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 charged him only $29.00 dollars a file to get his money. The money – nearly $ 6,000 – was paid in advance to the agency. For the $29.00 fee, the agency sent one notice, made a few phone calls and reported it to the credit bureaus. 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 dentist was so angry and confused by the process that he let the accounts go and lost all that money owed to him, plus the balance of the original fees he paid.
The poor dentist had been attractive low, per file fee but learned that you get what you pay for. While the per file fee may work in some instances, you cannot expect to get much for the money. In comparison, consider a contingent rate. A contingency debt collection fee 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.
Advantages to this approach are that a business has 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. The disadvantage of the rate is that it could, in some instances be more expensive that a flat fee per file.
There are many collection agencies to choose from, and finding an attractive contingency rate should be easy. The lowest rate is not always what it appears to be though. One of our clients, an electrician, received a very competitive rate quote from an agency. When he looked closely at the contract, however, he realized that the 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. It turned out that the great rate he thought he had only applied to a third of his files. Never pay additional fees for research. It is party of what a debt collector does to get the job done, and should be included in the rate.
If you are lucky enough 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.