I had a conversation last week with a client about the value of collectors and debt collection agencies, comparing use of collection services with the use of in-house collection efforts and hiring of an attorney.  This is a very interesting topic, but unfortunately not one with a concrete answer.

What’s The Different Between Collectors, Attorneys and In-House Efforts?

The first order of business is to compare and contrast the services and costs of collectors, attorneys and in-house employees. Let’s start with a chart I’ve prepared comparing what I consider to be key offerings in the collections context:

Chart comparing the services offered by collection agencies, attorneys and in-house departments that can help you company collect its debts.

There are other key differences between these parties, of course, such as a lawyers ability to give your company legal advice and confer with you about legal interpretations that may help your case. At the beginning of the debt collecting process, however, some of these abstract legal questions mean nothing to your company’s underlying goal: to collect the debt.The chart I’ve created above analyzes key parts of the debt collection process, and not the litigation process.

As you can see, a collector is a great source to make initial phone calls and demands for the debt, to communicate to the opposing parties that you are serious about pursuing the debt and to do credit reporting.  In-house collection outfits can make demands for payment, but they are sometimes treated less seriously than an attorney or a debt collector.  As far as attorneys go, they are needed when its time to file suit and get into the legal nitty-gritty, but not necessarily the most cost effective option or very good at true collection efforts, like constantly contacting the debtor and reporting them to credit agencies.

Each of these collection options have their own pros and cons.  Who to choose will boil down to what the situation demands.

Comparing Cost of Attorneys and Debt Collectors

No one works for free, and that’s true for debt collectors. While debt collectors can charge for their services in a variety of ways, collectors usually charge a commission for their services.  If they aren’t successful at collecting there’s no fee, but if the collector is successful, the collector receives a percentage of the amount collected for its fee – usually 20-30%.  For obvious reasons, the higher the debt the more negotiable the commission.

The question boils down to whether a debt collector is worth this expense.

When speaking with my client we were using a $50,000 debt as an example. He wondered whether a collector’s service was justified at the 20% commission rate when he could hire an attorney on an hourly basis to make some initial demands and work the file.  After all, 20% of $50,000 is $10,000.  At $300 per hour, that’s 33 hours of attorney work.

The customer makes an excellent point. As mentioned at the top of this post, however, there isn’t an easy way to break down this decision.

Of course, if the collector makes one phone call and collects the debt, the $10,000 fee is high.  Nevertheless, this is an unlikely scenario given that the debt was so difficult to collect that you sought a collector’s services in the first place. Instead, consider the following factors:

  1. The debt may never be collected.  Collectors bear this risk and when an account is a true dead end, it’s the debt collectors and not you to swallow the costs in attempting to collect the debt;
  2. 30 hours of work goes fast, especially in the legal world.  Your attorney will do a few research memorandums, will make a few phone calls, will send a few letters and will start drafting your lawsuit. You’d be surprised at how quickly this adds up.
  3. Attorneys are in the business of filing suit and not making repeated attempts to collect debts.  When you send your account to an attorney to collect, he or she is likely to start preparing the thing for litigation, which will very easily eclipse your $10k / 30 hours budget.  Even though the litigation might ultimately be successful, you may have been able to collect on the debt faster and for less with a collector.
Each situation will be different.  Depending on how close you are with the opposing parties in reaching a settlement, simply having an attorney write a letter may be enough to push the debt along.  Sometimes you’ll have a good feel for these variables, and other times you’ll be completely in the dark.  Unfortunately, there isn’t a concrete way to know whether to send something to a collector or an attorney.  Nevertheless, debt collector services are worth it, as below explained.

Why Debt Collectors Are Worth It

Debt collection services gets a bad reputation. Unfortunately, it’s a deserved reputation, as the industry is riddled with rogue collection agencies and dishonest employees.
Nevertheless, if you wade through this clutter you’ll find a group of strong and reputable agencies that offer very helpful services.  Consider this “Open Letter To Rogue Debt Collectors and Bad Employees” to get a feeling for the friction between good and bad collectors in the industry.
Here is a list of things that debt collectors are great at, but attorneys suck at:
1.  Reporting businesses and individuals to credit bureaus.  Reporting a debtor to credit bureaus and threatening to do so is a very, very effective collection technique.  Collectors do this all of the time, and attorneys very rarely do it.
2.  Debt Collectors are great at keeping track of accounts, calling debtors, following up with debtors, repeatedly contacting debtors with letters and phone calls and moving forward on files and promises by debtors to pay.  Attorneys suck at this. Attorneys are good at filing suits and managing litigation (most are, anyway).  They are not in the business of calling debtors over and over again, eliciting payment promises from them, and the like.  Sometimes, however, this is all your debt needs to get paid.
3.  Debt collectors can have candid conversations with debtors. Attorneys, however, almost always cause the opposing parties to tense up and shut down communications.
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