Chapter 13

Bringing in Outside Collections Professionals

In This Chapter

Hiring a collections professional

Understanding what professionals can do for your case

Finding qualified professionals

Budgeting for professional services

Firing a bad professional

Debts aren’t fine wine, and they definitely don’t become more enchanting with age. The older a debt gets, the less collectible it becomes. Sometimes you need to call in the reinforcements: debt collection professionals.

But how do you figure out where to find professionals, what credentials to look for, which one to hire, and how the system really works so you can get your money’s worth? How do you make your collection professional an extension of your in-house collection team — the next logical person to turn to when the going gets tough? That’s what this chapter is all about.

How Outside Debt Collection Professionals Can Help You

An entire industry exists to help you collect money that’s owed to you. Debt collection firms operate around the world and offer an array of services.

Most debt collection companies prefer to become part of your collection team instead of being perceived as outside contractors. Depending on the scale of your operation and your needs, debt collection services may propose to

Have their people work at your company.

Answer phones under your business name.

Process forms and paperwork to facilitate billing and collections, such as completing and filing forms for payment from insurance companies.

The purpose of integration is to save you money by having the professional service perform much of your collection work so you don’t have to hire and train your own staff.

If you’re a do-it-yourselfer, involving a third party for assistance in collecting your debts may feel like defeat. Don’t let those feelings deter you from bringing in a professional in a timely manner, before your debtor goes out of business or files for bankruptcy, or your debt otherwise becomes uncollectible.

Considering your options

Professional debt collectors come in two flavors: collection agencies and collection law firms. Collection agencies typically handle all collection matters up to the point that a case goes to court, and collection law firms typically pick up cases around the time they appear destined to court. Some professional debt collectors offer one-stop shopping, providing a broad range of services, from pre-collect services to collection lawsuits. Others may provide only specialized services, such as contacting debtors to make demands for payment.

Whether you hire a collection agency or a law firm, you find that many professionals focus on particular types of collections. For example, some professionals specialize in

International collections.

Regional collections, such as the Northeast or Southwest regions of the United States, or even a single state. (In the case of law firms, licensing issues often limit them to collecting in a specific state.)

Consumer collections only, or commercial collections only (although many collectors handle both).

Specific litigation services, such as repossessions, claim and delivery actions (seeking court orders to recover secured assets), or bankruptcy representation.

Collections for a particular industry, such as insurance, medical, common carriers, sporting goods, electronics, or clothing.

Needless to say, you have a lot of options if you decide to round out your collection team with professionals, or if you simply want to let professionals handle most or all of your collections needs.

When choosing a collection agency, consider how its size and services correspond not just to your immediate needs but also to the expected growth and future needs of your firm. Bigger agencies may offer more options, but a smaller agency may be better able to shape its offerings to your specific needs and to grow with your business.

Selecting a professional

When you approach a collection professional, she should try to anticipate your needs, asking about the type of business you operate; whether your business is regional, national, or international in scope; who your debtors are (and whether they’re primarily commercial or consumer); and what types of services you’re looking for. If you don’t know what services you need, the collection professional should happily provide you with Web site links, brochures, and detailed explanations of the services she recommends for your company and what those services cost.

Characteristics of a good collection service

How do you separate good debt collection professionals from mediocre ones? Here are some signs to look for:

One-stop shopping: You don’t want to search all over the country for professionals that provide different kinds of services in different locations. Find a debt collection professional that offers all the services you need in the locations you require, including national or international services.

Bricks, mortar, and people: Check the debt collector out, perhaps even in person. Ask him questions, and get references who can tell you about his services. What does the service look like? What type of people work there, what computer systems and other technologies do they use in their collection efforts, and how responsive are they to emergencies?

Meaningful reporting: Whether you want reports on individual collections files or a bulk report listing all the claims you’ve placed with the service, a good professional tailors reports to your needs. When you work with your debt collector, specify the information you require and how you want it presented. You want information you can use, not a bunch of fluff reports with information that’s not helpful.

Prompt communication: And I do mean prompt. When you need updates or status reports or favors, good professionals are at your beck and call.

Alerts: Good debt collection professionals alert their clients to potential conflicts of interest and to developments that may affect their credit policies or collection efforts.

Information on other claims: Within the bounds of confidentiality, what does the professional know about other claims against your debtors?

Remittances on collections: When do you need to receive payment on collected accounts? Collection professionals usually provide remittances on a collection-by-collection basis, but depending on the volume of claims you place, they may be done in batches, once or twice per month.

Good percentage of recovery: How often does the collection service settle claims versus collecting accounts in full? If you authorize your collection agency to settle cases for 80 percent of their value, will it settle every case for no more than 80 percent or continue to try to collect 100 percent? Also, how much does the collection service recover as compared to the total value of accounts placed with that agency? So many variables affect percentage of recovery that you can’t find standard answers to these questions, so be your own judge: Keep statistics for each of your collection professionals and compare their performances over time.

Recommendations: Your debt collector should provide sound recommendations on handling collection files, working with particular debtors, and accepting (or not accepting) settlement offers made by debtors.

Trustworthiness: Can you rely on your collection professional’s advice? Over time, has the advice turned out to be good in maximizing recoveries, or is your debt collector just out for a quick fee?

Legal compliance: Your professional should scrupulously follow state and federal laws, as we describe in Chapter 6.

Remember that your debt collection firm is there to serve your needs. Don’t hesitate to ask for the reports and services you require.

When you hire a professional for litigation, that professional requires a broad set of skills, as we discuss in Chapters 16 through 19. These chapters provide an overview of the litigation process that helps you evaluate the competency of debt collection law firms. We also provide a sample attorney fee agreement on the CD accompanying this book (Form 13-1) and a sample remittance of moneys collected (Form 13-2).

Treat the hiring of a professional collection firm as an interview process in which you’re choosing between a number of applicants, some of whom are better suited for your needs than others. Just as with job applicants, references are important. Get feedback from your business peers: Who have they hired to assist with collections, and what were their experiences?

Helpful organizations

Many debt collection services are members of professional organizations. These organizations serve both collection agencies and law firms, help educate and support their members, and can help connect you with a qualified member who can serve your collection needs. Organizations include:

International Association of Commercial Collectors (IACC; www.commercialcollector.com): Members assist with both commercial and consumer debt. Click “Find an IACC Member.”

Commercial Law League of America (CLLA; www.clla.org): Members assist with both commercial and consumer debt. Click “Find a CLLA Professional.”

Association of Credit and Collection Professionals (ACA International; www.acainternational.org): Members assist primarily with consumer debt matters. Click “Find a Member.”

To find commercial or collections attorneys, lawyers often use the Martindale-Hubbell directory (www.martindale.com).

A quick visit to these organizations’ Web sites provides a tremendous amount of information about the organizations and their membership and allows you to quickly locate collection professionals near you and your debtors.

Determining what services you need for your claim

To put it simply, you can find professionals who will provide any service you need that relates to the collection of your accounts. In addition to what you normally think of as collections — contacting debtors to get payment on delinquent accounts — collection professionals offer some or all of the following services:

Pre-collect services: Routine services, such as billing and follow-up, which occur before the invoices are delinquent.

Billing services: Implementing systems to produce and submit bills to those responsible for payment. This type of service is often used by medical professionals to set up systems that bill insurance companies and follow up with patients for any amounts the insurance companies don’t pay. When more than one person or entity is responsible for payment of portions of a bill, having a professional service set up your billing system can be an enormous benefit.

Document and form filing: Setting up systems to properly complete and file forms requesting payment. As with billing services, this type of service is most often used by medical professionals to ensure proper preparation and filing of insurance forms and similar claims forms. This service can also be useful in other trades to create systems to properly prepare and perfect construction liens and security interests, as we discuss in Chapter 3.

Skip tracing: Helping you locate a missing debtor. We discuss skip tracing in detail in Chapter 12.

Credit reporting: Reporting delinquent debtors to credit bureaus shouldn’t just be a threat you make to delinquent debtors — it should be a promise. Debt collection professionals can provide these services if you prefer not to handle credit reporting in-house.

Credit interchanges: Wouldn’t you like to know how a particular account of yours is paying other creditors? Wouldn’t you like to know how some of your accounts pay their bills overall, not just to you? A credit interchange involves the exchange of credit information among companies operating in the same industry, and it can often provide reports about your customers’ payment patterns.

Credit repair: Although your goal is to collect money from debtors, some of your debtors were once good customers whose paying habits deteriorated. They may come to you seeking help to repair their credit, to pay off your account, and to try to get their feet back on the ground. Some debt collection professionals provide services to help debtors correct their credit histories and improve their credit scores.

You can stick to the bare bones or put together a comprehensive package of services — whatever suits your needs.

If you know that a debtor won’t pay voluntarily and that a collections lawsuit will be required, tell your collection professional up front so that the matter proceeds directly into litigation.

Deciding When (Or Whether) to Bring in the Pros

Far and away the biggest mistake credit executives make is to wait too long before engaging collection professionals. The older a debt gets, the more difficult it becomes to collect. Here, as with other collections decisions you make, you need to define a line in the sand, the point past which you don’t believe you’ll be successful in your collections unless you bring in an outside professional. That line may vary depending on the size of the debt or the complexity of the collection. You may be comfortable taking smaller debts to small claims court yourself — as we describe in Chapters 16 and 17 — but prefer to rely on professionals for clients who owe larger sums of money.

When you bring in a professional, you know you’re giving up some money. However their fee is calculated, professionals receive some portion of the money they recover. But you’re past the point of recovering profits; now you’re really trying to minimize your losses. You may be tempted to hold onto a collection file as long as possible to avoid the professional’s fees. On the other hand, 100 percent of nothing is still nothing, and you’d most likely rather have two-thirds of something than 100 percent of nothing. That’s the way professionals see it.

No hard and fast rule dictates when to bring in a professional. If you’re using a traditional collection agency or law firm, conventional wisdom suggests bringing in the outside professional approximately 90 to 120 days after the debt becomes delinquent. Look at it this way: After 90 days pass without a payment being made, your debtor has already ignored several attempts by you to collect the debt. As time passes, delinquent debtors become more and more confident that you aren’t going to follow through with your threats and that they can safely ignore you.

Factors that may affect your decision

Of course, no general rule suits all businesses. Factors that may influence your timing include

Economic trends in your industry. If your industry is experiencing a downturn, you may benefit from early involvement by a professional.

General economic conditions. Similarly, when the economy as a whole is worsening, early collections efforts may help you recover before troubled debtors run out of money.

Competition in your industry. If you face a lot of competition, your customer may be taking advantage of the situation by running from one supplier to another, running up big bills and leaving them unpaid. If you delay in pursuing collection, your competitors may beat you to the punch and, by the time you get around to it, the customer may have no funds left to pay you.

Requirements of your auditors or banks. If you’ve obtained loans against your receivables, professional collection services may help you keep your accounts current and satisfy lenders that your accounts are sound and that you remain creditworthy.

Factoring companies or receivable insurance contracts. Similarly, if you finance factor or insure your receivables, collection professionals may help you fulfill your contractual obligations relating to your accounts.

Collection professionals can make specific recommendations about when you should refer a debt to collections based on their knowledge of your industry and their collections experience, both in general and involving debtors similar to your own. When you evaluate how soon to send debts to your professional, her recommendations and advice can be invaluable.

Cost considerations: Should you write off the debt instead of turning it over?

Why should you pay $100 to collect $50? Good question. It doesn’t make any sense to overspend when collecting accounts receivable. The costs of collection should never exceed the receivable’s full value.

If you’re paying a debt collector by the hour, the cost of collection can easily eat up the money you recover. The good news is that most collection professionals will assist you on a contingency fee basis, taking a percentage of the amounts they recover as their fee. Whether they take 10 percent or 50 percent of your claim, you get the remaining percentage. Make sure you understand what the contingency fee covers, because some services may come at an additional price. For example, even if your law firm represents you on a contingency fee basis for your claim against the debtor, it may charge additional hourly fees for defense of counterclaims.

If your case goes into litigation, you incur collection costs in addition to the fee payable to your collections professional. Lawsuits cost money, so be sure to discuss your litigation budget with your law firm before the lawsuit is filed. Filing fees may be modest in small claims court but may amount to hundreds of dollars, depending on the claim’s size and the court used. Additional fees associated with litigation include witness fees, deposition costs, and transcript costs.

You may incur costs beyond your collector’s fee in other special situations. For example:

Bankruptcy: The debtor files for bankruptcy, and due to the nature of your claim, rather than your filing a simple claim, specialized litigation becomes necessary.

Liens: You need to foreclose on a lien.

Defense of counterclaims: Your debtor files a counterclaim to your collections suit, as we discuss in Chapter 15, and you must pay the costs and fees of defending against that suit.

Although contingency fee arrangements are popular and prevalent throughout the United States, they’re not standard in all countries. In your international collections, you may find that some debt collectors insist on an hourly fee rather than a contingency fee.

Providing information to your professional

After you’ve chosen a professional and are ready to forward the claim to him, gather every relevant document in your collection file (from the credit application to the final invoice or statement of account), organize them logically, and send a packet of them to your collector. The first page of your packet should be a placement form, a cover sheet that makes it immediately clear to the collector that you are forwarding a new claim for collection as opposed to providing additional documentation on a claim previously forwarded. The placement form also puts at your collector’s fingertips information necessary for effective collection of the account, including

Name, address, phone, e-mail, fax, and contact person for both the debtor and your company.

Exact balance owed. Separate accumulated interest from principal balance owed.

Banking connections, if they’re different from what appears on the credit application.

Results of contacts (admissions of the debt, promises to pay, disputes raised). You may want to include a copy of your phone log with the packet you forward.

Any other information you believe will help your professional get a running start, such as knowledge of businesses affiliated with the debtor, any branch locations, alternate phone numbers (such as cellphones), or special circumstances of this claim (for example, the claim represents an overpayment to the debtor who refused to return the funds).

When you forward a new claim to a collection professional, always use some sort of claim placement form as a cover sheet. Doing so shows that you’re well organized and avoids a potentially confusing exchange with your professional about what the forms are for.

If you’ve established a computer connection with your professional to upload and forward your claims electronically, the fields of data you enter (items of information such as debtor’s name, address, phone, balance owed, and bank account) show up neatly on the computer screen at your professional’s end so that he can work on the claim immediately. Documents may be forwarded as attachments, typically as PDF files.

The CD contains a claim placement form (Form 13-3). If you have retained a professional collector for a single account, the placement form may contain information similar to that you provide in your contract with your professional. However, your contract is focused on the obligations between you and your collector, and the placement form is focused on providing information about the claim itself.

Avoiding and Resolving Problems When Working with Collection Pros

Believe it or not, if you follow the suggestions we provide earlier in this chapter about selecting your professional, you’re unlikely to have problems with an outside service. The contracts that collections professionals use are usually quite clear, and disputes over their terms are infrequent. The key to avoiding disputes is a clear fee agreement that describes what services the professional will provide and what they cost.

In addition to cost and payment, when retaining a professional service, you should address the following issues:

Confidentiality: The service’s duty to keeping information confidential as required by law, including HIPAA if the accounts relate to healthcare.

Professionalism: Standards of conduct the service must meet when handling accounts and contacting debtors.

Ethics: The service’s obligation not to engage in unethical or other objectionable activities in handling accounts.

Communication: The service’s responsibility to keep you informed on the status of accounts and to respond to your inquiries.

Don’t underestimate the importance of good communication. The most likely sources of dissatisfaction with your collection service are the breakdown of the flow of information and your inability to get a timely response to messages left by phone or e-mail. A good collection firm keeps information flowing and promptly responds to your inquiries. Overworked or sloppy debt collectors tend to do the opposite, and they may leave you feeling like your accounts have been dumped into a black hole. If you can’t establish and maintain good communications, you need to consider using a different firm.

Get it in writing: Entering into a contract for services

You want to make sure you have written contracts with your collections professionals. You may enter into contracts on a claim-by-claim basis, or you may sign a contract that defines an overall relationship with your professional, perhaps to be renewed annually. Your contract should include provisions detailing what services you’re using and what they cost so that both you and your professional know exactly where you stand before your relationship begins.

The collection industry is highly competitive, and you can expect competitive rates. You may agree to pay professionals by the service, by the hour, or on a contingency basis, where their fee is a percentage of the amount they recover. A contingency fee agreement should describe

When and how amounts recovered are to be remitted: For example, your agreement may require that payments by check be remitted when the debtor’s check clears the bank, or, for a certified check, immediately upon receipt. If the service is collecting multiple accounts, you may choose to schedule payments of remittances (for example, biweekly or monthly) rather than separate payments for each remittance.

Costs chargeable to you: If the debt collector charges costs in addition to the contingency fee, the contract should describe what costs may be charged and provide a proper accounting to you. For cases that go to court, expect to pay certain litigation costs like filing fees, deposition fees, and subpoena and witness fees.

How remittances will be paid: Will your service pay you by electronic transfer, or by ordinary checks delivered by mail or overnight courier?

Before you hire a collections professional, figure out what services you actually need and what each service costs. You can make adjustments as you proceed, but you can avoid unnecessary sticker shock by paying attention to these details before you sign on the dotted line.

Establishing standards of ethics and behavior with your collections pro

When you hire collection professionals and include them on your collection team, you assume responsibility for the professionals to be, indeed, professional and ethical in their services. But at the same time you give up some of your control — perhaps a lot of your control — over the collection.

Beyond the possibility that your collector’s misdeeds may frustrate your ability to collect a debt or trigger a counterclaim, her actions are being taken in your name. The type of service you use to collect your debts will reflect on your business, and every time you place a claim with an outside collector you put the reputation of your company on the line.

By nature, the collections business is adversarial. Debtors don’t like to pay debts, and nobody likes to be confronted with aggressive collection efforts. Not all collectors act ethically or legally, and those problem solver-type news segments love to showcase abusive collection tactics. Your company doesn’t want to find itself at the center of adverse publicity as a result of a debt collector gone haywire.

But it’s actually not hard to find an ethical, responsible debt collector. Consumer laws such as the Fair Debt Collection Practices Act arose from the misconduct of a few irresponsible, abusive debt collectors, not the majority. These consumer laws, which we summarize in Chapter 6, have cut back abuses. Scrupulously following these laws, even when they don’t apply, can help ensure professionalism and avoid misunderstandings and other problems.

Unless you negotiate specific file handling procedures, your collections professional operates in accordance with his own standards. When you desire a more restrictive standard of conduct, don’t hesitate to instruct your collector to follow your standards. For example, you may limit the number of demands that he makes to a debtor before filing collection litigation.

You should be comfortable that your outside collectors are well-trained and professional and will handle your customers (debtors) with dignity. None of those hallmarks of professionalism are incompatible with aggressive debt collection. The bottom line is that you want your collection professionals to follow a standard of ethics that’s as similar as possible to the ethical standards of your own business.

Giving your professional an organized file

The more information you can provide to your debt collector, the better. We discuss collection files in detail in Chapter 3, and your file should include all the documents and notes we cover in that chapter. Just as with your in-house efforts, a complete, accurate file is key to success when you’re working with a collection professional.

Ideally, your files are organized such that you can quickly duplicate copies of all pertinent documents and provide them to your debt collector. Sort the documents in order of importance. The most important document describes the exact balance due from the debtor at the time you place the claim with your professional. Typically, that’s a current statement of account.

Talk to your collections professionals about what documents are helpful to them. Some professionals appreciate receiving a claim placement form, such as the one we provide on the CD accompanying this book as Form 13-3.

Deciding when to cut and run: Terminating the relationship

Withdrawal of claims isn’t always about cutting and running. Sometimes you have an up-front understanding with your collection agency that, if no collection occurs within a specific time frame, you no longer require their services on a particular account. Sometimes, everybody knows it’s time to give up, such as when a debtor enters bankruptcy and the amount you receive (if anything) is resolved through that process.

Sometimes, due to performance, legal, or ethical reasons, you should break your relationship with a debt collector. Most of the time, the signs are pretty clear:

Debts aren’t being collected.

Reports aren’t being received.

Calls aren’t being returned.

It may not be just one thing. Perhaps your professional seems to be a million miles away in terms of availability, accessibility, and overall communication. If you sense that it’s time to find another debt collector, trust your instincts. When you’ve seen enough symptoms of trouble, change may be the prescription that you need to fill.

Sometimes the withdrawal of a claim can be a real sticking point. That’s most likely to be the case when your debt collector is working on a contingency fee basis. The longer the collector keeps the claim, the better the odds of earning a fee. Your collector may perceive your taking the debt in-house as an attempt to capitalize on all the work she has performed on the file without paying her for any of that work.

How to file complaints for poor service

If the relationship between you and your collections professional becomes so strained that you want to file a formal complaint alleging unethical conduct, missing money, lack of communication, or other problems, keep these points in mind:

If your claim was placed through a law list, the law list handles your complaints.

If your professional is a lawyer, you can file a grievance with the bar association in the state where your professional is licensed to practice law.

If you located your service provider through a professional organization such as the Commercial Law League of America, that organization typically has a process for receiving and resolving grievances against its members.

By virtue of licensure, memberships, or both, any decent collections professional is subject to some form of grievance process.