue working with the company, then it’s a sign to avoid a lawsuit if you can.
There are times, too, when the legal merits for a case might be uncertain. In these instances, pre-litigation settlement would be the best route.
The Pre-Litigation Settlement Process
So, how do you start the pre-litigation settlement process?
First, you must submit a formal demand letter. This should include the outstanding debt that’s owed, details of the debt in question, options for how the debtor can settle the debt, and how they can get in contact with you to discuss.
Once the debtor reaches out, you can open negotiations. How this proceeds will vary from one case to the next and may or may not involve ADR or mediation.
Once a settlement has been agreed upon, it’s important to draft an official settlement agreement for both parties to sign. This will serve as the contract for how the obligations will be met.
In order for a settlement agreement to be enforceable under the Michigan Statute for Frauds for certain contract types, it must be put in writing and signed by all parties involved.
Even if a settlement has been agreed to, it’s important to plan for how you’re going to enforce it if the debtor defaults. In Michigan, for example, creditors can include a clause in settlement agreements that authorize entry of a judgment without a hearing if a debtor defaults on a settlement agreement.
When Pre-Litigation Settlement is Not the Right Move
There are times when pre-litigation settlement may not make sense.
If you begin negotiations, you may believe that the other party is negotiating in bad faith or is using stalling tactics just to delay the collection. Signs could include making lowball offers consistently, requesting unnecessary documentation, asking for unreasonable delays and/or ignoring your communications.
Pre-litigation settlement also may not make sense if the outstanding debt is large, and there are collectible assets tied to it. In many cases, pursuing a lawsuit might be the best avenue here.
In addition, you should consider debtor insolvency or their likelihood of filing bankruptcy after the settlement agreement is in place. If the debtor does file for bankruptcy, it may be beneficial to have an experienced bankruptcy attorney file a proof of claim, which would establish the debtor’s claim to the outstanding debt, which was agreed to before the bankruptcy filing.
Michigan-Specific Legal Considerations
An important thing to keep in mind is that there is a statute of limitations on business contracts, which is set by statute in Michigan. Different types of contracts have different period.
Written and oral contracts have a statute of limitations of six years, while sale of goods (UCC) have a period of four years.
It’s important to note that the clock for the statute of limitations begins when the breach of contract first occurs or when the payment was due. It does not apply to when the creditor discovers that the problem has happened.
In the 2025, the Michigan Supreme Court overturned a previous decision on statute of limitations in employment contexts, adding instructions for when limitations may be shortened. It’s possible that this could have downstream implications for other commercial contracts in the future.
Confession of Judgment and Promissory Note Options
Michigan is one of only a few states that still recognizes what’s known as cognovits, or confession of judgment clauses.
According to state law, it must be a distinct instrument from the underlying contract. In other words, it can’t be buried within the body of a long and complex settlement agreement.
An attorney of the court must also sign the cognovit for it to be enforceable.
It’s also possible for the creditor to enter a cognovit without a pending lawsuit. That being said, there are some enforceability limitations.
For instance, law requires them to clearly disclose the issue, must follow strict procedures and be clearly agreed to and signed by all parties. The reason for this is that they essentially waive a debtor’s due process.
Debtors do have 21 days to challenge the entry as well.
Local Court Landscape in Southeast Michigan (Business Courts)
To ensure that commercial disputes are handled more efficiently, the state enacted what’s known as the Business Court Act, Public Act 333 of 2012. This law established specialized business dockets that handle business disputes.
In Southeast Michigan, this includes the 3rd Circuit Court Business Court in Wayne County, which includes three business court judges, and the Oakland County Business Court, which includes two business court judges.
In Macomb County, there has been a business docket in place since 2011. The Macomb Business Docket hears all qualifying cases that are automatically assigned to it.
With so many different business courts in Michigan, it’s important to hire an experienced business attorney early to help you navigate all the local case management practices, administrative orders and procedures. This will ensure you’re following the process effectively and efficiently, without making mistakes.
How a Southeast Michigan Business Attorney Can Help
A Southeast Michigan business attorney can help your court case substantially. They can evaluate the strength of your claim and help you devise an effective strategy to collect the outstanding debt.
They can draft an effective demand letter, and assist you in pre-litigation settlement, including negotiating and structuring a binding agreement. If necessary, they can also prepare an official lawsuit and represent your interests in court.
Trust Babi Legal Group with Your Business Case
Collecting outstanding business debts can be challenging, especially if you’re deciding whether it’s best to pursue a lawsuit or pre-litigation settlement. By consulting with an experienced business attorney early in the pre-litigation stage, you will put yourself in the best position to succeed in your case.
At Babi Legal Group, we have more than a decade of experience in business law, and can help you navigate the complex and complicated business landscape in Michigan.
To learn more, please contact us today.
