This article will cover everything you need to know about business-to-business (B2B) debt collection. We’ll go over precautions you can take to minimize the likelihood of not getting paid on time, internal processes that can help you collect past due invoices, and documentation that can give you more leverage if a customer is late in paying. We will also detail how to select a collection agency, when to turn an account over to collections, and how to decide if litigation is appropriate. For more state-specific information, click your state on our interactive map below:
Select a state on the left to view its debt collection policies.
Debt collection agencies are expected to have revenue of nearly $19 billion in 2022. While most of that revenue will be collected from individual consumers (known as business to consumer collections, or B2C), B2B debt collection agencies (or commercial collection agencies) also successfully collect billions of dollars each year for their clients.
B2B debt can arise for a variety of reasons, including cash flow problems, disputes regarding the quality of products or services, and contract auto-renewals. Collecting B2B debt is extremely different from the debt collection process for individual consumers.
B2B debt includes money owed by any business, whether it is a corporation, LLC, partnership, or a proprietorship. When a proprietorship owes money, that means the owner is also personally liable for the debt. Money owed by businesses to an individual, for example, when someone lends money to a company or is owed a refund, can also be collected by a commercial collection agency because the money is owed by a business.
Does the Fair Debt Collection Practices Act Apply to B2B Collections?
The Fair Debt Collection Practices Act (“FDCPA”) applies only to B2C collections. It states this specifically in the first paragraph of the law. The FDCPA has stringent rules regarding debt collector behavior and documentation requirements, such as a debt verification letter. The regulations regarding B2B debt collection generally are less defined and vary by state compared to the specific requirements in the FDCPA laws.
How To Minimize Potential Collection Problems
There are three key categories of action that will help any company minimize the likelihood of past due invoices, collection problems, and bad debt write-off: initial research, documentation, and consistent internal accounts receivable collection policies and procedures, including collection activities.
Initial Research and Credit Evaluation
Businesses are in a constant search for new customers. But all too often, these potential new clients are not vetted for their legitimacy and ability to pay. A new customer who is not going to pay their bill does not help any business. Unfortunately, a small percentage of people and the businesses they run intentionally plan to either not pay or make their vendor take all the credit risk. Creditors have the ability to spot the vast majority of these situations up front by doing a bit of research.
Customer/Business Name
Your customer’s exact identity and contact information should be obtained in writing and included on all contracts, invoices, orders, etc. You need to know who you are actually doing business with, including the company and the primary individuals involved. It is financially dangerous to rely on the information in an email or a business card. You can easily validate an entity’s legal name on the internet within seconds using free sites such as Corporation Wiki, Open Corporates, or the business entity search on Secretary of State websites. Our collection agency often receives new claims from clients, and it is not 100% clear what entity is legally liable for the past due invoices. Sadly, this frequently makes it impossible to collect due to this simple deficiency.
Multiple Points of Contact
It is important to collect sufficient contact information and responsible party names at the onset of any commitment. You want to get email addresses, the company’s main corporate phone number, direct lines and/or extensions, and cell phone numbers of the key people at your new customer. This includes the accounting and finance people who will be processing invoices, senior management who are either championing or approving the project, and your primary point of contact for the execution of services or the ordering of products.
You will want to ensure that the prospective business is authorized and that you will have multiple points of contact if someone becomes unreachable. Having multiple points of contact help you avoid issues that come up when people leave companies for new employment, get promoted or transferred, or work from home/are otherwise indisposed due to health issues.
Be sure to validate the contact information with simple internet searches. Make sure the company address isn’t a PO box at a UPS store and is a real location. If it turns out to be a residence, what does that indicate about the financial viability of the business? Is it a startup with limited funds? Search phone numbers to make sure they are connected to the company or individual. Call the main company phone number to make sure you can reach a live person and ensure it is answered professionally and identifies the company name. You may also want to compare this phone number to what is on their website and what appears on a general internet search.
Internet Reputation
Do a quick check on the internet regarding the reputation of your new client and the people you are working with. Check out their website. Is it professional, updated, with a current year copyright and good contact information?
If they don’t include a phone number on their website, it means they are intentionally trying to make it harder for people to contact them via phone. Why? Is their social media active? Do they have lots of customer engagement?
Do a general internet search for bad reviews, comments about their financial situation, and current or historical litigation for the company and/or its owners and executives. If your customer has a ton of negative reviews from their customers, what does that have to say about their ability to stay in business long term and generate money to pay you?
If you find anything that causes concern, don’t be afraid to discuss it with your potential client. It’s better to either get reassurance now or decide this customer is too risky rather than hide from it and hope it just works out. You can always insist on a deposit or payment upfront if you feel there is too much risk but still want to try doing business with them.
Credit Check
You should do some sort of credit evaluation. After all, when you agree to provide services or products before getting paid, you are essentially offering a loan. No bank will give a loan without doing some due diligence. A credit application is the standard way of collecting information for you to verify, including trade and banking references. The credit application can also be used to establish terms for your business relationship.
Our free ebook, The Credit Application Handbook, has 20 sample credit applications and describes all terms that you can consider including. You may also want to run a credit report. It’s important to recognize that any early stage company that says they have to raise more money is potentially a big credit risk.
Insist On Solid Documentation
If you are delivering a service, it is critical to have a signed contract with the full legal name of your customer that indicates what you are going to provide, the cost and payment terms, and any obligations of your customer. A simple email back from your client saying “let’s move forward” is not necessarily a contract. Certain provisions of your contract may only be enforceable if it is signed by your customer. For example, if you are shipping a product, you should have a purchase order or a signed sales order that includes price, quantity, delivery dates, and payment terms.
Emails that just confirm to follow through with what was discussed on the phone is not sufficient. It is way too easy for your customer, at a later date, to dispute pricing or what was meant by the email. Promises in emails don’t mean much in a courtroom (they rarely are enforceable because your customer can embellish on what they meant) compared to a signed contract or an order issued by your customer.
We frequently get claims where the vendor deviates from their procedures which require signed agreements because it is a long-term customer or the customer is pressuring for immediate performance due to issues on their side. This is when creditors get burned and don’t get paid. The insistence on having solid documentation applies internally as well as with your customer.
Any changes to terms during the course of your business dealings with your customer should also be documented in writing. Many contracts say that they cannot be altered unless both parties sign an amendment. While this can make changes cumbersome, if you don’t follow the terms of your contract, your customer can subsequently object. This is especially true when you need to raise prices, delay shipment, extend the implementation period, or encounter scope creep. Your customer’s attorney will be sure to want to enforce the provision requiring a signed amendment if your customer doesn’t pay, so you can’t always rely on the good word of a trusted client.
Even if there is no contract requiring signed amendments, simple emails approving changes are often too vague to be enforceable. Most people are not trained to write precise emails with all the relevant terms, so when there is an email agreement, it is still vague.
Commitments in email are often misinterpreted, and it’s easy to say at a later date, “maybe that’s what you thought, but that’s not what I thought,” or “that’s not what I agreed to on the phone.” Still, an email is better than nothing. So it’s important when communicating via email that it includes all necessary terms, is reviewed by others, and finally is confirmed by your customer. A well-written email can give you solid protection if getting a signed amendment is too cumbersome.
Contract Terms That Improve Your Leverage if a Customer Becomes Delinquent
There are several terms that you can add to your contract or credit application that improve your position if your customer does not pay on time. It is good to include some of these terms on each invoice as well, though some are not enforceable by law unless they are stated upfront and expressly agreed to in writing.
Interest or Finance Charges
Your contract should indicate the rate of interest that you charge for late payment. While you may never collect finance charges, it provides leverage for a collection agency in negotiations. Many debtors will negotiate for a discount, and the debt collector can point out that if litigation is required, the judge will have to award interest, so they are already getting a discount if the creditor agrees to waive interest.
Our interactive map shows the legal rate of interest in each state, which is the rate that applies if no specific rate is mentioned in the contract. Make sure the interest rate is not above the legal rate allowed in a state. If the interest rate you state is considered usurious, it is not legally enforceable, and no interest can be charged. As a general guideline, any rate above 1.5% per month or 18% per annum may not be enforceable for B2B contracts.
Acceleration Clause
An acceleration clause provides that if one invoice becomes past due, then all invoices are immediately due and payable. If the contract has monthly, quarterly, or annual payments, the acceleration clause should indicate that the entire amount remaining on the contract is immediately due and payable if the customer becomes delinquent on one invoice.
This allows a debt collector to immediately pursue the entire balance owed, rather than having to wait weeks, months, or years to pursue remaining amounts. If litigation is required, you can only sue for what is currently due, and without an acceleration clause, you can’t sue for future financial commitments.
Collection Costs and Attorney Fees
Unless you have this provision in an agreement signed by your customer, you generally do not have the right to recover costs incurred by hiring a collection agency or an attorney for litigation. So it is crucial that this provision refers explicitly to collection costs and not just attorney fees. Otherwise, the contingency fee paid to a collection agency would not be a liability for your customer. Like with interest charges, you may never recover these costs, but it does increase your leverage if you have to hire a collection agency or litigate.
Governing Law, Venue, and Jurisdiction
Many companies prefer that disputes get handled in arbitration rather than litigation. The primary reason for this is that litigation filings are public records, whereas arbitration is confidential. Many people think arbitration is also faster and less expensive, and it can be in some cases. But in debt collection cases, litigation is almost always less expensive.
The filing fees for arbitration are based on the size of the claim and are always much more than the courts charge. On a $150,000 claim, the arbitration filing fees exceed $5,000, whereas the court filing fee can be a few hundred dollars. In addition, you have to pay the arbitrator hourly, often at a rate of $400 an hour or more, while the judge is free.
If you do not have a venue clause, then typically you have to sue where your customer is located. For debt collection cases without disputes, we typically do prefer to see where the debtor is located as it is faster and less expensive. However, if there is a dispute or a chance of a counterclaim (cross complaint), it may be advantageous to sue where the creditor is located. Although sometimes arbitration is preferred, so the dispute is not open to the public. Having a clause that gives the creditor the right to choose litigation or arbitration and the choice of venue in either their home state or the debtor’s state can be extremely helpful in some cases.
Our free ebooks Credit Application Handbook and Terms & Conditions ebook provide sample language for each of these four provisions as well as many others that you may want to incorporate into your contracts with your customers.
Auto-Renewal Terms
Contracts with auto-renewal provisions are now very common. About ½ of all states have created laws governing auto-renewal terms, but currently, these laws apply to B2B transactions in only 8 states. Use the interactive map above for information on your state and its laws about auto-renewal terms.
If companies do not comply with these laws, then auto-renewal provisions cannot be enforced. Unfortunately, we regularly get claims for unpaid invoices due to auto-renewals that are not legally enforceable because our client did not properly follow the laws for a specific state. The easiest way to stay in compliance is to create policies and procedures that comply with all state laws and apply them to each customer regardless of their location.
The most common provisions in state auto-renewal laws are:
Display of Terms
The auto-renewal provision must be clearly identified in the contract the customer agrees to. Therefore, burying it in a separate Terms and Conditions document linked to from the main contract would not be in compliance.
Affirmative Consent
The customer must click a checkbox or initial the contract where the auto-renewal term is mentioned.
Renewal Warning
The vendor must notify the customer in writing (email is acceptable) in advance that the contract is coming up for renewal. Most states require the notice to be received 30 to 60 days in advance, but Wisconsin requires it 15 to 30 days in advance.
Cancellation Method
The cancellation method must be clearly identified and explained in the renewal warning and must be relatively easy for the customer to complete.
Most “Software as a Service” (Saas) providers that initially contact our collection agency are not in compliance with all of these terms. Setting up the renewal warning process typically takes a significant effort to create a database of all existing customers with the auto-renewal cancellation deadlines and contact information so automated notices can be sent on a timely basis.
Some vendors take the time to add the state where their customer is located to the database, so they only notify those customers where the renewal warning is required by law. They feel this extra effort is justified as some customers would not cancel if they weren’t warned in advance.
Accounts Receivable Policies and Procedures
If you want to get paid on time, you need to invoice promptly and correctly, confirm your invoice was received without issues, and then follow up. Automated email reminders that an invoice is due in 7 days can help. Following up the day after an unpaid invoice was due is critical. This lets your customer know you take these deadlines seriously. Call within two business days if they don’t respond to an email. Customers learn which vendors will let them slide and which vendors require timely payment. What type of vendor do you want to be?
A written policy, even if it is only a bullet point outline, is key to having internal consistency. Additionally, it should outline what action you take when invoices are 7, 15, 30, 45, 60, and 90 days past due. Actions should include emails, phone calls from the accounts receivable team, communications from the sales and/or implementation teams to their counterparts, and when and how you escalate to your customer’s senior management or ownership. The written policy should also detail when you stop accepting new orders, shipping existing orders, and providing services—including access to software services.
The policy should also address what should happen if there are disputes. All too often, disputes are allowed to linger and fester, and are then placed way down on a task list to deal with later. This only makes it more difficult to resolve the dispute and get paid. If you continue providing products or services while an earlier dispute remains unresolved, you are giving your customer leverage. We see it all the time, where they will agree to pay undisputed invoices only if the vendor agrees to waive the disputed amounts.
Finally, the policy should indicate when and how final warnings are given and the actions that will be taken if some agreement is not reached and implemented. This includes a final warning collection letter and demand letters (sent by email, mail or courier) and sending files to a debt collection agency or attorney.
Debt Settlement Pros and Cons
While it may be very frustrating when a customer says they want a payment plan or discount, this alternative may make the most business sense for your company, depending upon the terms. A debt settlement for 10% less to get immediate payment is far better than sending a file to a collection agency or attorney. It may not be fair. It may cause you to take a loss on the sale. But if it is the best deal you can get, take it!
Your customer may propose a payment plan that would create a financial hardship for your company, causing you to want to reject it immediately. But again, if this is the best deal you can get from your customer, you may need to take it and find other ways to deal with the cash flow problems it creates. Of course, the longer the payment plan, the more risk there is that your customer will default.
Some companies have very experienced collectors and negotiators who know how to get information from the other side to determine the best deal. Unfortunately, most companies do not, resulting in mistakes that can be impossible to recover from, even if you hire a collections agency.
Once a creditor offers a discount, it is very difficult to ever get more than that amount. There are ways to float an offer without getting into that terrible position, but we almost never see creditors execute this properly. Instead, we are given a claim where we are already stuck with a deal our client no longer wants to accept. Even worse is when a client agrees to a discount and a collection payment plan, and then the customer defaults, but they are still legally entitled to the discount because of the way the deal was worded.
A reputable collections agency should have highly trained staff who know how to avoid these mistakes and get the best deals possible.
When To Send a File to a Collections Agency or Attorney
The longer an invoice is past due, the less likely it will be collected. Statistics on B2B debt collection show that by the time an invoice is 90 days past due, there is already a 25% chance that it will not be collected. There is only a 50% chance of collecting a 7-month-old invoice and 25% chance of collecting a 1-year-old invoice. The longer you wait, the lower your odds of collecting.
Any time an invoice gets to 90 days past due, the creditor should seriously consider if it is time to escalate the pressure by involving a debt collector or attorney. If you do not have a plan in place with your customer by this stage, and if you are not in active conversations expecting a final agreement very soon, it is probably time to escalate matters.
The bottom line is you have had 3 months to figure out a solution to the problem, and if you haven’t yet, or you aren’t actively engaged in productive discussions, you are probably spinning your wheels and allowing the chance of collection to decline further if you don’t do something proactive. Plus, your staff is losing time focused on an uncollectible invoice instead of giving attention to paying customers and new prospects, so there is a real opportunity cost for keeping it in-house.
Most commercial collection agencies work on a contingency basis, so you only have to pay on what they actually collect. With a professional debt collection partner, you are likely to get more money and faster, even after the contingency fee, than you will if you keep it in-house and your staff is busy with delinquent accounts instead of good clients.
Many other red flags indicate that a file should be sent to collections either before or after the 90-day past due point. Examples include:
- No response to emails or phone calls
- Can’t get a live person on the phone
- Customer’s industry hit by negative macroeconomic events
- You hear of lay-offs or senior executives departing the company
- Business owner is getting a divorce
- Your customer loses a major customer
- The project champion departs or is replaced
- Debt dispute letters and excuses that don’t make sense
- They have hired a debt settlement attorney
- Always a new excuse
Procrastination costs money. It’s easier to compile the information for your debt collection partner while it is fresh, and this gives them the best chance of collecting and frees up your time. So the sooner you act once it is appropriate, the better off you are.
Debt settlement companies and attorneys are challenging to work with. A commercial collection agency will have extensive experience dealing with debt settlement companies and likely can get much better results than a vendor because the threat of litigation is taken more seriously.
Choosing a Collections Agency or Attorney
We frequently get asked, “do attorney demand letters work?” We get claims every month where our client paid an attorney hourly to send a demand letter, and nothing happened. Attorney letters typically threaten legal action, but then the next step is actually a collection agency contacting the debtor. Doesn’t that sound backwards? Now the collections agency is at a perceived disadvantage, as the debtor believes his vendor is not willing to sue because they backed down from the legal threat.
At our collection agency, we get around this by explaining during our first contact with the debtor that we have been hired because we have an attorney willing to take the case on contingency if we can’t work out an amicable resolution. But most collection agencies simply send out their standard demand letter, which is perceived as a weakness, making litigation far more likely than it otherwise needs to be.
The attorney letter may also trigger the debtor to engage their own attorney, and now the collection agency must communicate only with their attorney and can’t talk directly to your customer. While we negotiate with attorneys on a daily basis, it takes away some of the options we otherwise would have during the debt collection process.
Finally, the amount paid to the attorney for a simple letter may have been enough to cover the out-of-pocket expenses of filing a lawsuit. Using our custom approach and proprietary tactics, we resolve over 97% of our successful cases without going to court. But when litigation is required, our clients do typically have to pay $500 to $1,200 to proceed using our nationwide contingency attorney network. We think it makes far more sense to hire a quality collection agency on a contingency basis instead of an attorney to write a letter that will most likely be ignored.
What Collections Agency Is Right for Your Company?
There are nearly 7,000 collection agencies in the USA. Over 50% of them handle commercial collections. However, only about 10% of them are exclusively B2B collections agencies. Collecting from a business is inherently different from collecting a past due credit card, telecommunications, utility, or medical bill from a consumer. The larger the amount you are owed, or the larger the number of claims you have, the more desirable it will be to work with an agency with an exclusive focus on business debt collection to get the best results.
Many companies using debt collectors for the first time think that cost or the contingency rate is a critical factor. But when it comes to debt collection, the success rate is far more important than the contingency rates. Most agencies have competitive contingency rates ranging from 10% to 25%. But success rates vary dramatically. We have an 85% success rate on large viable domestic claims. Our success rate is more than double the B2B debt collection industry average.
Another critical factor is the collection agency’s reputation in dealing with debtors and with clients. Unfortunately, too many agencies still don’t follow the law and illegally threaten or abuse debtors. This can become a public relations nightmare for creditors and cost money.
Sadly, some agencies also have a reputation for collecting money and not paying their clients. Therefore, it is essential to check the online reputation of your debt collector. The Kaplan Group has an A+ rating with the Better Business Bureau and many 5-star reviews on Google and Trustlink. We tell every prospective client about these ratings, so they know where to complain if necessary; therefore, these ratings and reviews can be trusted.
The size, quantity, and type of a company’s claims may also have an impact on what agency is a good fit. Our agency specializes in large claims and international claims. We require that the average size claim be at least $10,000 (we’ll handle claims as small as $1,000 as long as the average size is $10,000). We put a lot more effort into the collection process than the average agency, which is why our success rate is more than double the industry average. We don’t use predictive dialers, form letters series, and minimum wage telecollectors. We use a custom approach on each claim, and each collector has at least 10 years of experience. But to justify that expenditure of effort and expertise, the claims need to be large enough to have a sufficient payoff. The average size claim placed with The Kaplan Group is approximately 10 times the average size B2B claim placed with US business debt collectors. If you have lots of smaller claims, you need an agency that uses more automation to reduce costs and allow them to be profitable on small contingency fees.
About half of the 50 states require that B2B commercial collection agencies be licensed, bonded and/or registered to collect from debtors in their states. Each state’s B2B collection services requirements are provided in the map above. If your customers are located across the country, you need an agency that can provide nationwide service. The Kaplan Group has all the necessary licenses, bonds, and registrations to perform commercial collection services in all 50 states.
Dean Kaplan has traveled to over 40 countries during his career to negotiate a wide variety of business deals, including mergers and acquisitions, joint ventures, intellectual property licenses, and technology standards such as HDMI and DDR4 memory. Most US collection agencies do not have international reach. Some agencies are part of several global collection agency networks, so they can farm out claims to other agencies that have paid to join that network. The Kaplan Group has developed its own network of agencies that also have excellent success with B2B collections and large claims that covers most of the world. We have successfully collected from debtors on all 6 populated continents.
How Collection Agencies Work
Onboarding New Claims
Most agencies require that claims be submitted online. Some agencies simply require copies of unpaid invoices and contact information. This can make sense if they are dealing with large volumes and small balances.
When submitting a claim online with The Kaplan Group, we also request:
- A statement if there is more than one invoice so we can confirm the amount of the claim.
- A copy of all contracts (including purchase orders and sales orders).
- Proof of delivery if products were provided.
- Background information on what the creditor knows about why their customer isn’t paying.
- Emails between the parties if the debtor has explained why they aren’t paying. This allows us to know what excuses or explanations they have already provided, what disputes they have tendered, and what promises to pay they may have defaulted on. It also allows us to see which people at the debtor have been involved, and often we find contact information that our client did not provide.
Our staff works with our clients to make sure we have everything the debt collector is going to need from the start to ensure the highest likelihood of success.
Debt Collection Outreach
Some collections agencies use a series of mailed demand letters automatically issued by their system, automated emails, and phone calls placed by predictive dialers and randomly assigned to a debt collector when the phone is answered. This is appropriate when dealing with large volumes and smaller claims. This collection process tends to be a straightforward ‘you owe this money, now pay’ approach.
At The Kaplan Group, we use a custom approach for each claim. We:
- Study the claim before the initial outreach and look at the debtor’s website to get a sense of their company and business.
- Understand what service or product our client provided and when.
- Read all emails/correspondence to understand the history of the account.
- Determine who the key players are and who we should contact, as we typically only want to reach out to the highest-ranking person at the debtor company who was involved, though not always. Sometimes this involves contacting a senior executive or owner or an individual with the most at stake if the situation worsens.
- Email the debtor, including our demand letter and all relevant documents (invoices, statements, contracts), so that they know we are a legitimate representative of the creditor.
- Follow up with phone calls and emails until we receive engagement.
- Determine the true circumstances around why they have failed to pay. We obtain documents to prove any statements they make.
- Hear out disputes from the debtor, and get information from the creditor to refute any disputes.
- Receive payment/come to an amicable solution, or enter litigation.
We use our judgment from our historical experience in the business world and apply it to the collection process; all large claims are approached as a business problem to be resolved rather than an unpaid invoice to be paid. The goal is the same, but the first step to successful collections is getting engagement. If the debtor never engages, then eventually, we have to give our client the option of suing or closing the claim.
We work hard to avoid litigation due to its extra costs and the slow court process, so the initial contact is important to try to set the right tone. If they have disputes, we let them be heard. If we don’t, we are back to the litigation option. Most of the time, we get them to give us enough detail to have our client provide the necessary information to refute it, and their dispute goes away. At that point, they accept that they have to pay or they will be sued, and most of the time we work out an amicable solution. When they prove they have a legitimate dispute, we will work with both sides to come up with a resolution.
Payment Plans and Settlement Agreements
Creditors, not collection agencies, should have 100% control over any discounts provided to debtors or the length and terms of any collection payment plans. For creditors with a regular volume of claims, they may provide guidelines in advance to their collection agency. At The Kaplan Group, we get permission from our clients before any deal is agreed to, and we get both parties to execute a debt settlement agreement (typically from one of our templates), so there is a contractual agreement between the parties.
There are several important terms we try to get into every payment plan and debt settlement agreement. If the debtor defaults, they owe the original principal amount plus interest from the date the invoice was initially due. They also will be liable for collection costs, court costs, and attorney fees. These provisions put a lot of pressure on them to pay according to the deal. If they default, it is much easier to get a judgment against them as they can no longer dispute the services or products provided. We would simply be suing to enforce the money owed per the settlement agreement.
If there is a long-term payment plan, we want it to be on auto-pay, where we deduct the money automatically from their checking account on the dates specified in the agreement. This way, we don’t have to chase them each month for payments, and it significantly increases the likelihood of getting regular, timely payments. The debtor is allowed to tell us in advance to not run a payment (they won’t agree to auto-pay unless we expressly give them this right), although that does represent default on the agreement. Typically we don’t immediately enforce the default, as going to court will result in a long delay, but instead try to get them back on the payment plan. These agreements always have an acceleration clause so that we can pursue the entire amount immediately if they default.
We also spell out venue and jurisdiction in the event of default. We typically choose the least expensive approach for our client, which will be to litigate (not arbitrate) where the debtor is located. At this point, it is to our client’s advantage to have the case public, as all we are doing is enforcing the settlement agreement, and it is now the debtor who would prefer it to be private. By getting the judgment where the debtor is located, the attorney can commence judgment collection efforts immediately. If we sue in a different state, we then have to hire a new attorney in the state where the debtor is located and domesticate the judgment there, a process that can take 6 or more months and significantly increases the out-of-pocket costs for our client.
Creditors submit claims with defaulted settlement agreements or payment plans to us all the time. These rarely have the provisions above that we typically include and sometimes don’t even allow us to try to collect the original amount owed but just the discounted amount the client agreed to previously.
The negotiations to arrive at a settlement agreement or payment plan is a delicate process. We are very careful to avoid making an offer that we will regret later. Once a lower number has been proposed, it is extremely difficult to go up from that amount. Often we’ll say, “if I could get our client to agree to $X, can you make that happen?” rather than saying, “our client has approved $X.”
We employ lots of little tactics like this to get the best deal we can for our clients – tactics that most people would never think of because they aren’t negotiating all day, every day. We have the same goal as our clients: to get the most money as fast as possible, as that is how we also make the most money.
Remittance to Clients
Collections agencies use a wide variety of methods to pay clients. Some make payments every business day. Others do it weekly, bi-monthly, or monthly. Payments from debtors are to be placed in a trust account separate from the agency’s operating bank account. Checks from debtors need to clear, and the collection agency needs to prepare a statement showing the amount collected, the agency’s fee, and the net amount being remitted to the client.
If the debtor pays the creditor directly, the agency will invoice the creditor or deduct the fee from that payment from other money collected by the agency. The collection agency should get paid its fee from the trust bank account at the same time (not before) they remit to the creditor. Some agencies remit by check, and others use electronic (ACH or wire) delivery.
Debt Collection Litigation
Any reputable collection agency will allow the client to decide if they want to litigate a claim. However, creditors should avoid using agencies that insist on litigation if there is not a successful debt collection effort.
Unless a contract specifies otherwise, the lawsuit has to be filed where the debtor is located. Lawyers for debt collection will file cases within their specific geographic area. In large states, a collection agency may need a debt collection attorney in multiple cities. For collection agencies like The Kaplan Group, which provides services in all 50 states, a network of lawyers for debt collection is utilized.
Most debt collection attorneys will take cases on a contingency basis, getting paid when they actually collect. Many will require a small non-contingent fee that ranges from $250 to $1,000, which can be larger on bigger claims. The creditor must pay in advance for all out-of-pocket costs such as filing fees, process servers, and subsequent judgment collection efforts like bank levies and debtor’s exam. The cost to initiate a lawsuit generally ranges from $250 to $900, but this can vary by state. Click your state on the map above for more specific information.
The cost to sue is relatively small, so it is usually an easy decision for a creditor to spend $250 to $1,200 to file a lawsuit if the debtor company is still open and is not insolvent. However, the contingency rate is much higher, typically about ⅓ and sometimes as high as 40%, compared to the 10% to 25% a collection agency charges. Plus, the court process can take multiple years just to get a judgment, and then the judgment collection process starts. Given these extra costs and delays, agreeing to a settlement with a discount and/or a payment plan is often the smarter business decision than going to court. But if litigation is the last option and the return on investment looks promising, it makes sense to sue.
Having solid documentation is required for litigation. If our clients don’t have a contract and can’t prove that the debtor used the service at an agreed-upon price, then there is a good chance we won’t win in court. That’s when the debt collection attorney will want a higher non-contingent fee. We are able to convince many debtors to pay because we can show them we have all the documentation to win in court and that in the long-run it will cost them a lot more if we go down that path instead of reaching an amicable resolution now.
With the proper documentation, winning the lawsuit and getting a judgment is not typically that difficult. But that doesn’t mean the money is collected. Judgment collection is a completely separate process, and if the debtor is broke or wants to make collection difficult, it can take years, and there is no guarantee that the money will be collected. This is another reason creditors need to consider any reasonable pre-litigation settlement offer.
While most lawyers for debt collection work on a contingency basis to collect the money, if the debtor files a cross-complaint (countersuit) against the creditor, the attorney charges hourly for the defense of the lawsuit against the creditor. There is no way for the attorney to make money on a contingency basis defending the lawsuit, so they charge hourly.
Sometimes it will only cost a few thousand dollars if the cross-complaint isn’t complicated. But if the debtor can make a messy claim (such as custom software didn’t work or services/products were significantly late), the attorney may request a retainer of $10,000 to start, which could get very expensive.
At The Kaplan Group, we solve 97% of our successful cases without going to court. If that doesn’t work, we give our clients a quote for litigation and our recommendation whether to sue or not. We do an ROI analysis to determine our recommendation. All our debt collectors are college graduates, and many have post-graduate degrees such as MBAs or JDs. To us, filing a lawsuit is just another investment opportunity for our client, just like spending money on an advertisement or marketing campaign with the goal of generating a profit. Our clients are not obligated to sue or to use our attorney network for litigation. They always have the option to hire their own attorney or close the claim and take other action.
