If you’ve been in business long enough, getting sued by a client is almost inevitable. Fortunately, there are things you can do to protect your business assets and your reputation.
Don’t Ignore The Lawsuit
Even if you believe a lawsuit to be frivolous, there are serious consequences for ignoring it. Most lawsuits require you to respond within a certain time period (usually around 30 days), and if you fail to respond within the prescribed time, the person filing the lawsuit could get an automatic judgment against you. This is serious because a judgment against your business, especially when there are serious allegations of wrongdoing, can permanently harm your reputation and cost you money. A matter of fact, it’s better to settle a lawsuit you view as frivolous than to ignore it because settlement is almost always cheaper than an automatic judgment.
Inform Your Insurer
Having general liability insurance can protect your business from taking heavy financial blows during a lawsuit. If you have it, immediately forward any lawsuit filed against you to the insurer. Depending on your coverage, your general liability insurance may pay for any damages you’re found liable for in a court settlement or judgment. But failure to purchase general liability insurance could cost you thousands. And for some business, not having general liability insurance could bankrupt their business.
Don’t Discuss The Lawsuit
The first instinct business owners may have when sued by a client is to work out a settlement on their own. However, this can be risky. Anything you say to the client regarding the lawsuit, including admitting wrongdoing, can be used against you. It’s best to contact an experienced attorney who can contact your client’s lawyer to work out some type of settlement offer if appropriate. If you have to continue doing business with the client because of an existing contract or outstanding work, make it clear to them that while you are willing to complete required work, you are not willing to discuss the lawsuit. If they want to discuss the lawsuit, refer them to your attorney.
Preserve Your Records
Once a lawsuit has been filed against your business, you must take extreme care to preserve any records related to the lawsuit. This means that emails, text messages, voicemails, notes, documents, recordings, and any other data related to the lawsuit must not be destroyed.
Sometimes businesses don’t deal with lawsuits until AFTER they have escalated and an automatic judgment has been filed against them. If this has happened to you and the judgment amount is threatening your ability to operate your business, you may consider filing bankruptcy. Bankruptcy may discharge lawsuit debt under certain circumstances and allow you to continue doing business. However, bankruptcy will not discharge debt that is the result of a lawsuit if the following applies:
- Your lawsuit debts were acquired by fraud, misrepresentation, or false pretenses. If it is found that your company failed to deliver what you promised or that you misrepresented your product or service, then you may not discharge the lawsuit debt in bankruptcy.
- If you willfully and maliciously injured someone and they won a lawsuit against your business because of it, that debt cannot be discharged in bankruptcy.
You may also want to consider filing bankruptcy if you’ve just been notified of a client lawsuit and you have other debts that you know you’re unable to pay. Filing bankruptcy can put an automatic stay on lawsuits. This means that the lawsuit process will be temporarily stopped once you file bankruptcy. To find out what your options are when a client sues you, contact an experienced attorney today.