Working with OCAs
February 15, 2010
The following article originally appeared in the February 2010 issue of ABC-Amega's free client newsletter, "Credit-to-Cash Advisor". How Outside (3rd-party) Commercial Collection Firms Work Credit and collections being what they are, even with the best credit management procedures in place, some accounts are going to go past due. It's also likely that, at some point, you'll need the services of a professional collection agency. This article is designed to provide you with basic information you need to know before you turn your accounts over to an outside collection agency for handling. While ABC-Amega's claim management procedures are the basis for what follows, similar processes are generally followed by most reputable, national commercial collection agencies. Selecting the Right Collection Partner
The Credit Research Foundation suggests, "investigate, evaluate and rate the agencies that you plan to use just as carefully as you do with customers when you grant credit." In selecting an agency, partner should be the operative word. You want an agency that will work with you to understand your business and meet your needs. According to "Selecting the Right Collection Agency", an article that previously appeared in the Credit-to-Cash Advisor, there are nine things you should consider:
- Your customer base. If your customers are other businesses, select a commercial collection agency, rather than one that primarily handles consumer accounts. Collecting business-to-business (commercial) debt is often much more complicated than collecting consumer accounts. Of course, if you deal primarily with consumers, select a consumer collection agency that is familiar with federal and state law requirements that govern dealing with delinquent consumers.
- Size and location of the collection firm. Do you need an agency with national or international reach, or is a local firm enough?
- Integrity and standards of the firm.
- Legal and financial position of the firm. Check their accounting practices. Collections made on a client's behalf should be kept in a separate "Trust Account" and not commingled with the agency's operating funds.
- Industry experience of both the executives and the collectors. Are they certified by an independent organization (like the Commercial Law League of America)?
- Industry specialization. Collecting in some industries, like telecommunications and healthcare, require knowledge of regulatory conditions.
- Technology. Will you have online access to information on your accounts? What kind of reporting is available?
- Fee structure. Generally, U.S. commercial collection firms work on a "no collection, no fee" basis. Most also offer some kind of Free Final Demand period (see below). If the debtor pays within 10 or 15 days after placement of the past due account, the agency doesn't charge a fee.
- Value adds. This may or may not be important to you. Some firms offer training programs, educational newsletters, webinars, etc.
The Collection Process Placing Your Accounts
In today's world of split-second communications, agencies routinely accept placements via every means possible. Single placements can be mailed, faxed, emailed, or submitted via an online web form. Bulk placements, taking any form from Excel™ or Lotus 1-2-3™ spreadsheets to proprietary accounting formats, can be submitted via FTP, CDROM etc. The most important thing is that account information is as complete as possible. Definitely include the customer's business name, a contact person (preferably responsible for accounts payable), address, phone number and, of course, the amount past due. If the buyer has moved and you don't have current contact information, provide whatever you do have. The agency will utilize the Internet and other sources to find the debtor for you. Give the agency a complete package of documentation -- the more backup detail, the better. Include a complete statement of account, copies of purchase orders, invoices, proofs of delivery, contracts, photocopies of checks for partial payments, personal guarantees, etc., as well as any correspondence where the buyer admits he owes you the money. To enhance the quality and depth of reporting the agency is able to give back to you, include "extra" information like invoice numbers, amounts and dates, and the date of last payment. Claim Processing
When a claim is received, the agency will check to make sure they have all necessary information and then enter it into their collection system. They should also cross-reference against their debtor database to determine if there are other claims against the same company. If there are, they can be consolidated to one collector, increasing his/her information and leverage on the account. After placement, you will receive an acknowledgement that the account was received and is scheduled for collection. Free Final Demand
Often just the threat of referring an account to a collection agency can motivate a debtor to pay. Most commercial collection agencies in the United States offer a free final demand option. When the account is placed, a demand letter is sent to the debtor stating that you must receive payment by a specific date or the account will be placed with an outside firm. At the same time, the agency sets up a "proceed" date on which they will move ahead with third-party collection if you haven't notified them that the debtor has paid. Example: ABC-Amega receives a Final Demand form on the 10th of the month, with a "proceed" date of the 20th. We create a file noting the date to proceed. If the account is not paid on or before that date, the file is assigned to a collector to commence handling on the 20th. We recommend using a 10-day or 15-day free final demand period. Providing an already delinquent debtor any additional time simply delays collection efforts, and will negatively impact your overall collection results. We do not recommend using the final demand on overseas accounts, accounts that are more than 120 days past due, or those on which the debtor has already broken payment promises. It is important to note that free final demand forms intended for commercial debtors should never be used on consumer accounts as they do not usually contain the language (Mini-Miranda Warning) required by the Fair Debt Collection Practices Act (FDCPA). Initial Debtor Contact
The initial third-party contact -- usually by telephone -- creates the strongest impression on the debtor. It should be made immediately -- as soon after the "proceed" date as possible. A good collector will use this call to:
- Make a firm demand for payment in full.
- Identify important aspects of the debtor company, including structure (sole proprietor, partnership, corporation, etc.), legal name, person responsible for accounts payable, etc. This information will be important down the road if the debtor is not forthcoming.
- Determine if the debtor has a potentially legitimate dispute, is in serious financial trouble, is simply stalling for time, or might be likely to "cut and run". The collector's skill and ability to "read between the lines" will determine his next course of action.
- Elicit a commitment from the debtor. This may be payment in full by a specific date, but in many cases will be a promise to make a "good faith" initial payment, or set up a regular payment plan.
Continuing Collections "In-House"
In-house collection associates will attempt to negotiate payment in full or a reasonable payment schedule via telephone contact, email, faxes, and letters for approximately 30-45 days. If the collector's direct persistence doesn't achieve the desired results, it's obvious that more pressure is required. The key to successful collections is to create in the debtor an "escalating sense of cognitive dissonance." In simpler terms: "The debtor must get an ever-growing bellyache." Handing off an account to a third-party agency increases the pressure. Involving an attorney, creating the potential threat of litigation, ratchets up the pressure and consequences even more. Attorney-Amicable Collection
Some agencies employ in-house attorneys to send out letters requesting payment on "official" legal letterhead. Many, including ABC-Amega, however, believe that it's not just any pressure that is required, but local pressure. It's not enough to forward the account to any qualified creditor's rights attorney. The attorney must also be situated in or near the debtor's locale. This is particularly true with international accounts where customs and law may vary greatly from those in the creditor's country. It is important to understand that the attorney is actually working directly for you. However, the agency will continue to monitor the attorney's efforts and act as a liaison. U.S. collection agencies certified by the Commercial Law League of America utilize U.S. attorney firms that are also bonded and certified by the League. Thus, you can rest assured that the attorney is well qualified and reputable. When an account is placed with a local "affiliate attorney", she will attempt to recover the debt amicably, without resorting to legal action. Occasionally, the attorney may make, or hire an investigator to make, an on-site visit at the debtor's place of business. The collection agency itself can also arrange a site visit prior to attorney intervention. (Site visits require an additional fee.) However, in most cases, especially in the United States, the attorney will phone and/or write the debtor demanding payment. Legal Action
After working the account for several weeks and being unable to secure an amicable settlement, the attorney may recommend a lawsuit in order to collect the account. Together with this recommendation, the attorney will provide an estimate of suit requirements and court costs. These charges will be in addition to the agency's contingent fees and are usually required "up front". (Read our article "Court Costs and Suit Fees" for further explanation of these charges.) No legal action should ever be instituted without your express approval. Before deciding on legal action, however, you want to determine that there is a reasonable chance of collecting. Consider the following ten questions before deciding to go ahead with a lawsuit. (For further details, see our article "10 Questions to Ask Before Deciding to Sue a Collection Account".)
- Is your claim large enough to sue? At least $1,000 to $2500?
- Is the debtor still in business?
- Is there an address where Service of Process can be made?
- Does the debtor appear to have sufficient assets to satisfy a judgment if one is awarded?
- Does the attorney (or your collection firm) have any previous experience with the debtor?
- Is the debtor disputing the account?
- Can you supply sufficient documentation to substantiate the debt?
- Has the debtor threatened to file a counter claim (countersuit)?
- Will you be able to supply a witness if one is required.
- Do the costs involved warrant filing a lawsuit? Our rule of thumb: initial court costs should not exceed 10% of the value of the claim.
The Litigation Process
Litigation in most countries is a slow process and the United States is no exception. Once you authorize a lawsuit and forward the suit requirements, the attorney will file a complaint with the appropriate court. The next steps will be determined by the debtor's response, or lack thereof. There are basically six steps in the U.S. Collection Suit Process. (Editor's note: for further detail, see an article written by ABC-Amega "6 Steps in the U.S. Collection Suit Process.") - Summons and Complaint served upon the debtor.
- Default Judgment, if the debtor fails to respond to your Summons and Complaint in the time stipulated.
- Summary Judgment, if the debtor responds but his response does not include any disputed issues of fact.
- Trial, if neither Default nor Summary Judgment is awarded and no compromise can be made between creditor and debtor.
- Final Judgment and Writ of Execution. Assuming you (creditor) win the case, the Writ of Execution will be issued to a local sheriff, who will attempt to arrange payment of the Judgment by the debtor and/or determine if there are any assets that can be attached.
- Supplementary Proceedings. Should the Sheriff be unable to collect the Judgment, the creditor's attorney has the right to question a principal of the debtor about any assets the sheriff may not have discovered.
Fortunately, most lawsuits do not progress all the way to supplementary proceedings. Default judgments are obtained on most, and many others are settled prior to trial. Debtor Payments
Generally, the third-party collector will instruct your debtor to write checks payable to your company, but send them to the agency. These payments are then deposited into a Trust Account, which is maintained by all reputable agencies to hold only debtor payments. In other words, expenses of running the agency should never be commingled with debtor payments. After the check has cleared, the agency will forward you the net amount, after subtracting their fee and any out-of-pocket costs to which you have agreed. (Note, some agencies will consider a "remit gross" method whereby they forward you the entire debtor payment and bill you for their fees.) If you receive a check directly from the debtor, deposit it to your account and inform the collection agency of receipt. They will then bill you for their fees. However, if you receive a payment for anything less than the final amount you agree is owed, you might want to follow this advice of the Credit Research Foundation: "If the customer sends you a check after any free demand period has ended, and it has not gone through a lockbox system so that it is already in your account, send it to the collection agency rather than depositing it [especially if it is for less than the amount you believe is owed]. Let the agency determine if any restricted endorsements (i.e. a statement on the check like 'paid in full' when you have not agreed to the reduced payment) make the check worthless." This article was originally published in their client newsletter "Credit-to-Cash Advisor". ABC-Amega Inc. provides 1st and 3rd party commercial collection services since 1929, and collecting in more than 200 countries worldwide. For further information, contact info@abc-amega.com.
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