Utilizing Collection Agencies and Attorneys in the Collection Process

Introduction
After you have exhausted all amicable means within your own company to coax payments from a customer, you have several courses of action open to you. You can either write off the debt because the amount in contention is too small to pursue or the company is insolvent, start legal action such as placing the claim with a collection agency or attorney, explore the use of Small Claims Court in the applicable state or use a method of alternative dispute resolution.

Small Claims Court
Small claims court judges resolve disputes involving relatively modest amounts of money. The people or businesses involved normally present their cases to a judge or court commissioner under rules that encourage a minimum of legal and procedural formality. The judge then promptly makes a decision (a judgment). Although procedural rules dealing with when and where to file and serve papers are established by each state's laws and differ in detail, the basic approach to properly preparing and presenting a small claims case is remarkably similar everywhere. In a handful of states, including California, Nebraska and Michigan, you must appear in small claims court on your own behalf. In most states, however, a lawyer can represent you or your company. Nevertheless, even where it is allowed, hiring a lawyer is rarely cost-efficient. Most lawyers charge too much given the relatively small amounts of money involved in small claims disputes. Several studies show that people who represent themselves in small claims cases usually do just as well as those who have a lawyer.

When it comes to disputes involving money, you can usually file in small claims court based on any legal theory that would be allowed in any other court--for example, breach of contract, delinquent bills or breach of warranty. The limit is normally between $2,000 and $7,500, depending on your state. For instance, the maximum is $3,000 in New York, $7,500 in Minnesota, and $2,500 in Washington. Recently, there has been a trend toward increasing small claims court limits.

Rules normally require that you sue in the small claims court district closest to the other party's residence or headquarters. In some instances, you may also be able to sue in the location (court district) where a contract was signed. Check with your small claims clerk for detailed rules.

If a defendant has no contact with your state, you will generally have to sue in the state where the defendant lives or does business. Because of the distance involved, out-of-state small claims lawsuits may tend to be expensive and unwieldy.

If some time has passed since the incident that brought about your lawsuit, for example, after the breach of a written contract, you may need to do a little research to determine whether you can still file your claim. Check your state's legal code under the index heading "statute of limitation."

If you decide to choose the small claims court option, check the dollar limits and notification requirements to see if your claim qualifies. Experience with this alternative is mixed, because even if the debtor or its representative does not appear in court, and you are awarded a summary judgment, you still have to locate and attach the debtor's assets to satisfy the judgment. This can be a long, expensive and frustrating experience.

Choosing A Collection Agency / Attorney
(The use of the word "agency" or "agencies" in the remainder of this document will refer to collection agencies and attorneys unless otherwise specifically identified.)

As with any other service, there are good and bad agencies. Beware of any agency that offers you cut rate commissions far below the accepted Commercial Law League rates, offers you kickbacks on commissions, or makes outlandish promises about recovery success.

You should investigate, evaluate and rate the agencies that you plan to use just as carefully as you do with customers when you grant credit. Here are some suggestions:

Using An Agency
When you turn an account over for collection, make sure you give the agency a complete package. This should include:

The more back-up detail the agency has, the better it can work for you. If the matter has to go to suit, you would have to provide this information anyway, so you might as well do it at the beginning of the process. If any paperwork is missing, it gives you time to locate it.

Unless there is a good reason for you to become involved (i.e., a return of merchandise or a valid claim which reduces the amount owing, and you issue a credit memo) do not interfere with the process between your customer and the agency. You hired the agency, so let them do their job. Many times a customer will contact you, and try to make a deal so they won't have to pay collection charges or have their reputation tarnished. The customer may also threaten you with a counter-suit because of a product problem or state that if you press the claim, they will never again do business with you. Stand firm, however, if they do threaten suit, let the collection agency and your own legal department know about it.

If a customer sends you a check after any free demand period has ended, and it has not gone through a lockbox system so that it is already in your account, send it to the collection agency rather than depositing it. Let the agency determine if any restricted endorsements (i.e. payment in full when it really is not) make the check useless, and require a replacement, or if the check does not clear, let the agency follow up.

Before you place a claim with an agency, you should have determined whether you plan to eventually press for suit and judgment if the agency cannot collect amicably. You do not necessarily have to let the agency know of your decision at this stage, but you should have a plan of action in place.

If you decide to proceed with a suit, be prepared to pay additional costs, and to wait a long time for a resolution. Some state civil courts have cases backed up months, and sometimes years, and many times a customer will file a petition in Chapter 11, or simply go out of business before your case can be heard. You can expect your customer's attorney to use delaying tactics, and put as many legal roadblocks in your way as possible, to discourage you from proceeding further. Obviously, you have to reserve your decision to sue for those cases where the debt is meaningful. You and your attorney must believe you stand a chance to win, and more importantly, collect on any judgment you might be awarded.

While in some instances, placing an account for collection is due to disputes between you and your customer, in most cases it is a strong indicator that your customer has more serious problems than you suspected. These problems may be managerial, operational, or financial--it is probably a bit of each. The undisputed portion must be paid immediately. Any portion of the debt not disputed should be paid; if not, place the account for collection.

Dealing With Agencies & Attorneys: Fundamental Terms And Principles

Claims
Agencies deal with the collection or settlement of claims asserted by one individual or business entity against another. There are two types of claims. A "commercial claim" is an obligation incurred during the course of conducting a business which arises from goods sold or leased, services rendered, or monies loaned for use in the conduct of a business or profession. A "retail" or "consumer claim" is an obligation incurred primarily for a personal, family or household purpose.

Not all commercial accounts are based on open account balances; some claims may be based on lease agreements, security agreements, consignment transactions, guarantees or on almost limitless variations of similar business transactions. It is necessary that the agency be familiar with the available legal means of effecting collection of such specialized types of claims. This requires specialized knowledge of creditors' rights with respect to perfecting a lien, enforcing a security interest, as well as effecting collection.

Forwarders/Receivers
A "forwarder" is the agent of the creditor who refers claims to attorneys for collection. A forwarder may be an attorney, a commercial collection agency, or a credit insurance company that acts on behalf of the creditor in the referral of claims for collection. The attorney who receives the claim is a "receiver".

Claims emanating from a forwarder are usually forwarded to an attorney because the debtor is outside of the forwarder's jurisdiction and the forwarder has been unable to obtain payment. Forwarding is approved by the prior express authorization of the creditor-client for whom the forwarder serves as agent. Thereafter, you, the creditor becomes the client of the attorney. The forwarder, however, continues as agent, to facilitate the handling of the claim between the receiving attorney and the creditor. Because forwarders have certain expertise and are relied upon by the creditors, it is the usual practice that all correspondence and contact by the attorney with the creditor be through the forwarder.

Fees
The fees charged for the collection of claims may differ from agency to agency. There are also various types of fee arrangements that may be established.

The amount of the suit fee is a matter of contract between the receiver and the creditor, as is the question of whether the suit fee is to be contingent or noncontingent, or partly contingent and partly non-contingent. A suit fee, if earned, is payable in addition to commissions. It belongs exclusively to the receiver unless there is a division of service and responsibility between the receiver and an attorney forwarder. The suit fee agreement preferably should be entered into before suit is commenced, and the fee should be commensurate with the services rendered, the amount involved, and the results accomplished.

"Court costs" include, but are not limited to: sums required to be deposited for filing an action, fees paid for the service of process and witness fees. You as the client, should first approve other out-of-pocket costs before they are expended. Unless otherwise agreed by you, telephone calls, skip-tracing investigation, postage and expenses for the duplication of material are considered normal office operating expenses absorbed by the receiving attorney. At no time should a receiving attorney incur unusual out-of-pocket expenses without the creditor's approval.

FORWARDING CONTRACT
A "forwarding contract" is the agreement entered into between the forwarder, as the agent of the creditor (with the creditor's consent), and the receiver; specifying among other things, the agreed commission to be paid as the receiver's compensation for collection of the claim.

LAW LISTS
A Law List contains the names and addresses of selected attorneys who are willing and able to accept and service collection claims. The attorney pays for the listing and may maintain such listings in one or more Law Lists. Law Lists are a recognized source for the selection of local attorneys by forwarders.

RECEIPT OF CLAIM
The Code of Professional Responsibility adopted in each state usually requires that the attorney assume ultimate responsibility for supervision and review of forwarded matters in order to successfully represent the creditor. Occasionally, a forwarder may not have in its possession complete details or documents regarding an account, but, if necessary, such information can be obtained from the creditor. In most instances, the majority of accounts forwarded are for past due balances, and original documents are usually not necessary. Most debtors are aware of the money they owe and a phone call or routine demand and investigation for payment may be all that is required.

ACKNOWLEDGMENT
A claim should be acknowledged on the day it is received in order to assure the forwarder that the item has been accepted for collection. Failure or delay in acknowledging the claim may deny the receiver the right to compensation for payments received before acknowledgment.

INITIAL DETERMINATIONS
After the claim has been forwarded and a file opened by an attorney, a demand letter is sent to the debtor informing him of the attorney's employment to collect the account. Concurrently with or immediately following this step, the attorney should contact the debtor by telephone to request payment in full or determine the debtor's intent to pay.

DISPUTED CLAIMS
If the debtor claims a dispute, all of the facts should be ascertained in detail and sent to the forwarder for further advice and instructions. If there is only a partial dispute, you should instruct the forwarder or attorney to request that the undisputed portion of the account be paid promptly. Failure of the debtor to pay the uncontested amount may indicate financial difficulties.

In the event the debtor insists upon a return of all or a portion of the merchandise which created the disputed amount, and you accept the terms of the return, it is necessary to promptly and clearly communicate those details to the forwarder or attorney.

INITIAL REPORT
After the agency or attorney makes initial contact with the debtor, the agency should be compelled to furnish you with a report on the claim advising the prospects for collection. In evaluating the claim, the agency/attorney should report all pertinent facts uncovered and also review and advise you of any past experience with the debtor.

If arrangement for payment has not been made, the report should include a recommendation, if possible, as to any extension, or alternatively, the commencement of suit. If legal action is recommended, the attorney should set forth requirements for court costs and suit fees if circumstances require a retainer. The economics (amount of claim, time, your company's perceived reputation) should be considered in the recommendation.

No lawsuit can be instituted without your prior authorization. The mere forwarding of a claim to an attorney for collection does not imply the right for them to bring suit against the debtor.

If it is determined after investigation that the account is uncollectible, the attorney should return the claim promptly to the forwarder together with a complete report.

ALTERNATIVE DISPUTE RESOLUTION
ADR (Alternative Dispute Resolution) is a term that refers to a variety of techniques for resolving disputes without litigation. Two of the better known methods of ADR are mediation (in which the parties to a dispute reach a voluntary settlement with the help of a skilled facilitator) and arbitration (in which the parties choose a disinterested neutral agent to present their case for a legally binding ruling). Many specialized rules and procedures have been developed in cooperation with interested organizations and industries to facilitate these dispute resolution processes.

Mediation
Mediation involves an attempt by the parties to resolve their dispute with the aid of a facilitator. The mediator's role is advisory. The mediator may offer suggestions but resolution of the dispute rests with the parties themselves. Mediation proceedings are confidential and private.

In mediation, you and the other party meet with a neutral third party that helps you try to arrive at your own solution. Mediation is now mandatory in a few Small Claims Courts and optional in many others. The goal is that before a judge hears a case, you get an opportunity to construct your own compromise.

When you file a small claims case, the clerk of the court may assign you to mediation or strongly suggest that you look into it. Mediators may be available right in the courthouse, or you may be referred to a local mediation service.

Some mediators work free; others are paid a modest fee by the court. They are trained to help people talk about their disputes and come up with reasonable solutions. (Most mediators are not lawyers, in case you were worried about being trapped in a room with both your opponent and a statute-spouting attorney.)

Because mediators, unlike judges, have no power to impose a solution, mediation sessions tend to be much more relaxed than a court proceeding. They may last from 30 minutes to several hours.

Why Mediate?
If you are convinced that your opponent is totally unreasonable, you may wonder why you should waste time mediating. But experience shows that when the parties to a Small Claims Court case voluntarily agree to mediate, the overwhelming majority of disputes are settled. Even when people who do not want to mediate are forced to go through the process, mediation gets results: In Maine, where mediation is mandatory, about 50% of cases settle.

Mediation has other benefits, too. According to a 1992 study by the National Center for State Courts, parties who agree to mediate their cases are more likely to be satisfied with the outcome than are small claims litigants who go directly to court. One big reason for this is that parties who arrive at a mediated settlement are more likely to pay up than are those who lose at trial.

Mediation is not a good idea in every case. If you are determined to get every penny you are asking for, and you don't have an ongoing relationship with the other party, bypassing mediation and going directly to Small Claims Court (except in the few places where mediation is mandatory) makes the best sense.

If you do want to mediate, how can you get a reluctant opponent to the table if mediation is not mandatory? Mediators can help with that, too. Typically, as soon as you notify a local court-sponsored or community mediation program that you would like to try mediation, (notification is often automatic with a court-sponsored program), someone from the mediation program will contact the other party and try to arrange a mediation session. They have lots of practice at convincing reluctant parties to sit down at the bargaining table.

Arbitration
Arbitration is submission of a dispute to one or more impartial parties for a final and binding decision. The arbitrators may be attorneys or business people with expertise in a particular field. The parties control the range of issues to be resolved by arbitration, the scope of the relief to be awarded, and many of the procedural aspects of the process. Arbitration is less formal than a court trial, the hearing is private. The courts review few awards because the parties have agreed to be bound by the decision of their arbitrator. In some cases, it is prearranged that the award will only be advisory.

Why Arbitrate?
Most creditors do not want to become involved in lawsuits. Litigation can entail lengthy delays, high costs, unwanted publicity, and ill will. Appeals might be filed, causing further delay, after a decision has been rendered. Arbitration, on the other hand, is usually faster and less expensive, and it is also conclusive.

Some important points about arbitration:

Conclusion
When the marginal cost of collection exceeds the marginal benefit, it is time to employ one of the aforementioned methods of collection.

The more accurately you know your collection costs and the more accurately you can estimate the likelihood of collecting, the more precise your probability determination will be.

After estimating probability, you can compute your mathematical expectancy of gain, by multiplying the amount to be placed for collection by the probability of collecting. Recovery rates vary as a function of the type of account, age of the account at placement, amount of previous effort, and a number of other factors. It is when the mathematical expectancy from internal efforts is slightly higher than that from third party intervention, that the cost of collection effort becomes crucial.


Section 2

Collection Agency Status Report

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