I am often asked to comment on which option – a collection agency or attorney is best for collecting bad debt. The simple truth is that one size does not fit all. Each option has its benefits and the best option has to be based on your specific collection needs:
Size and number of files – Attorneys generally litigate. If you have a large number of files of varying amounts, litigation will not always make sense. A collection agency is equipped to reach debtors by both mail and telephonic contact. A law firm may want to work only on the larger files, or will send only one demand to files under, say $1,000. A collection agency certainly can handle larger files, depending on the nature of the file.
Location – If your customers are in various states, an attorney may be unable or unwilling to help you, or you may have to retain different lawyers for different locations. Many collection agencies are multi-state, and some are national in scope.
Rate basis and out-of-pocket costs – Whether you choose a collection agency or attorney, always ask for a contingency rate versus flat or hourly. A contingent rate means that you will not pay anything up front, and receive a percentage of sums collected. Also, ask for an estimate of out of pocket costs. What is included in your rate and what is extra? If your attorney is going to litigate, you will likely have to front the costs and get them reimbursed when the money is collected. Court costs vary, but they can cost you hundreds of dollars, which brings up the next factor – actual collection of the funds.
Post Judgment Collection – If you hire an attorney and are awarded a judgment, the court does not collect the money for you. Getting a judgment is one thing – getting paid is another. In some states up to 80% of judgments go unpaid. I have been asked many times to collect judgments obtained by attorneys. Make sure collection agency or attorney has the experience and is willing to pursue post-judgment collection.
Research Capability – Over half of the delinquent customer files need some sort of research to locate debtors or their assets. You make sure the collection partner you choose has the experience and tools for quality research. Also, you should never pay an additional fee for research.
Credit Reporting – Reporting debts to credit bureaus is often cited as the key benefit of hiring a collection agency. I disagree. First of all, credit bureau reporting laws have been changed to limit the types of files that can be reported by requiring information you may or may not have on the customers, such as date of birth or social security number. Also, the credit agencies have limited the impact of some types of debt to the credit score, making credit reporting have much less impact. Lastly, reporting a debt may make you feel good, but it will not in many cases get you paid. The key benefit of using a collection agency should be their ability to focus on your files, and make a consistent and prolonged effort to get recover for you.
Focus and Experience – Make sure the collection agency or attorney has experience collecting for your type of business. Use a collection agency or attorneys who specialize in debt collection. The attorney who did a great job on your will may not be the best choice. Also, whoever you choose has to be versed in the various collection and credit reporting laws such as the FDCPA and FCRA.
The best option is to find a collection agency that has relationships with attorneys. If the collection agency cannot collect the debt, they can research the file to see if litigation makes sense. They can also assist the attorney with post judgment collection. Therefore if you are hiring a collection agency, make sure they attorney relationships and get the best of both worlds!