You Can't Collect? Then What?
If you are unable to collect a past due on your own, you basically have four choices:
- Write it off.
- Take it to small claims court.
- Send it to a collection agency.
- Send it to a collection attorney.
Carol S. Frischer, a collections manager with the CPA firm of Holthouse Carlin & Van Trigt LLP (Los Angeles, CA) never considers the first option without utilizing at least one of the latter three.
She shares some of her observations on the pros and cons of each, and when it makes sense to use each one.
Small Claims Court
"In California, the maximum amount you can attempt to recover in small claims court is $5,000," observes Frischer. "In other states, it can be less. As such, you have to decide whether it's even worth your time and effort to pursue a debt in small claims court."
Often, if Frischer has had enough contact with the debtor to get a sense that he will pay if "jolted" a bit, she will arrange to have the debtor served. "Often, just being served is enough of a jolt to get them to pay, because they know I'm serious about collecting," she states.
If and when a claim actually does get into court, though, there is no guarantee of collecting:
As such, for Frischer, small claims are most effective to get debtors to settle ahead of time.
- A debtor may not even show up to the hearing. "They may be being sued by so many people that they just don't care," she states.
- And whether or not the debtor does show up, and even if you do get a judgment, the court has no power to enforce the judgment. "You are still left with the task of trying to collect on the judgment," she notes.
Letter Series. If Frischer has exhausted her own attempts to collect, she will frequently turn an account over to a collection agency that offers a "special." An example is a series of five letters requesting payment, with the final letter being from a collections attorney with which the agency has an arrangement. Such "package deals" can be available for as little as $15.
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She offers two words of caution, though:
Collection Work. If the letter series doesn't do the trick, you can then arrange for the agency to utilize other means to collect. If it is able to do so, you can be charged up to 50% of what is recovered. Is this worth the price?
Frischer's belief is that, if you feel it is either the collection agency or nothing, then it's better to accept the 50%. "Half of nothing is nothing," she notes.
For this reason, Frischer generally only arranges to have collection agencies attempt to collect on accounts that she feels she will have to write off otherwise. Examples:
"If a debtor has 'skipped,' and I have very little additional information, the collection agency will offer free skip tracing service in its attempts to collect," she states. "More power to them if they can collect! If I turned the account over to an attorney, the attorney would charge me a fee for skip tracing, whether or not he was able to collect the account. That out of pocket cost can be very expensive, especially if he is subsequently unable to collect."
If Frischer is virtually sure that a debtor will file for bankruptcy if contacted by a third party, she will send that account to a collection agency rather than an attorney. The reason: "As soon as the agency contacts the debtor, he will file for bankruptcy, and it won't cost us anything," she notes. "However, if I have an attorney make the contact, it can cost us $200 or more out of pocket."
Editor's Note: This article originally appeared in the Credit & Collection Manager's Letter.
- Be sure to read the letters being sent out, to make sure they reflect the kind of message you want to send to the debtor.
- Also be aware that such letter series aren't always effective, particularly with experienced debtors who "know the drill" and just ignore the letters.
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