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How to Control the Cost of Debt Collection

Posted by Marilyn Miller on October 01, 2018  /   Posted in Uncategorized

Debt collection costs – who doesn’t hate them? I get it. You don’t get paid and have to pay someone to get your money for you. It stinks.

On the other hand, bad debt sitting on your books doesn’t do anything for you and your business. You can’t use it to grow your business or pay your employees. You have to convert those receivables into cash and to do that, you have to recover bad debt. With bad debt, something really is better than nothing.

How do you control your costs of collection? The first step is your own consistent effort to stay on top of the aging of your receivables. You must have a plan and procedure in place and you must stick to it. The better you get at your own in-house collection, the more you can keep the costs of debt collection to a minimum.

Even with the best efforts, some bad debts need to be referred for outside collection. If you have not collected the money in 90 days, you have to consider hiring a collection agency. The number one factor that drives up collection agency fees is the aging of the debt. Collection agency fees are higher for older debts. You are not doing yourself any favors hanging on debts, hoping your customers will pay you. In addition to higher fees, there are some hidden “soft costs of delay” Get help!

Debt collection costs are about more than the rate a collection agency charges. Do you have a customer contract? If you do, you may be able to charge interest and/or recover some or all of your collection costs.

So, the top three things you can do to lower your debt collection costs are:

  1. Recover as much as you can in-house using smart and consistent procedure.
  2. Don’t hold on to the debt too long.
  3. Maximize your recovery by adding contractual language to include interest and costs of collection.

How do you manage your debt collection costs?

Collection Agency: Love to Hate? Think Again!

Posted by Marilyn Miller on September 26, 2018  /   Posted in Uncategorized

Google “collection agency”. You will see a ton of articles about what to do if you are contacted (“harassed”) by a collection agency, as well as advertisements from attorneys willing to prosecute your Fair Debt Collection Practices Act (FDCPA) claim against an agency.

Believe it or not, reputable collection agencies (and most are reputable) believe in the FDCPA and work hard to comply with the law. The advice I always give to small business owners looking to hire a collection agency is to ask about an FDCPA training program for their collectors – a must to make certain your customers will be treated with respect.

Don’t get me wrong, there are abuses. However, the debt collection industry is like any other, with good and bad players. The debt collection industry represents the largest source of complaints to the Consumer Financial Protection Bureau. However, there is some feeling that the methods of data collection used by CFPB might not accurately reflect consumer issues with debt collectors.

Of course, my industry may be unique in we are often resented by both our collection clients and the people who owe them money. Our clients see us as a necessary evil, and the resentment they feel about not being paid often transfers to the collection agency when they see a portion of their hard-earned money going to collection agency fees, truly adding insult in injury.

What are the other options?  Do it yourself? Sure, you should have a program in place to collect as much as you can in-house. A good consistent program will certainly cut down on the files you need to refer for outside collection. Hire an attorney? Yes, some cases can be settled by an attorney, but not all files are right for litigation, and there is are still costs associated?. Just ignore the delinquent accounts and take a tax write-off? Well, that rarely gives you much relief, if it helps at all.

Consider a recent study done by Fundbox that reported some $825 billion in unpaid invoices to small businesses in the US alone. The study conjectured that if all unpaid invoices were paid on time, small businesses across the country could hire 2.1 million new employees, thereby reducing unemployment by 27 percent – how is that for a jobs program?

Not getting paid by customers can also mean that you are unable to grow your business by physical expansion, purchase of equipment, sales and marketing. You may even have to raise your prices.

The collection industry’s trade Association, ACA International reported that in 2013, third party collection agencies returned nearly $50 billion to their customers.

Still hate us?

Medical Debt Collection: How Letters of Protection Work

Posted by Marilyn Miller on September 25, 2018  /   Posted in Uncategorized

Medical debt collection is hard enough these days due to changes in the law and higher insurance deductibles. Planning in advance can certainly minimize the number of patient files referred for outside collection. In the case of treatment for conditions resulting from an accident, when you are asked to delay payment pending an insurance or legal settlement, a Letter of Protection often makes sense.

Consider this case from our collection files. Patient came to a chiropractor after an auto accident. Doctor treated the patient for months and accrued a large bill. Patient claimed not to the have the money to pay but promised to pay his bill as soon as he received settlement from insurance company. Patients’s attorney requested and received bills from doctor. Years go by without payment, and all patient contact information is no longer valid. Is the doctor out of luck? No, because before treating the patient, he required a letter of protection from the patient’s attorney.

A letter of protection (LOP) is a letter provided by the patient’s attorney that promises to pay you as soon as the case settles, before the patient receives the final disbursement. An LOP is a solid promise to pay. A lawyer would face consequences for jumping a letter of protection.

Some medical practices only require a lien from the patient, which states that the patient will pay when a settlement is reached, but I have seen too many of these liens disregarded, especially if patient does not get a large settlement. One of doctor clients had only a patient lien, and the patient got his settlement and bought a new car and then had nothing left to pay his doctors. He was not employed, so my doctor was out of luck. A letter of protection would have guaranteed payment.

A lawyer cannot provide you a letter or protection without client approval. If an attorney tells you a patient will not agree to a LOP, then you are under no obligation to treat without payment at the time of service.

Here are some additional things to remember:

  1. Ask the attorney to include in the letter that they will let you know immediately if the case is lost, or if their services are terminated.
  2. If the attorney changes, the new attorney must provide a new letter.
  3. Ask the patient to provide a separate lien to you which similarly states that they are responsible for costs and will pay you when settlement is received.
  4. Make certain to include a clause in both the attorney and patient letter that state that payment is NOT contingent on the case prevailing. The patient owes you whether they win their case or not.
  5. Have a system to follow up on LOP’s. Contact the attorney at least quarterly for updates.

Remember, you are not required to accept a letter of protection. You are doing it as a favor, because sometimes people are badly hurt through no fault of their own and you want to help them. That is great, but you must protect yourself. A legal case could take years to settle, so tread lightly and consider each case on its own merits.

If you can, ask the patient to provide you nominal payments at each visit. You can make this a condition of delaying payment. One provider I know charges $5.00 each visit. Payments will keep your statute of limitations from expiring. Payments also get the patient into a good habit of paying you something each time you see them.

 

Debt Collection or Letter Service: Which Do You Want?

Posted by Marilyn Miller on September 21, 2018  /   Posted in Uncategorized

Debt collection involves a number of activities. Some debts are simple to collect, while others are more difficult.

More often than not, debt collection involves more than simply sending letters.

Yet, yesterday I received an email from a collection agency in another state promoting a very low fee to send 4 letters. To get the lowest rate, you have to submit a larger number of files. You pay the per file fee upfront. No phone calls are made for the fee, and all funds are sent directly to you. Sound great, no?

Let’s do the math

A small dental office sends 100 files to collection. The fee is $ 8 per file, so $ 800 is paid up front. Remember, you pay the fee whether or not the letters work, but if it does work, your only expense is the initial fee.

Twenty debtors pay from the letter, and you recover $1,000, more than your original investment.  You ask the collection agency what will happen to the other files, and they quote you the rate for real collection, which will be the standard contingent rate of anywhere from 35-50%. The new contingent rate is in addition to the initial fee, which is, of course, non-refundable.

Let’s say the total value of the money owed to you in those 100 files is $ 10,000. You have recovered 10% of the money owed to you. Can your business afford to lose that $ 9,000?

Remember that 4 letters are likely sent monthly, which means that your contingent rate will likely be higher, as debt collection rates increase as debts age. The debts get staler, people move and incur more debt. Trust me, the longer a debt is out there, the more likely money owed to you will be used to pay other bills.

You should be sending collection letters yourself. Your collection agency should be contacting debtors by mail and phone, and researching for new information.

Effective debt collection is about so much more than letter writing. The choice is yours.

 

 

Can a Maine Collection Agency Recover Finance Charges?

Posted by Marilyn Miller on September 05, 2018  /   Posted in Uncategorized

Using a Maine collection agency help small business owners with bad debt recovery, but they collect finance charges? It depends on you, for several reasons.

First, do you have a contract signed by your customer that states that interest will accrue on delinquent balances? The contract needs to detail when interest will begin to accrue, how it will accrue and confirm that interest rate that will apply. For example: “Finance charge of 1.5% per month will be accrue on all balances over 30 days past due”.

If you do not have a contract you CANNOT charge interest, and your collection agency cannot collect it. It is not enough to put your interest rate on your invoice. You must have it agreed to, in advance, by your customer. As I have stated before, even a simple informal email confirming key details can serve as a contract, IF the customer acknowledges and agrees to it.

Secondly, the type of transaction matters. If your customer is a business, you still need a contract, but you can add interest within reason to all transactions. If your customer is a consumer, you are governed by Title 9-A, the Maine Consumer Credit Code. 

Maine law limits the amount of interest you can charge, depending on size of the debt, specifically:

 The finance charge, calculated according to the actuarial method, may not exceed the equivalent of the greater of either of the following:

A. The total of:

(i) 30% per year on that part of the unpaid balances of the amount financed that is $1,000 or less;

(ii) 21% per year on that part of the unpaid balances of the amount financed that is more than $1,000 but does not exceed $2,800; and

(iii) 15% per year on that part of the unpaid balances of the amount financed that is more than $2,800; or [1997, c. 727, Pt. B, §3 (AMD).]

B. 18% per year on the unpaid balances of the amount financed. 

 Generally, 18% a year (1.5% a month) is the most acceptable and commonly used rate.

If you decide to take your case to Maine Small Claims Court, do not assume that you will be awarded interest with your judgment. You must ask the court to award you the prejudgment interest. If your debt plus accrued pre-judgment interest totals more than the Small Claims limit of $6,000, you will only be awarded that amount. And, the Court will have final say on the awarding of interest.

If you do not have a contract, ask the Court to at least award you pre-judgment interest. With a contract, you can accrue the greater of your contract amount or a formula  set by the state which is the one year US Treasury bill rate plus 6%. If you do not have a contract, you can still get post-post judgment interest, but will be bound by the formula, which is normally less than a contracted amount.

A Maine collection agency can collect any interest that is legally due or that has been awarded to you. It is very important that you communicate all information regarding this topic so that your agency can get the very best result for you.

Collection Agency: Is Your Rate Really Competitive

Posted by Marilyn Miller on September 03, 2018  /   Posted in Uncategorized

Since I run a small business debt collection agency, I often get calls from prospective clients who are only interested in our rate and do not want any other information. It is frustrating to me because I believe that each client is different and the same rate should not always apply.

Like any business, a collection agency is started to make money. If your collection agency charges a rate that makes no profit, they will not be able to continue in business.

You get what you pay for.

A contingent debt collection rate means that no money is paid upfront and the agency is compensated with a percentage of monies recovered. Rates can vary based on many factors: the aging of the debt, volume of accounts placed, or size of the file placed. The contingency fee (i.e, no fee until money is collected) should support the amount of activity that will be needed to recover the money owed. While we all certainly want to manage the overall cost of collection, a low rate is not always what it appears to be.

Years ago a prospective client, a dentist, told us that he had over 200 delinquent patient accounts and had made an arrangement with an agency that gave him a very low rate. After 18 months, the agency had recovered only $1,200 for him and told him that in order to proceed to “Stage 2 Collections”, a high rate would be needed.  The low “teaser” rate did include credit reporting but little else. We took over the account and recovered thousands of dollars for him, a rate that made sense for us, and also gave him a much better return.

All contingency rates offered by collection agencies are not the same.

Some rates are all inclusive, while others provide very basic services and add charges for activities that are essential for successful recovery. So, the low rate is not really low at all.  For example, I once reviewed an collection agency agreement for a customer. His “low” rate did not apply to any file under $250.00 or any file that needed research (40-50% of collection files do). Legal fees were also not included in the rate.  The “great rate” applied to less than 30%  of his files. Never pay additional fees for research. It is part of what a debt collector does to get the job done, and should be included in the rate.

A contingent collection agency rate should require no upfront expense.

The collection agency is has an incentive to work hard to recover bad debt as they receive no compensation at all if unsuccessful. The contingency fee should be structured to include all services necessary to get the job done.

Do not assume that a contingent rate means that collection agency services are free.

One advantage to using a collection agency is the fact that a creditor does not have out of pocket expenses. If a collection agency fails to collect a debt, you should owe them nothing. However, your collection agency is taking a risk when they agree to collect for you. They believe that the debts you are submitting can be collected. You want a long term relationship with your agency, so handle it with care, and work with them to get the best results with your agency.

When I hear a potential client tell me they have many accounts for collection, but are only going to send me a few to “see how I do”, I immediately lose interest. I know that client is sending me the worst files, and that I am being set up to fail. There are only so many hours in a day, and choose to work only for serious clients.

There are many collection agencies to choose from, and finding an attractive contingent rate should be easy. If you are lucky to land a very low rate, watch to make sure you are getting the very best results from your collection agency. A low rate means nothing if the agency does not recover your money.

Customer Contracts: The Top 5 Benefits for a Small Business

Posted by Marilyn Miller on August 29, 2018  /   Posted in Uncategorized

Customer contracts are the single most important part of any business arrangement. If you are extending credit, there is simply no good reason not to use one. Contracts must be in writing, and they must be agreed to in advance by both parties.

How do customer contracts benefit your business?
They document all details of the customer relationship.

Imagine beginning a relationship with both parties clearly understanding how things are going to work. A customer contract is a road map to success.

They can often be very simple.

Not every customer contract has to be complicated. Often, a simple statement will do. For example, if you take new customer orders over the phone, confirm details of cost, expectations for payments and the consequences of non-payment in an email before providing your service. Ask customer to email back their agreement to your terms. You have a simple contract.

They help resolve customer disputes.

If you have a solid customer contract, you can use it to resolve customer disputes. For example, I have a customer who outlines, in detail, how a customer must cancel the contract. If a customer does not cancel correctly, additional charges apply.

Also, if you decide to litigate a customer dispute or non-payment, a customer contract will greatly increase your chances of success. You contract should also address the subject of arbitration, and how it may or may not be used to resolve disputes.

They can lower your costs of debt collection

If you wish to recover collection agency or attorney fees, you must include them in your customer contract and make sure customer agrees to them beforehand. The same holds true if you want to add finance charges or late fees. You cannot just add them onto your invoice after the fact.

They can be used to personally guarantee a business debt.

If your customer is a business, especially a new business or a business in distress, we recommend obtaining a personal guarantee. A personal guarantee means that an owner of the business guarantees the debt if the company is unable to pay.

Ask your attorney to draft a customer contract for your business for you today. It will not cost much, and it will be the best money you spend this year.

 

 

 

 

 

Small Claims Court and Debt Collection: Mistakes to Avoid

Posted by Marilyn Miller on August 24, 2018  /   Posted in Uncategorized

It happens every day. We get calls from small business owners who have taken matters in to their own hands and taken their non-paying customers to small claims court. They get a judgment but the debtor still does not pay. What went wrong?

Although the small claims process was designed to give small business owners access to the court system, it is not the answer for all files. Here are some common mistakes we see:

1. Suing the wrong party – If your beef is with a business, and you do not have a personal guarantee, you likely have no cause of action against the owners. The opposite is also true. If your customer is a person using a trade name, (not a corporation), then it may be pointless to sue the business alone. It is important to make sure you have the right party. Of course, this means you have gathered the correct customer information and have a good customer contract to begin with.

2. Suing a party with no assets. – Make certain there is something to get!

3. Suing someone who already has many judgments against them – Try to do as much research as you can before you file the lawsuits. Some states have a very good website where you can look to see if your customer has other judgments again them.

4. Filing suits that do not make economic sense – If you have to pay $100.00 to file suit, is it worth it for a $250.00 debt? There may be better options.

5. Suing for the wrong amount – Make certain your suit reflects all charges and payments. You will need to have a customer financial agreement in order to ask for pre-judgment interest.

6. Not asking for post-judgment interest or other costs – Do not make the mistake of assuming that you will be awarded interest or your costs of collection. Ask for it! The court may or may not award everything, but you have no chance of getting what you do not request.

7. Not getting proper service – Getting service means making sure the person you are suing actually receive the lawsuit. Take the extra step of making sure you research and have the correct address.

8. Not bringing the right forms to court – I once saw a business owner spend all morning in court only to have his case dismissed because he did not bring proof that the defendant was not in the military. Most courts have guides to help you with the process, or ask the court clerk for help.

9. Not bringing background material to court – Even if the defendant has never responded to you and you expect that they will not appear, come prepared to do battle. Bring your entire file.

10. Expecting that the court will collect the money for you – Small claims court does not collect the money. You have to do that, or hire someone to do it for you.

Do not make the decision to take files to court yourself soley on your desire to save on collection agency fees.Take a look at your past due receivables. Perhaps it makes sense to hire a collection agency or an attorney to help you collect money without having to spend your time away from your business. Not all files should be litigated. Some files are only going to be collected if they are litigated. The magic is in knowing the difference.

Collection Agency: Monster in the Closet?

Posted by Marilyn Miller on August 22, 2018  /   Posted in Uncategorized

Last week, my friend asked my advice on a customer who was not paying. I told her that I would happily work on the case for her, but suggested that she first send one last letter to her customer giving a final opportunity to pay. I told her to set a firm due date for the payment, and to communicate that if the bill was not paid on time that it would be referred for outside collection.

My friend followed my advice, and received payment in full. She was grateful, saying that the mere “threat” of a collection agency or the “monster in the closet” as she called it, caused the bill to get paid. I would never recommend a threat of any sort, but I do recommend constant communication with customers, even when the communication is difficult.

From your very first contact with your customer, you must communicate how and when you want to be paid. Do not be afraid to do this. You are in business to make money. You provide your product or service with the expectation of getting paid.

When customers do not pay you, they are sending you a message. So, the message you send back is important.  Chances are that people who owe you money owe other people as well. Do you think those creditors are sitting and doing nothing? How to get your bill to the top of the pile?

You must create a sense of urgency.

Your customer contract must clearly indicate your payment terms, and the consequences for payment. For example, it might say:

If your account is referred for outside collection, you agree that you will be responsible for and all costs of collection including but not limited to collection agency fees, attorney fees, cost of suit, court fees. 

Continue conversations with your customers, making sure your invoices have the terms clearly printed on them, and advise your customers how and when you expect to get paid.  Remember, a customer still wants something from you.  They want to use the credit you extend because it is good for their finances.  You as the creditor then assume the responsibility of its management.  Credit will not manage itself.

You will see that some customers pay from your final notice, to avoid being sent to collections. Others will pay only when their file is referred from collection. Do what it takes to get paid.

Do not be afraid to let the monster out of the closet. Of course, make sure your agency collects debt professionally and ethically, but let them do their job and get results for you.

Eight Signs it is Time to Hire a Collection Agency

Posted by Marilyn Miller on August 20, 2018  /   Posted in Uncategorized

You have a growing small business, are “doing everything right”. You use customer contracts and have a good plan to recover bad debt in-house. When do you need to hire a collection agency?

Here are 8 signs it is time to get some outside help:
  1. You have a growing number of receivables over 90 days past due.
  2. You are spending too much time chasing non-paying customers and you do not have enough time for sales and customer service.
  3. You are having trouble paying your creditors because you are owed so much money.
  4. You do not have the cash flow to hire new employees or buy new equipment.
  5. Customers you have been billing move and you have no way to find a new address or contact information for them.
  6. You and your staff do not wish to be involved with customer disputes over payment.
  7. You have been going to small claims court and getting judgments, but are still not getting paid.
  8. Your accountant tells you that you cannot get a tax benefit from writing off your bad debt.

When small business owners to not get paid, it hits the community and people in the community immediately. Small business owners usually pay themselves last, and if they do not have the cash flow, they work for nothing. Heck – even President Trump has been accused of non-payment to small businesses.

Hiring a collection agency can save you time and put cash back into your business.

Debt collection agencies have resources to research and find people and their assets. They are expert negotiators who know how to handle disputes. They can set up effective payment plans and make sure people pay when they say they will. If you have obtained court judgments that you cannot collect, a collection agency knows how to attach assets, and execute court judgments using liens.

Hiring a debt collection agency may be the best business decision you make this year!

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