All too often, commercial debt collection becomes a negotiation. At that point, the stronger the position our client has, the better the deal we typically can negotiate. This could be more money, faster payments, avoiding court, or if necessary, the final outcome in court and the subsequent judgment collection process.
Surprisingly, the vast majority of our new clients have many deficiencies in their boilerplate documentation that weaken their position and ultimately cost them money. One of the most common issues we see is no provision for the imposition of collection fees on the customer. Below is an excerpt from our free ebook, the Terms and Conditions Handbook, covers over 70 different items that should be considered for governing the vendor/customer relationship.
“In the USA, typically, you will not have the legal right to recover collection costs or attorney fees unless there is a signed written agreement with this provision. Just having this provision on your invoices is not necessarily enough. You want to have a document signed by your customer indicating they agree to this provision. You want to specifically include collection costs so that collection agencies can add this fee into the amount they are trying to recover on a pre-litigation basis, as they cannot add “potential” attorney fees at this stage. Whether or not you actually collect these costs, it gives you and your agents much more leverage during collection agency, litigation, and judgment collection activities.
In the event that Vendor commences any action to collect delinquent invoices, Applicant agrees to pay collection expenses and attorney fees, whether or not suit is filed.
We see the following version less frequently, but it has the advantage of spelling out the liquidated damages in the event of default. Some courts use a schedule to determine the fee to be awarded to attorneys for getting a judgment. This fee typically is substantially less than the contingency or hourly fee paid to the attorney. By having an agreed attorney cost in the executed Application, the Vendor has a much better chance of being awarded the full attorney cost, thereby offsetting the cost of having to litigate to get paid. It also helps at the collection agency stage, and gives in house collectors more leverage during the threat to send to collections:
We further agree to pay a 25% collection charge, in the event of default, if the account is placed with an attorney or bonded collection agency.”
When we are collecting on a $25,000 claim, and we can add our 20% collection fee (e.g. $5,000) to the amount owed, we now are negotiating from a starting position of at least $30,000 (more if interest or late fees is also a provision). Whether the delinquent customer is negotiating for a discount or a payment plan, having a higher starting position on our side gives us more leverage.
This potential extra cost to the debtor typically gets the issue higher up on their priority list of problems to solve. This alone can help us get a resolution while other customer debts languish or get ignored.
Clearly, when we can collect the collection fee, our clients are far better off financially. Often, our 
clients prefer to waive the collection fee in exchange for a voluntary immediate payment. This is better than going to court, and at the same time we can give the debtor an incentive to pay our client’s past due invoices instead of amounts owed to other vendors.
This provision also gives in-house collectors more leverage. Final demand letters and phone calls can remind customers that if it goes to collection, they are responsible for the significant collection costs. This may motivate the customer to make arrangements to avoid collections when all else has failed.
Surprisingly, of the 22 terms and conditions examples in the free ebook, only 6 had provisions for attorney fees and only 1 had a collection fee provision. This is a missed opportunity.
For companies that use credit applications, this provision can be included in that document, as described in our free ebook “The Credit Application Handbook”. If you don’t use a credit application, then this provision should be included in your terms and conditions, which need to be referred to in the sales order, insertion order, or other contract to be signed by the customer.
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