Collection Agencies And Other 3rd Party Options

Collection agencies are one of several options available when a credit department needs to look outside the company for third party debt collection help. When a credit department has exhausted all its in-house accounts receivable collections options, it may be time to look for help outside the company. There are several outside third party possibilities available. This section will focus on pursuing outstanding debt through the small claims court.

In Court

Once it becomes obvious that a credit department is not going to be able to collect on an open invoice, the next step is to decide if going outside the company to pursue the debt is a good idea. Sometimes, the amount of the outstanding debt is not large enough to warrant the time and expense required to continue to pursue payment. In this case, a credit department may decide to write off the bad debt, and move onto collecting other more feasible open accounts. Other times, the amount may not be huge, but it may be large enough to make pursuit in the small claims court system attractive.

Usually cases brought to small claims courts are disputes involving a relatively small amount of money. Plaintiffs typically present their cases to judges or court commissioners and relatively little legal paperwork is required. A big benefit of this legal venue is that once the case is heard by the judge, a final decision is made almost immediately. Although the exact rules for how to pursue filing a case in small claims court differ from state to state, the basic procedures are similar in all states. There are a few states which require that the plaintiff (individual or company) must appear in court on his or her own behalf. California, Nebraska and Michigan are among these states. Most states, however, will allow a plaintiff (either an individual or a company) to be represented by an attorney. The problem with this is that attorney fees usually take a big bite out of any monies awarded in the case of a favorable ruling. Studies show that individuals or companies representing themselves in small claims courts typically do just as well as those with legal counsel.

Disputes involving money are usually deemed appropriate for pursuit in small claims court if they would be acceptable in any other type of court. For example, disputes involving breach of contract or non-payment of bills can be pursued in small claims court. The dollar limits vary from state to state, but are typically in the $2,000 to $7,500 range. The dollar limits also may vary for suits filed by individuals versus companies. For example, in California, an individual can sue for up to $10,000, while a company can only sue for up to $5,000.

If the party or company being sued resides or is located in the same state as the plaintiff, usually, the case must be filed in the county closest to that person’s or company’s residence or location. If the party being sued is not located in your state, then most likely, you will be required to file suit in the state where the defendant resides or works. This can sometimes make the pursuit of the filing unattractive due to the distance involved and the time and money required.
Statutes of limitations also may come into play if the filing involves a money dispute that happened a while ago. Check the legal code in your state entitled, “statue of limitation.” In California, the statute of limitations for a written contract is four years.

Before you make your decision as to whether or not to pursue your debt collection in small claims court, check with the requirements for filing in your state. Remember, that even if you take your collection case to small claims court and win, you still have to locate the debtor and pursue collection of the debt once more. The costs relating to the ultimate collection may not be worth the time and money spent to get the favorable ruling.

When making the decision to file suit in small claims court, it might be worthwhile to check into the cost of turning over these claims to collection agencies. Collection agencies typically work on a contingency basis. While an agency may not want to put much effort into a claim worth only a small amount of money, sometimes debtors are instantly motivated to pay after hearing from a collection agency just one time. Professional debt collectors have the experience and training they need to get debtors motivated to pay. It might be much easier and more profitable to turn claims over to the professionals rather than spending a lot of time and energy going to small claims court.

Agencies

When a credit department is unable to collect its accounts receivable debt, it may be time to hire collection agencies. Agencies are accounts receivable collections professionals and know the most successful collection techniques. Professional debt collectors spend all day everyday working claims and frequently have a much higher success rate than in-house debt collectors. This section will focus on how to choose a commercial collection agency.

As in any service industry, there are high quality agencies, and there are disreputable agencies. The key is to figure out which kind of agency you are hiring, before you actually begin the working relationship. When dealing with business-to-business debt collections, the correct agency to hire is a commercial collection agency. A commercial collection agency does not deal with consumer debt. It only deals with collections involving one business not paying another business. A commercial collection agency does not have to abide by the laws that pertain to consumers (e.g., the Fair Debt Collection Practices Act). Quality agencies are fully up to date on all laws pertaining to commercial collections.

As you begin the process of selecting your agency, you must take the time to research and investigate all candidates. Watch out for any agency that promises commissions or rates which you know are significantly lower than the industry average. Other red flags include promises of kickbacks or over-the-top collection results.

As you evaluate your collection agency candidates, put as much effort into understanding each agency and its skill-set, rates and reputation as you do when making credit decisions for new customers. Hiring an agency is a very important decision and warrants scrutiny. Below are some steps to take when evaluating agencies:

• Only evaluate commercial collection agencies. These agencies will know the ins and outs of business-to-business debt collections.
• When evaluating a very large national agency, request references for other companies they work with from your industry.
• Make contact with the references within your industry. Ask questions about the agency’s collection success rate. Determine how quickly collected monies are turned over to the client. Ask about status reports and the general flow and timeliness of information back and forth.
• When evaluating local or regional agencies, the same process applies. Ask for and call references, preferably within your industry. Confirm all bonding insurance coverage and claim history.
• Use your industry network to find out what agencies other credit departments use and like. Some agencies specialize in particular industries. These agencies can be particularly successful because they have even more knowledge of how to motivate debtors within the specific industry.
• Check to see if the agency offers any other services such as legal counsel. Some agencies have their own attorneys which they can use to further motivate slow- or no-pay customers. Sometimes debtors will pay after just receiving a letter from an attorney. Others will need to be sued, and agency debt collection attorneys are very knowledgeable and know the most efficient, expedient ways to file suit.

The bottom line is to do your homework when you decide to hire a collection agency. The better you understand the agency’s debt collection process, the more likely the agency will deliver positive collection results. One last word of warning: Don’t wait too long before you turn over claims to a collection agency. The more past due the invoice is, the lower the probability of collection. Even the highest quality agency can’t perform miracles with long past due debt.

Once a credit department has decided to hire collection agencies, it is important to understand the way agencies work to make sure the best debt collection results are achieved. This section will focus on understanding the way collection agencies operate and what credit departments can do to help maximize results.

Once a collection agency is hired, the credit department will begin to turn delinquent accounts over to the agency. For the agency to be successful, the credit department must provide the most up-to-date, accurate information to the agency. This information should always include:

• A summary of all the delinquent invoices associated with the debtor
• Photocopies of all individual invoices, purchase orders, contracts, proofs of delivery, etc.
• Photocopies of all checks remitted to-date by the debtor.
• Photocopies of all written correspondence between the credit department and the debtor relating to unfilled orders, claims of shortages, breakage, non-conformity, or returns.
• Photocopies of any personal or corporate guarantees.
• Accurate phone numbers, e-mail addresses and contact persons relating to the debt.

The more background and accurate contact information you turn over to the collection agency, the better. If down the road, a lawsuit has to be filed, all of this background information will be needed. Therefore, it is always a good idea to put it together in the account package when you initially pass it on to the collection agency. When putting together the account package, you will also determine if you are missing any of the information, and you will have the time to locate it.

Once the account has been turned over to the collection agency, do not attempt to keep your finger in the collection process. Let the agency do its job. Cease all communication with your customer while the agency is pursuing payment. Frequently, once a debtor has been contacted by a debt collector, the debtor may attempt to contact you to negotiate a settlement. The debtor may become aggressive and threaten a countersuit or removal of all future business with your company. In this situation, the best thing is to remain firm, and refer them back to the collection agency.

If the agency has pursued the payment and the customer sends a check to your company rather than directly to the agency, turn the check over to the agency so that they can determine if the amount is the amount agreed upon by the agency and the debtor. In some cases, the amount may not be the correct amount, a replacement check will be required, or the check may not clear the bank. In all these instances, the agency will know the best course of action to take.

When you turn an account over to the agency, the credit department should have a plan in mind if the agency is unable to collect the amount owed. If you plan to pursue a legal suit, understand that the costs associated with collecting the debt will go up, and the time it takes to collect will also increase, possibly a lot. It is not unusual to find out that civil courts in some states are backed up for months and months. Remember that while you are waiting for a case to go to court, the debtor may go out of business or file for bankruptcy. In addition, the debtor’s attorney will use delaying tactics and try to put as many roadblocks in your way as possible. Dragging the suit out is a key strategy in these cases.

In the end, when deciding whether or not to take legal action against a debtor, the debt amount must be significant enough to warrant the costs involved in pursuing payment and the case must be deemed winnable. Finally, even if the case is won, you still have to collect the debt. If you don’t believe the debtor will ever pay, then it is probably better to just write off the debt.

Sometimes credit departments turn an account over to a collection agency because of a dispute with the customer. More often, however, turning an account over to a collection agency is indicative of potentially serious problems occurring with the customer’s business. It might be time to reevaluate the future credit extended to the customer, and definitely let the agency pursue outstanding payments sooner than later.

Defin­ing The Terms And Prin­ci­ples

Collection agencies and debt collection attorneys have their own unique terms and jargon. Once a credit department hires a collection agency or an attorney, it is important for everyone to understand the terms and principles being used. This section will focus on defining the terms and principles used by agencies and debt collection attorneys.

Agencies are specialists in collecting or settling claims alleged by one individual or company against another. Two kinds of claims exist: commercial claims and retail claims. A commercial claim is a business-to-business obligation which has resulted from goods sold or leased, services provided, or monies loaned to a business for commercial use. A retail claim is a consumer obligation incurred for personal use.

While many commercial claims relate to unpaid invoices, this is not always the case. Sometimes commercial claims can relate to lease or security agreements or other business transactions. Because of the variety of circumstances which can result in commercial claims, the agency must be versatile and informed on the legalities related to each specific type of claim.

A forwarder is the creditor’s agent who turns claims over to debt collection attorneys. Attorneys, commercial collection agencies or credit insurance companies can be forwarders for a company. The attorney to whom the claim is given is the receiver.

Forwarders typically turn claims over to an attorney because the forwarder has been unable to collect payment and the debtor is located far enough away from the forwarder to make it impossible to pursue legal action at the local level. Once the forwarder turns the claim over to the attorney, the creditor becomes the client of the attorney and any further correspondence between the attorney and the creditor goes through the forwarder.

The fees charged for collection services are unique to each individual agency as are the fee structures. Below are some common examples of collection agency and attorney fee structures:

• A commission is paid by the creditor to the forwarder upon successful collection of the outstanding commercial claim. The commission is usually contingent upon the successful collection, and is usually a percentage of the total amount collected.
• A retainer is an upfront payment of a specific dollar amount to retain the services of an attorney. The retainer is included in the total fee ultimately charged for the services provided and the collection results attained.
• A suit fee is paid to the attorney for legal services provided by the receiver on your behalf to persecute a commercial claim. The suit fee is applied to the litigation costs including any proceedings occurring after the judgment. If a counterclaim is filed, the fees for this are considered separate and typically require a separate fee arrangement.
• Court costs include costs associated with the filing and process and witness fees. The creditor should always approve out-of-pocket costs before they occur. Typically the attorney absorbs normal operating office costs such as telephone calls, photocopying, postage, and skip-tracing efforts.

Once a credit department determines that it cannot collect an outstanding debt, there are other third party options besides hiring a collection agency or debt collection attorney. Mediation and arbitration are two such alternatives. The final two articles in this six part series will focus on these options.

Mediation

Once a credit department has determined that internal debt collectors can not collect a delinquent account, hiring collection agencies is one option they might explore. Another next step in the debt collection process might be to go to mediation. Mediation is an example of alternative dispute resolution (ADR). ADR is a way to resolve a dispute without having to bring in an attorney. Mediation involves bringing in a professional facilitator who works with the creditor and the debtor to reach a satisfactory settlement. This section will focus on mediation as a way to settle disputes.

When a company and a debtor are in a dispute over delinquent accounts receivable, they can choose to go to mediation and bring in a facilitator to help with the negotiation of a settlement. The mediator’s role is purely as an advisor. The mediator may make suggestions and observations; however, the ultimate resolution of the dispute is up to the two parties involved. All mediation proceedings are conducted in private and are completely confidential.

The true purpose of mediation is to try to avoid going to court. The hope is that with the help of a neutral third party, the opposing sides will be able to reach their own solution. In some states, mediation is a requirement prior to filing a case in small claims court. In many other states, mediation is optional but highly recommended by the courts.

When a case is filed in small claims court, the county clerk may automatically assign a mediator to the case, or mediation may be strongly encouraged. Often mediators are available and located right there at the courthouse. If not, the court may refer the case to a local mediator in the community.

In some cases, mediators will provide their services at no charge. In other cases, the court will pay the mediator a small fee. Mediators are trained to work with people in a dispute and help them reach a workable solution. Most mediators are not attorneys.

Because mediators have no real power in the dispute resolution, negotiation sessions tend to be less formal than a courtroom setting. Sessions tend to last anywhere from thirty minutes to several hours. Often, the more relaxed environment is helpful in promoting productive, non confrontational discussion, thereby encouraging the parties to work together.

A credit department might wonder what the point of mediation is if the debtor has exhibited a total unwillingness to come to terms up to now. Surprisingly, studies show that when two parties willingly go to mediation, the vast majority of the cases are successfully settled without having to go to court. Even when parties opposed to mediation are forced to mediate, many of the cases are settled. Mediation has been shown to be very worthwhile.

Interestingly, studies have also shown that parties who arrive at a resolution through mediation are more likely to be happy with the ultimate outcome than parties who proceed directly into the court system. One reason for this might be that people who arrive at a resolution with the help of mediation are more likely to pay their debt than parties who lose in small claims court.

Sometimes a credit department should proceed directly to court and bypass mediation. This would occur if the creditor is dead set on collecting every penny owed and there is no desire to continue the business relationship into the future. In this scenario, if the creditor wins in court, the dollar amount awarded might be higher than the mediated result. The creditor will still have to collect the debt, however, and this still may prove difficult if not impossible.

What happens if the credit department wants to go to mediation, but the debtor does not? As soon as the mediator is contacted about the case, he or she will typically contact the debtor and attempt to schedule a mediation appointment. Mediators are highly trained in convincing reluctant parties to give mediation a try. They are highly successful at getting the parties to the negotiation meeting, and from there, talking face to face with the help of the facilitator can have very positive results.

Collection agencies do not typically work with mediators. Professional debt collectors are skilled in negotiating on behalf of the creditor with the debtor. During the debt collection negotiations, agencies are in contact with the creditor to determine what an acceptable settlement is. Agencies will never agree to a settlement without the written consent of the creditor.

Arbitration

Collection agencies offer credit departments one option for third party help with accounts receivable collections. Another option open to credit departments is arbitration. Arbitration occurs when a dispute is presented to an individual impartial person or to a group of impartial people for a binding final decision. This section will focus on arbitration.

Arbitrators can be business people who are experts in a specific industry or similarly qualified attorneys. The arbitrators determine the type of disputes they are willing to hear, the range of dollar settlement they are willing to handle, and the specifics of how the arbitration process will proceed. Similar to mediation, the arbitration process is less formal than the courts. Because the parties in arbitration have agreed to abide by the final binding decision, few arbitrated cases ever make it to court.

Why do creditors choose binding arbitration? Most creditors and people in general do not want to be faced with a lawsuit. Lawsuits are costly, time consuming, can be contentious, and can create unflattering publicity. If appeals are filed, long delays are common, and payment may be dragged out indefinitely. Arbitration is usually timelier, less costly, and the decision is final. Here are some other key points about arbitration:

• Arbitrations are much faster than going to court. Courts are overwhelmed with criminal cases and insufficient budgets. Speedy processes are not a bailiwick of the court systems. Appeals can slow things down even more.
• Arbitrators are experts in the industry or subject matter of the disputes which they arbitrate. Therefore, they are better able to sift through the data, understand the salient points of the dispute and render fair and satisfactory decisions.
• Arbitration is conducted similarly to a business meeting. It is more informal than a courtroom, with parties to the dispute telling the arbitrators their sides of the story.
• Arbitration is totally private and confidential. No news articles will be written about the proceedings.
• Because the arbitration process is so much faster than going to court, a lot of money can be saved. Arbitration eliminates the need for many of the court filings thereby saving legal fees associated with drawing up papers and filing motions.
• Binding Arbitration decisions are final. The decisions are legally enforceable. The court system upholds the arbitrator’s decision and does not question the result as it relates to the law.

Formal arbitration is not a function of collection agencies. Collection agencies are experts in accounts receivable collections. They work directly with the debtor and attempt to collect the entire amount owed. They go into every debt collection attempt with the expectation that they will collect all the monies owed. Because of their expertise and mindset, they have a very good debt collection success rate. There are several third party debt collection options available to credit departments. Each accounts receivable collection has its own set of challenges. Which option will be optimal will vary from one case to the next. A job of the credit department is to be able to determine which option will get the desired result at the lowest cost. In this case, the cost can be defined as time as well as dollars.

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