Introduction to Law Firm Collection Agencies
A law firm collection agency is a debt collection agency that is not only staffed with professional collection agents; it is also a law firm. This means that all collection activities can be handled in-house and all legal activities can be performed within the same firm. This is important because a law firm collection agency can take your collection matter as far as possible without you having to hire additional professionals or use multiple companies.
Many people may question, "What is the difference between a law firm collection agency and a collection agency?" The difference is that really basic collections / preliminary collection matters are better suited for a collection agency (assuming they are properly licensed and bonded for your state) and then when you go after say a large company or a company that has retained legal counsel, you can elevate the collection matter to a law firm collection agency (assuming the law firm collection agency is properly licensed and bonded for your state) to help you with the more difficult collections and legal matters that require legal representation. In addition, typically you will have as a collection agency get the money faster (2-5 months). But during that time, the collection agency may be spending money on attorneys to help them with legal matters so just keep that in mind .
A collection agency typically uses hundreds of telephone collectors who call on each overdue debt. A law firm collection agency is made up mainly of attorneys, paralegals and support staff. The agency has fewer people, but because they are attorneys, they are able to decide whether or not to pursue legal action – something a collection agency cannot do. This is just one of the benefits of using a law firm collection agency, over a traditional collection agency.
Most business owners have an attorney (or at least a favorite attorney) on the opposite side of their desk. Most attorneys are highly familiar and comfortable dealing with opposing counsel. A business owner may be in the role of a creditor and an attorney is often in the role of a debtor. An attorney must understand that most clients will expect them to be highly skilled in dealing with other attorneys. Having an attorney on your side in a collection effort can not only provide you with an advantage in certain cases, it can also smooth the way for a lot of cases that may have resulted in a collections dispute.
Finally, if you have a pre-existing relationship with a law firm that is also a collection agency, it might make sense to give them first dibs on your collections matters.
Why You Should Use a Law Firm for Collections
When it comes to collection, using a law firm has benefits. A law firm collection agency employed by law firms provides a "safety net" for receivables that are inside and out of their jurisdiction, because the firm employs collection attorneys in those jurisdictions. This saves them time and money.
Higher rates of recovery are perhaps the greatest benefit law firms can pass on to their clients. The fact that the law firm collection agency is fully compliant with the Fair Debt Collection Practices Act (FDCPA) and other Federal and State laws means the client, and the law firm taking the call on the client’s behalf, does not have to worry about compliance issues.
The collection attorneys know the laws. The law firm collection agency also provides pre-litigation services that can help prove the debt before the law firm even sees the file. That means that the law firm can be selective about the debts they choose to litigate, usually selecting larger debts with greater recovery potential.
A law firm collection agency that employs attorneys to litigate cases provides a better chance of higher recoveries because debtors tend to pay when attorneys are involved. The case lawyer’s credibility is enhanced through involvement in other litigation involving the same debtor. Debtors tend to pay because they know that the creditor (the law firm’s client) will continue to pursue their debt through litigation.
The law firm collection agency also provides alternative approaches to collecting the debt. Their collection department and attorneys work together. The collection department performs pre-legal collection efforts which can prove the debt and therefore increase the chance for successful post litigation collection.
Law firm collection agencies are not limited to just one state or jurisdiction. They may also have the ability to coordinate efforts throughout the country. Adding collection attorneys in Arizona, Florida, California, Texas, Illinois, New York, and other key states means the ability to represent your interests to your advantage.
What to Consider When Retaining a Collection Agency
When it comes to choosing the right collection agency, a law firm’s reputation, industry experience and fee structures can all have a significant impact on the bottom line. Consider the following factors: Industry Experience: Many law firms are not wading into the world of collection agencies. However, those that are may be doing so just because the work is coming in the front door. Yet there are various factors that can contribute to the decision to enter this field. Still, limited experience in this arena can translate into limited collections from debtor-laden customers. The knowledge of a collection agency can be more valuable than a law firm’s haphazard attempts to recover the outstanding debts of its clients. There is no type of collection that cannot be completed more effectively with the help of an experienced collection agency. Such agencies are knowledgeable and experienced with respect to commercial collections, consumer collections, past-due subscription collections, delinquent account collections and judgment collections. Fee Structure: Collection agencies usually operate on contingent fees. This means that they take a percentage of the amounts they collect, typically between 15 and 30 percent. Reputation: What collection agency has the best reputation? While you are not such a law firm, you can check the reputation through associations with the Better Business Bureau, the Commercial Law League of America, the American Collectors Association and the CLLA/CAA International Fellowship of Creditors’ Rights Attorneys.
Debt Collection Legal and Ethical Standards
Just as rules govern lawyers, there are regulations that collection agencies must follow when collecting debts. The biggest law to be aware of is the Fair Debt Collection Practices Act, or the FDCPA. The FDCPA prohibits unscrupulous practices that debt collectors use to attempt to collect a debt. It also protects consumer privacy by limiting the information collection agencies can share and with whom they can share it.
The FDCPA, enacted in 1977, protects consumers from "abusive, deceptive, and unfair debt collection practices." There are several components to the FDCPA: General Communication Restrictions: Among other things, the FDCPA prohibits telephone calls at inconvenient times, communication in certain situations where a consumer has a lawyer, and having communications with third parties if the consumer requests they stop. Debt Collector Communication: All communications must be truthful. A debt collector cannot provide false or misleading representation to the consumer and all attempts must contain the name of the creditor and state that it is attempting to collect a debt. Validation of Debt: The FDCPA requires debt collectors to send consumers a written notice providing them with three key pieces of information: For this last point, if a consumer notifies the debt collection agency that the disputed debt is under $500, the debt collection agency must stop all practices until the dispute is resolved. Also, under the FDCPA, consumers aren’t responsible for paying costs and attorneys’ fees on past-due accounts unless they have agreed to pay these costs. Debt Collector Restrictions: Debt collectors are prohibited from performing certain acts including: Serious penalties exist for those companies, including law firms, who violate the FDCPA. The Federal Trade Commission can pursue monetary penalties and injunctions for those law firms who break the law. Additionally, consumers can file a private lawsuit against debt collection agencies (and their attorneys) for violations of the FDCPA. Damages can reach up to $1,000 for a single violation, interest on any amount awarded, actual damages for emotional distress, court costs, and attorneys’ fees.
Rules and regulations governing debt collection for law firms differ from that of other collection agencies. Law firm collection agencies have additional ethical and RPCs to follow. For example, RPC 1.5 prohibits agreements that vis-à-vis a client, set as the fee for services a percentage of the amount in controversy. The FDCPA prohibits a law firm collection agency’s attempts to collect on a disputed debt while a civil action, arbitration, or other proceeding is pending, provided the debt collection agency knows of the proceeding.
How to Submit a Collection Matter to a Law Firm
Not surprisingly, many law firms do not track the success of their collection agencies or collection service. For the most part, small to medium-sized firms will either use their own staff for follow-up on unpaid accounts, or hire outside collection help, either a freelancer or a full-fledged collections agency. However, outside collection assistance, whether free-lance or a brick-and-motor business, costs money. If a firm is going to spend money on collections, it makes sense to evaluate how successful the service is.
Your collections provider should be able to share with you the percentage of the total amount collected and/or the percentage of accounts collected (from total number of accounts placed) for the time period requested. For example, you may want to identify collection activity for the past 12 months. Some firms break collections down by time period, such as 31 days, 60 days, 90 days, 120 days, etc. This is not necessary, but it may give you insight into whether your firm is providing some pushback at the moment of billing (31-60 days), or whether the litigation partner is engaged sufficiently in the collection process . A simple analysis of past due balances over the prior year compared to the prior year may give you some insight into whether collections have improved or declined.
In addition, you may want to pull breakdowns for past due balances for the dollar amounts over $50,000 and over $100,000 to see if large accounts have been cleaned up. Of course, all collection agencies carry a ‘bad debt’ mark against them when they bind an account, so be sure to ask your collection agency whether the current write-off is indicative of your weak collections history or their style of collecting. Perhaps you have just created a habit of not getting clients paid to your collection agency, and they are doing a good job of picking up the slack.
As always, look for collection data that expresses what you need to know about your collection success. Caution: Watch out to be compared against the same collection agency/department from prior years, because a stronger collection effort against previously poor collections may make the current results seem poor.
Examples of Successful Legal Debt Collection
ABC Law Firm, a small immigration practice on the West Coast, was stuck in a cycle of unreliable payments over the course of two years. Struggling to make payroll and pay operating expenses, a firm representative spoke with a collection agency at the recommendation of an industry colleague. While the firm was unable to collect payments due on all outstanding case files, this third party was able to recover more than $22,000 from smaller, older files that had been unpaid for several years.
XYZ Law Firm, headquartered in the Midwest, retained a collection agency to recover unpaid balances owed for employment-based and family-based representation. From the outset, this firm communicated with the agency regarding their general approach and shared key performance indicators often used to benchmark performance for other clients within the same industry. Due to its knowledge of U.S. immigration and North American employment practices, the agency was able to negotiate payment installments for open matters. Through a combination of payment plans and garnishment of wages for three cases, this firm was able to recover more than $20,000 in unpaid balances due for these files.
GHI Law Firm, located in the Southeast, applied a partner-level approach for each case that was assigned to its attorney collections team. This collaborative approach allowed for a number of high-level initial phone calls to be made on all cases. This firm’s compliance team also periodically audited the handling of all accounts. Stemming from this level of oversight, a number of cases where attorney fees were collected directly by the collections team, were quickly closed and paid. GHI was quite satisfied with more than $80,000 in legal fees recovered for widely-dispersed client files.
JOA Law Firm, an Atlanta-based practice, regularly found itself giving up on accounts that did not respond adequately to initial collection efforts. Following a brainstorming session on accounts currently in collections, the firm decided to approach the collections company with a plan to assign its team of attorneys additional accounts. The benefits realized by having a legal professional handle the collection of a file were apparent. In one fell swoop, over $100,000 was recovered for both pending and past closed matters through the assignment of 124 cases.
Best Practices for Companies in Dealing with Collection Agencies
Businesses need to consider how they will collaborate with their law firm collection agencies. Here are some practical tips as to the best way to do that:
- Understand your agreement with your collection agency as it relates to remitting your payments to the law firm. Consider whether you want the collection agency to process your payments and provide a more detailed accounting of all of your accounts, or whether you prefer to direct payment to the law firm directly.
- If you choose to have the collection agency process your payments, make it clear when you want payments and remittance advices submitted by the law firm to you for accounts where the collection agency is not handling the collection work. Also, be clear where you want payments and remittance advices to be sent for any clients for whom the collection agency has been handling collections.
- Be clear about who can discuss matters relating to the collection of your accounts, to whom and under what circumstances. For example, some businesses only permit employees to discuss payment arrangements with a lawyer; others permit the matter do be discussed with a lawyer or other staff and, in any event, only show flexibility for clients over a certain amount or due date.
- If necessary, consider having a staff member attend your account reviews with your collection agency’s staff. Ensure they understand the key objectives of the meeting and who can make what decisions . For example, if your staff member does not have the authority to review payment plans with clients, ensure that is clear at the beginning of the account review, otherwise it may become a costly exercise with little benefit for your agency.
- Instruct your collection agency on when you want them to advise you on a matter and when they can act on your behalf. For example, some businesses specify that they want to be advised when a case is over a certain age even if it has not yet reached the 90 day stage. Depending upon how tight you wish to control your collections, you may also want either staff or clients to meet with your law firm’s collection agency staff before any negotiations begin.
- Also be sure to review your agreement to see if you have agreed to provide your collection agency with access to your computer system(s) for accounts receivable, so that they can access information about particular debtors directly. If you are having problems accessing your systems to provide your collection agency with your accounts receivable data, consider dedicating an employee to the task or providing training so that your administrative staff can input the collection agency’s information and produce your report.
- Always keep open lines of communication with your collection agency. That is the best way to ensure that you are getting the results you expect.