Tough situation. I'm not really for getting rid of dogs. Often their behavior is a reflection of their owner, just like children. There are lots of dogs in need of good homes, so I wouldn't advocate their being taken away and euthanized.
On the other hand it's not in my nature to sue somebody either. I think a fair compromise could be sought for bills and expenses and ask that they leash their dogs at all times, or else you'll be forced to call the police / animal control.
Lastly though, I think you should document the incident in some way via law enforcement or animal control agencies. That way if this happens again there is a precedent.
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