What is Legal Collections?
When an individual or a business owes money, the legal collections process kicks in. Legal collections refers to the legal measures that are taken to get back unpaid money from debtors, whether they are individuals or other businesses. For businesses and individuals alike, legal collections is a last resort. Lawyers or other third parties go after debtors who haven’t paid up despite active attempts by the creditor to be paid. Often, a creditor will have exhausted all means of personal requesting payments before enlisting the help of a lawyer to compile all information possible about the debtor and make official contact. A formal letter is usually the first step. If there has been ongoing communication about the debt and a debtor has consistently ignored it, they will often respond to the lawyer’s letter, as it’s more serious in tone and sometimes gives the debtor a chance to settle the debt out of court. After the letter, phone calls and emails continue. When all else fails, a lawyer may decide to file suit against the debtor, depending on the amount owed and other factors . Whether a lawsuit is filed or not, this whole process occurs over time, and can even take years, depending on the cooperation of the debtor. The legal collection process can be lengthy, especially in the case of unpaid loans, as debtors may need to be given a chance to repay their debts over time. Other factors that can slow down the process include how long the debt has been outstanding and whether the creditor has had long-term communication with the debtor before bringing the case to legal attention. Assets and debts are sometimes at the heart of further collections cases that come about as a result of another lawsuit filed under the legal collections umbrella. A creditor may try to get a court to put a lien on a debtor’s property if they are unable to recover the amount of a judgment. Creditors have other options for collecting their debt against individuals and businesses, but it’s important to recognize the investment of time and money that legal collections requires.
The Laws Regarding Debt Collection
A lawsuit to collect on a delinquent account is an adversary proceeding filed in the bankruptcy case. In an adversary proceeding, the debtor has 30 days to file an answer to the complaint. If an answer is not filed, a default judgment can be entered. If an answer is filed, an answer to the complaint and a counter-claim can be filed by the creditor. Compliance with all applicable debt collection laws is crucial to all law firms who collect debts on their behalf or on behalf of their clients. Most states have their own debt collection laws and the Fair Debt Collection Practices Act (FDCPA) governs the collection of consumer debts. If the FDCPA applies to a debt, it supercedes all state debt collection laws. Collectors must be aware of the telephone calls rules (no inconvenient or harassing times and places), the form letter rules (specific disclosures and language are required), enforcing consumer rights rules (requests to validate the debt must be honored) and other consumer protection laws related to debt collection. Failure to obey the FDCPA results in liability for actual damages, statutory damages and costs incurred. There are no award limits in FDCPA cases.
The Process of Legal Collections
Initially the account will be placed with a collection agency and a demand letter will be sent to the debtor. The collection agency will attempt to make multiple contacts with the debtor to try and collect the full amount owed. After an extended period of time, if the account is still unpaid the account may be forwarded to a law firm for further collection attempts. The law firm will usually set forth in a demand letter the statutory consequences of the collection action. Typically at that juncture, the creditor will have a choice of whether to file a lawsuit or obtain a "judgment on the pleadings." The advantage of observing the latter is that an appreciable amount of collection costs will be avoided.
A judgment on the pleadings is a non-appealable order obtained within five (5) days of the filing of a Complaint for a sum certain. Many times you will see the initials "On-Pled" next to a case number noting that a judgment was entered "on the pleadings." Often, the mere filing of the Complaint for a sum certain has the same effect as the entry of a judgment. Regardless, whether the creditor enters a judgment or obtains a judgment on the pleadings, collection efforts will continue. Garnishment of wages and bank accounts will proceed and post-judgment collection actions could potentially include foreclosure actions for any real estate owned, levies and court appearances.
Problems with Legal Collections
One of the most common challenges faced by Attorneys and Collectors is debtors non-compliance. Generally, for every debtor there is a different, customized process put into place. The challenge comes in when a debtor does not comply with that process. Non-complying debtors can come in many forms. Some debtors refuse to respond to any offers of collection. Others will only respond but to offers of settlement. Others will respond requesting time to make payments, but will fail to comply with their own deadlines. Of course there are also threats from different individuals to try to scare off collectors from pursuing the debt owed, that have no basis in law. The second common challenge faced is dealing with expired debts. At times debts are so old that the statute of limitations to collect on them has expired. This can often come as a shock to one trying to collect the debts. But, the reality is that debts, like most things, cannot be milled over indefinitely. There are some options for collecting on these debts but they are more difficult than the other scenarios. The third challenge is the cost of litigation. Oftentimes the cost of initiating a suit and bringing it to a conclusion is far above the amount sought in collection. That being said, there are many options for assisting in the cost of suit against a debtor. Some people also simply do not sue because the odds say that they may lose. Those odds can be mitigated by careful and thoughtful drafting of the complaint and careful preparation of the litigation strategy.
Ways to Enhance Legal Collections
A proper plan of action should always begin with a solid client engagement and retention system. In other words, everyone in the firm should be well trained on the particulars of creating an effective retainer agreement with realistic provisions for payment of fees and expenses. A good retainer agreement is also a necessary component of good collections later. Obtaining a current credit report and checking for liens and judgments in advance can be extremely helpful to the law firm and the lawyer. It is amazing how much information is accessible without running afoul of federal and state collection laws.
After the engagement, establishing payment schedules by phone and in writing at regular intervals is also helpful to ensuring payment occurs or at least that non-payment will not occur without notice and with sufficient time to react. It is extremely important to maintain consistent documentation of all communications and remittances. After all , you must prove that you were timely and diligent in all dealings with the client. Not only does this help your position if you must hire a licensed collection agency or attorney later, but it can also help with disqualification arguments designed to have your firm disqualified for representation later in the suit by the other side.
Negotiating a settlement can also help when your client is on the verge of defaulting on payment. But careful care must always be taken in knowing what the financial situation is for the client and all those related to the client. An old rule is this: NEVER get between a dog and the lamppost. The same applies to a lawyer when their client is owed money. If you create a dispute with the person or entity who owes money to your client, they can see you as the enemy instead of the source of help. More generally, legal negotiations often hinge more on human psychology and good common sense than on legal technicalities. Finally, using some form of legal technology is almost always a good way to help with legal collections efforts.
Collection Agency vs. In-house Collections
In-house collection, or collection within your organization, is the most commonly used approach to collecting debts. This is often done by a department within your business, often known as the "Accounts Receivable Department" or "AR". Legal collections, or collection by a collection agency, has become one of the more common approaches for businesses. Legal collections can also sometimes be referred to as "debt buying" or "debt collection."
There are many pros and cons to both collection options. As always, it is important to keep in mind that these pros and cons change as time goes on, but are provided based on our previous experience and history.
In-house collections can often be the best option because It doesn’t include fees. These fees have been paid by the client and are factored into price, so the client can still collect the debt they are owed. You can have a dedicated person that collects the debt. They have the knowledge and experience in-house on how to collect it. They can also create an ongoing relationship with the client. In-house collections can also be helpful when your company needs to answer questions about the debt, and can explain the full picture to the client.
However, in-house collection may not be the best option in certain situations. Collection by in-house has a learning curve. Just like anything else, the more practice you have doing something, the more efficient you are at it. Oftentimes, the AR department for companies like this do not handle collection calls. So there is no reason for them to know the laws surrounding collections. By beginning in house collections, your company may be at a disadvantage to be able to collect the debt owed. In-house collection can also be very costly. It can take time away from AR’s other duties, which can lead to them needing to work overtime, or bringing in a temporary employee to help out. This takes away from the company budget. In-house collections can lead to your clients becoming offended easily. This can happen since the collections process can be uncomfortable for both the AR person calling, and the client being called. In-house collections can be stressful, and they can cause stress towards everyone in the company. This stress can cause an unhappy workplace. In-house collection may also make employees try to collect too quickly, because they want results now. Collections is a process, and it’s best to follow procedures so that your company doesn’t get hurt.
Collection by legal can have many pros. Legal collection could allow you to save money, because Often the amount owed is much higher, because a collection agency is able to waive legal fees if they are paid the full amount owed. Legal collection can be less stressful. Often, you don’t personally call the people, so it’s easier to keep your emotions out of the equation. Legal collection can also help educate your collection staff, since legal is very knowledgeable. A collection agency can also be a great motivator for clients to pay- they will want to avoid a lawsuit.
Legal collection does have many cons. Legal collection is time consuming. It can take 6 months to 2 years to collect a debt that would have taken in-house collection a couple of weeks. Legal collection is also cutthroat. If the client doesn’t want to cooperate or pay then it’s hard to persuade them. Legal collection means you can lose a client. Legal collection can become a time suck and can also have negative effects on your business. Legal collection can also cost a lot of money. It is very expensive to hire a law firm, and to keep them on retainer for 6 months.
Ethics in Legal Collections
The process of collections in the legal industry is bound by stringent ethical guidelines. These rules are meant to protect both clients and debtors. When it comes to collecting outstanding debts owed to a law firm, there are restrictions on how far an attorney can go to recoup the fees. This, of course, is in the best interest of the client and debtor.
Cases that involve individuals with reported financial difficulties may require special consideration. It is in your best interest to collect the amount owed, while still allowing your debtor time to get back on their feet. Similarly, attorneys must consider the best legal methods for recovering debts within the bounds of the law. Collection law varies by state, with many states enforcing limits on allowed procedures and requirements for collecting on debts. To that end, The Model Rules of Professional Conduct governs these actions. The biggest concerns of the Model Rules include:
Lawyers must adhere to the Ethical Rules when collecting debts. For instance , using deception to get a debtor to pay up can have dire consequences. In keeping with the spirit of this rule, lawyers must be clearly identified on all documents and correspondence related to the collection process. At no time may a legal practitioner communicate false information to a debtor or represent themselves as another person.
Many states have their own ethical constraints on lawyer-debtor collection communications. Some states require that lawyers obtain written approval from their Law Society in order to hire an outside collection agency. If your state has these rules, they should be followed to the letter.
The lines between sharing information for the sake of collecting a debt and disclosure of protected information protected under the Fair Debt Collection Practices Act (FDCPA) must not be crossed. The FDCPA specifically prohibits debt collectors from providing information to outside sources. As a debt collector, lawyers must be mindful of these regulations and obey them. Failure to comply can result in severe financial penalties or even incarceration.