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Opening up Customers Wallets

When clients don’t pay up, it may be time to call in a professional debt collectorSpotlight – Banking and Finance

When a customer stiffs gym owner Andrea Hillman, her first reaction is to make a few phone calls and send a letter requesting payment. But after a few months, the owner of Tone Zone Fitness and Training in Howell steps up the pressure by calling in a debt-collection agency.

“Membership in my gym is only $35 a month, and a person can quit by the 15th of the month without owing anything,” she says. “It’s so easy, but some people just stop paying without telling me they’re leaving, and their fees just keep running up.”

Since Hillman opened her facility in December 2004, CNK Consultants, a Freehold-based collection agency, has collected about $2,000 from nonpaying customers. “I’m very pleased with CNK’s results,” she says.

After reviewing documentation to determine the validity of a stale receivable or other debt—usually money owed for 90 or more days—CNK and other third-party collection firms will make written and verbal demand for payment. They often raise the threat of court action.

“We generally work on a contingency basis, where we’ll get 25% of the funds that are recovered,” says Ronald Askew, CNK’s director of sales and marketing. In some cases, the payments may be stretched out over a period of months. “If we don’t get any money, the customer won’t owe us anything unless out-of-pocket fees like attorney costs are incurred,” he says.

Bad-debt collection is big business. In 2004, the most recent year for which statistics are available, companies placed about $202 billion of stale receivables with contingency-fee collection agencies, according to First Detroit, a Michigan-based research and publishing firm that follows the credit and debt-collection markets. That’s down from $220 billion in 2003, but First Detroit President Albert W. Scace says the reduction may be due to more companies selling their bad debt outright to third-party companies like Norfolk, Va.-based Portfolio Recovery Associates, instead of placing them with contingency collection agencies. On average, says Scace, agencies manage to collect 18% to 19% of old debts—sometimes with the help of a judge.

“Nobody goes into a [debt-] collection lawsuit lightly,” says Myron D. Milch, a Hackensack lawyer who specializes in collections. “But when you’ve sent letters and made phone calls and haven’t gotten results, a debt-collection lawsuit may be your best option.”

Milch usually gets from one-quarter to one-third of any recovery, plus out-of-pocket court costs and other fees. “Simply filing and serving a complaint can eat up a few hundred dollars, so I usually won’t handle cases that involve less than $3,000 in receivables,” he says. “Before I take on a case, I’ll look for signed documents, receipts and other proof that a debt really exists.”

He says that some transactions won’t qualify for a court-ordered collection. “Let’s say you drop off some seed or other material to a lawn-care company, and an employee signs for the goods,” says Milch. “That may not be enough to prove that the company actually received the goods, especially if the firm uses a lot of day laborers who can’t be tracked down by the time you go to court to try to collect your payment.”

But creditors who can produce signed purchase orders or other documents have powerful legal tools at their disposal. Milch recalls one case he handled some years back, when a debtor in the exclusive northern New Jersey neighborhood of Alpine owed $15,000 to a client.

“We got word that the customer was selling his house and would soon be moving to Hong Kong,” Milch says. “So I went to court and got a prejudgment writ of attachment that basically gave us a lien on his assets before the case even went to a judge. This was presented to the debtor, who immediately gave us a check for the full $15,000.”

Third-party debt collectors can be very helpful, but selecting the right one involves more than picking a name out of the phone book, advises Thomas A. Muccifori, a partner with Archer & Greiner who spends about half his time on collection work. Checking with friends or colleagues can be a good way to vet a collector and find one that is both effective and operates within the law.

“The federal Fair Debt Collection Practices Act places restrictions on the actions that can be taken in the course of trying to collect a debt, especially from a consumer [as opposed to a business-to-business] transaction,” he warns. For example, a collection agency usually can’t send a letter to an individual debtor’s boss. “In certain circumstances, the creditor company may be held liable for the improper actions of an attorney or agency that it hired. Each violation may subject an offender to a $1,000 penalty.”

Right now Muccifori is defending a New Jersey company that found itself on the hook for the actions of a collection agency. “Thousands of allegedly improper documents were sent out on behalf of my client,” he says. “With a potential fine of $1,000 per document, we could be looking at a nightmare.”

For the most part, however, third-party debt-collection efforts beat the alternative.

“At about one-third of the recovered amount, my services aren’t cheap,” says Milch. “But without me, a creditor will get nothing.”

E-mail to mdaks@njbiz.com

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