I recently read an article on a legal resources website called HG.org. While I found it to be somewhat vague, the gist of it is timely and relevant. I will digest it and offer my thoughts.
The COVID shutdown has resulted in an increase in the number of past-due or delinquent accounts. Merchants and businesses both small and large are encountering great difficulties in collecting monies that they have rightfully earned for goods sold and delivered, services rendered, and the like. What can such a business do to collect these past due receivables? Does the business write off the debt or pursue the debt? I will always advocate for the latter option. Now, the business concern must decide whether to engage a collection agency or retain counsel to attempt to recover the monies which it is rightfully entitled to. As a practicing attorney in the field, my knee-jerk reaction is to advocate for the retention of counsel. Taking a step back however, there are instances where that may not be possible, or the right move.
Both debt collection agencies and debt collection law firms perform similar roles by pursuing unpaid debts. Additionally, and particularly with respect to consumer debt, both are regulated by the Fair Debt Collection Practices Act (the Act defines, among other things, what is considered a consumer debt). However, the manner in which the agency or firm collects debt varies among law firms or agencies and even within such law firms or agencies. It is important to understand the similarities, differences, and limitations of either option before a business turns over its delinquent accounts to either one.
Some important considerations include…
Amount of the Debt
Some debt collection law firms may require a minimum balance, such as $1,000, in order to accept work. Many debt collection agencies however, will accept even smaller debts, possibly in a greater volume. Agencies may employ individuals who specialize in collecting such small balances and may pursue debts as low as $25. Often, the salary of these individuals is tied to their collection percentage. Collect more money, make more money. This has the potential to have the debt collection individual push aside accounts where the debt is questioned or challenged by the debtor in favor of accounts where there the debtor is more willing to pay all or a percentage of what is owed. This has the potential to render the particular debt unenforceable. I will discuss that later in this article. Debt collection law firms may have an entire staff of collectors that work under the supervision of an attorney or attorneys to collect the debts. The debt collection law firm may even be only one portion of a larger law firm. Debt collection law firms handling a higher dollar value debt or a more complicated account will typically take the time to address a debtor’s inquiry and offer an explanation as to why the debt is legitimate. Education of the debtor always plays a key role in collecting debt.
The creditor typically pays a contingent fee to the collection agency, this means that the creditor is not charged for the agency’s services until the debt is collected. This contingent fee is based upon the balance of the debt. Contingent fees usually range between 35 percent and 50 percent of the amount collected. A higher contingent fee is charged if the debt collection agency must turn the debt over to a debt collection law firm in order for both entities to profit off of the collection of the debt. The age of the account or its balance may also affect the contingent fee charged. Debt collection law firms may also charge a contingent fee, often between 25 percent and 33 percent. The creditor may be charged, sometimes in advance, for out-of-pocket costs associated with taking the debtor to court, these are non-contingent. A portion of these fees however, can be tacked onto the judgment and then repaid to the creditor upon collection of the judgment balance.
What can be done? Phone Calls and Letters vs. Lawsuit
The primary way that debt collection agencies and debt collection law firms differ is in regard to the actions that they can take. Debt collection agencies primarily collect debts by making continued contact with a debtor with the hope that the debtor will agree to pay off all or a portion of the debt owed. These communications may be through letters and telephone calls. While debt collection law firms can also take these steps, they can also take further steps to pursue and collect the debt. Debt collection attorneys are equipped to take the case to court. An attorney can initiate a lawsuit that puts legal deadlines into place. Many times such lawsuits result in default judgments against the debtor. The debt collection law firm can then take additional action once it obtains a judgment from the court, including seizure of the debtor’s bank accounts, placing a lien on un-exempted property, collecting profits from rental or business income, and the garnishment of the debtor’s wages.
Speed is an Important Factor
A primary consideration when making this decision is how quickly the entity may be able to recover the debt. In many cases, debt collection agencies attempt to collect the debt, but must then turn it over to a debt collection law firm for legal action. Additionally, debt collection agencies may be hesitant to turn the debt over even if there is no sign that they will be successful because it must then pay a substantial fee to the debt collection law firm. This means that a debt collection agency may have debt accounts for months or years without ever having success. This can result in the debt being essentially invalidated as the result of the expiration of the Statute of Limitations, which vary from state to state. In contrast, a debt collection law firm will likely be quicker to sue on the unpaid debt, in advance of the expiration of the applicable Statute of Limitations and therefore recover it faster than a debt collection agency. Savvy or professional debtors understand the limitations of debt collection agencies and may be less likely to ignore communications from lawyers if they are concerned over being sued.
What should a creditor do?
Before making a final decision, a creditor should talk with a reputable debt collection agency and a debt collection law firm in order to make a fair comparison between the two entities. The size of the balance owed, the type of debt, the potential fee charged, and the speed by which the creditor wants to be paid are all factors that can impact the decision.
I am available to discuss these options with you and help you determine which is best for you.