Accept a Discount or Long-term Payment Plan: A Real Life Example

All too often during the collection process our clients need to consider which is best for them, a lump sum payment with at a significant discount of what they are owed or a long-term payment plan for the full amount. We always want to collect 100%, but that isn’t always the right business decision for our clients. Our clients look to us for recommendations. A recent email exchange shows how we look at the situation.


Our client is an international company specializing in architectural technology. Their customer originally owed them over $77,000 but there was a dispute. We initially negotiated a long-term payment plan that gave the debtor a $17,000 discount if they paid off the remaining $60,000 over 20 months. They paid $23,000 but then defaulted in March, going three months without making any payments. The remaining discounted balance owed was $37,000 while the default amount owed was $55,000. After months of not getting any response, we learned that their head of accounting had recently had a heart attack and the company was now using a consultant in their finance department.

Current Situation: Lump Sum or Payment Plan?

In talking with the consultant, I realized there was potentially a possibility to get a lump sum payoff if our client was willing to give another discount. I knew this would be painful for our client, but it still might be the right business decision.

Why? There is always risk that a debtor won’t complete a long-term payment plan. During a pandemic that risk is even higher and had already caused a default. We also knew the debtor had been struggling financially for a couple of years before the pandemic and recession. The debt was 18 months old. Knowing that Covid-19 is still out there, able to cause economic shutdowns at any time, makes waiting on receiving money riskier than normal.  

Our client was naturally concerned that having already given a discount on the amount they owed, and needing to deduct our fees (collected on contingency), the numbers no longer made sense. They balked at considering a change to the previously negotiated payment plan.

My Rationale for Evaluating Options

Here’s my actual client report:

“I completely understand your concerns. If we collected another $20,000, we would keep our contingency rate at 15% (technically it should go to 20% because it falls into a different price category, but we’ll hold it), so that would be $3,000 and you would net $17,000.

We have already collected $23,000, from which you netted $19,550.  So if we collect another $20,000, that would be a total net of $36,550.  If we could get them to $25,000, then your incremental net would be $21,250 for a total net of $40,800.  

The original principal amount owed was $77,770, so that would be a net recovery of a little over 50%.  I realize that’s not great.

However, at this point, the way I look at these things, the numbers above are somewhat irrelevant.  For me, the focus is a risk/reward scenario.  I see three main options:  1)  Sue for the full $55k in remaining principal plus interest, with the contingency rate increasing to 35% and paying $1,500 up front in legal costs.  We probably won’t collect any more money until 2022 (more than 18 months from now given how backed up the courts are) and who knows whether they will be around to pay and how long it will take to collect that money once we get a judgment;  2) Restart the $3,000 a month with a 15% contingency rate on the remaining $37,000 due under the settlement agreement.  So a payment plan that goes through June of next year, but in all likelihood could take 2 years if COVID causes more lockdowns, or 3) Try to get $20k to $25k now (at 15%) and avoid the risk of not getting paid under scenarios 1 and 2.

Those are the 3 choices.  How we got to these 3 choices doesn’t really matter.  Most of our clients are choosing the least risky option right now, either because they have a need for more cash inflow or they believe the risk is very high on long-term payment plans with certain debtors.  However, they do choose more risky non-litigation options if they think the probability of their former customer staying in business long-term is high and they don’t need the cash.

I hope this analysis helps with your evaluation.  Let me know if you have questions.”

What Happened?

What did our client choose? Did they go for the lower lump sum or decide to pursue a monthly payment plan? In this case, they decided that if we could negotiate a $25,000 final payment they preferred that to the risk of a longer term payment plan or the costs and delay of going to court. Fortunately we were able to make this happen for our client.

At The Kaplan Group we are always available to talk through your options and explain our thinking on the best course of action. We consider not only the amount of money owed, but also your sector and the economy in general when making recommendations. Call us to talk through your options.

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