The fundamental question facing creditors is whether or not the potential costs of a collection action are worth the amount they are owed by the debtor, and if they prevail in thier collection action, will they be able to collect?  The reality is that the costs of protracted litigation can sometimes outweigh the amount of the debt. 

The Illinois State Bar Association recently submitted proposed legistlation to the Illinois General Assembly that it hopes will encourage settlement by modifying the Illinois Interest Act and how it treats prejudgment interest.  Presently, the Illinois Interest Act provides interest at a rate of 5% annually on most written agreements prior to the entry of judgment.  Following the entry of judgment, interest accrues at the rate of 9% annually. 

The ISBA proposal is designed to encourage quicker settlements by allowing debtors to avoid incuring prejudgment interest, or alternatively denying recovery by creditors.  First, the proposed legislation would modify the manner in which prejudgment interest accrues by tying it to the average Treasury Bill rate for the year proceeding commencement of the collection action.  Next, within 120 days of answering a complaint, the debtor may make a settlement offer.  If the creditor does not accept the offer withing 30 days and is awarded an amount less than the settlement offer at trial, it will be barred from collecting prejudgment interest.  

We advise all of our clients to implement interest and attorney's fees provisions in their Terms and Conditions.  The reasons for this are two-fold: (1) attorney's fees are only recoverable if provided for by contract or statute; and (2) clearly set forth interest provisions allow them to maximize rates prior to entry of judgment.  Notably, these recomendations cannot insure the recovery of either attorney's fees or interest, becuase in many instances, the court has discretion in these areas.       

The proposed legislation appears below.  

§ 2-1303.1 (a) If a party seeks money damages in an action at law or in arbitration, prejudgment interest must be awarded from the date the party from whom money damages are sought is given written notice of the claim for money damages or the action or arbitration is filed, whichever is earlier, until the award or judgment is entered. Actions at law include counter-claims, third-party actions, and claims for contribution. The written notice of the claim for money damages must reference this Section and be tendered by (1) personal service by the sheriff or private process server; (2) certified mail, return receipt requested; or (3) any method in which delivery is documented and tracked by accepted business practices. The written notice may be tendered by party seeking money damages or his or her attorney and may be tendered to the party from whom money damages are sought, that party’s attorney, or that party’s liability insurer.

(b) The prejudgment interest rate will be calculated by the Comptroller using a rate equal to the average one-year constant maturity United States Treasury bill rate of the preceding calendar year before the cause of action is filed plus two percentage points. The Comptroller must calculate this rate and publish it on his or her official website by January 10th of every year.

(c) Any defendant may avoid paying prejudgment interest by making a written offer of settlement to plaintiff at any time after that defendant has entered an answer to a complaint, petition, or demand for arbitration but no later than 120 days after entering an answer. If the plaintiff does not accept that offer of settlement in writing within 30 days of his or her receipt of it, and the plaintiff’s award or judgment against that defendant is less than or equal to that offer of settlement, no prejudgment interest may be awarded against that defendant. The parties may agree in writing to extend the 120-day period for defendant to make a written offer of settlement.

(d) This Section does not apply to any of these parties or situations:

(1) A unit of local government, as defined Section 1 of Article VII of the Constitution, a school district, a community college district, or any other governmental entity.

(2) Actions in small claims.

(3) Claims for punitive damages.

(4) If the cause of action and its legal dispute are subject to a written contract or agreement between the litigants in which prejudgment interest is authorized by the contract or agreement entered into after January 1, 2010.

(5) If the cause of action and its legal dispute are governed by a more specific statute.

Section 99. This Act takes effect on Jan. 1, 2010 and applies to all actions accrued on or after that date. (Source: P.A. 85-907.)