To Place or Not to Place for Collection – Michael Dennis, CBF

Hamlet - To Be or Not To Be

I recently received a call asking what I thought of this proposal to a creditor from a third party collection agency.  The agency would collect on a contingent fee structure debts at between 15% and 20% of the amount collected depending on the age of the debt when placed.

If the standard collection process did not produce results, the account would be transferred to an attorney for lawsuit.  At this time, the contingent fee would more than double to a minimum of 45% of the amount collected plus court filing fees.

I responded that this was a win-win situation — for the agency.  If the agency was able to collect with minimum effort, it picked up 15% to 20%.  If it went to an attorney, the collection agency probably still received a portion of whatever the attorney was able to collect.  My concerns were:

  1. If the attorney works directly for the collection agency, the agency has little incentive to address the collection process aggressively, and
  2. I always want to be the decision-maker relating to if or when an account is placed with an attorney.  Why?  If placing an account for collection seriously damages the business relationship between supplier and customer, suing the debtor usually destroys the relationship and any possibility of future business
Michael Dennis, MBA, CBF, LCM

That’s my opinion.  What’s yours?

Michael Dennis’ Covering Credit Commentary. Michael’s website is  www.coveringcredit.com

The opinions presented are those of the author.  The opinions and recommendations do not necessarily reflect the views of CMA, or their Officers and Directors.  Readers are encouraged to evaluate any suggestions or recommendations made, and accept and adopt only those concepts that make sense to them.

6 Replies to “To Place or Not to Place for Collection – Michael Dennis, CBF”

  1. If the agency is able to collect with minimum effort, then I haven’t done my job prior to placing the claim with the agency! We use third-party collection agencies only after the business relationship has already been damaged by the customer’s refusal to pay us. At this point, by their own doing, they have changed their status with us from “customer” to “debtor”, and possible future business is no longer a concern. And, yes, I agree that if the attorney works for the agency, it may reduce their incentive to work as hard as we want them to. The agency that we use will only place our claim with an attorney after approval by us to do so, and I have been known to say “no”.

    1. I echo what Karen says. By the time I turn an account for collection I have made the decision that future business is not something I am interested in. If the agency can collect with minimal effort, more power to them because I have not been successful. I always retain the final decision on whether to proceed with suit. Depending on location sometimes I will use their attorney or go directly to an attorney I have worked with. Either way the decision is still mine to make. At a 45% contingent collection fee, they have almost as strong an incentive to collect as I do because they are getting just as much money.

  2. We have a person dedicated to “Late Stage Collection” internally. When our regular collection staff is unable to make headway on an account, it is transferred to our Late Stage Collector. This is a last ditch effort to collect from inside before transitioning to a 3rd party. We have been very successful with this strategy for about 10 years. We have not only avoided paying collection fees, but have been successful in maintaining a positive relationship with most customers and have brought a good number back into the fold. The Late Stage Collector maintains contact with the placement agency once the decision is made to outsource. She has to provide the go ahead to pursue litigation.

  3. Michael,

    I assume that the collection agency would prefer to take a bigger chunk of the fees by successfully collecting on the account; However, if you were concerned it would be best to make it clear that you will not utilize the services of an attorney referred by the agency. At that point, they are little more than a broker. They will get a small commission from the attorney (if they are not part of the same organization). If your collection agency knew that they were not going to retain the account if it went to legal, they would have much more incentive to work the account to completion rather than lose it completely.

    As for damaging the relationship, I agree with the previous comments. Furthermore, as they say, business is business. If I have a product that the customer wants, and at a price that is good for him, he may still come back and pay COD or COD + if need be. And if we can garner business at no exposure, we would take it.

    Survival in business doesn’t allow for much pride in many cases, especially those so cash poor that they were in the position of having a collector bang on their door. When all the fog is lifted, they know they should accept responsibility for what transpired.

  4. An experienced credit executive should be able to decide if an account should be placed with a collection agency or an attorney. Contingency verse hourly cost should always be managed by the credit executive and should never be more then 20% fo the total principle.

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