When clients donÂt 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.
ÂMembership in my gym is only $35 a month, and a person can quit by the 15th of the month without owing anything,Â she says. ÂItÂs so easy, but some people just stop paying without telling me theyÂre leaving, and their fees just keep running up.Â
Since Hillman opened her facility in December 2004, CNK Consultants, a Freehold-based collection agency, has collected about $2,000 from nonpaying customers. ÂIÂm very pleased with CNKÂs results,Â she says.
After reviewing documentation to determine the validity of a stale receivable or other debtÂusually money owed for 90 or more daysÂCNK and other third-party collection firms will make written and verbal demand for payment. They often raise the threat of court action.
ÂWe generally work on a contingency basis, where weÂll get 25% of the funds that are recovered,Â says Ronald Askew, CNKÂs director of sales and marketing. In some cases, the payments may be stretched out over a period of months. ÂIf we donÂt get any money, the customer wonÂt owe us anything unless out-of-pocket fees like attorney costs are incurred,Â 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. ThatÂs 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 debtsÂsometimes with the help of a judge.
ÂNobody goes into a [debt-] collection lawsuit lightly,Â says Myron D. Milch, a Hackensack lawyer who specializes in collections. ÂBut when youÂve sent letters and made phone calls and havenÂt gotten results, a debt-collection lawsuit may be your best option.Â
Milch usually gets from one-quarter to one-third of any recovery, plus out-of-pocket court costs and other fees. ÂSimply filing and serving a complaint can eat up a few hundred dollars, so I usually wonÂt handle cases that involve less than $3,000 in receivables,Â he says. ÂBefore I take on a case, IÂll look for signed documents, receipts and other proof that a debt really exists.Â
He says that some transactions wonÂt qualify for a court-ordered collection. ÂLetÂs say you drop off some seed or other material to a lawn-care company, and an employee signs for the goods,Â says Milch. ÂThat may not be enough to prove that the company actually received the goods, especially if the firm uses a lot of day laborers who canÂt be tracked down by the time you go to court to try to collect your payment.Â
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.
ÂWe got word that the customer was selling his house and would soon be moving to Hong Kong,Â Milch says. ÂSo 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.Â
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.
ÂThe 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,Â he warns. For example, a collection agency usually canÂt send a letter to an individual debtorÂs boss. ÂIn 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.Â
Right now Muccifori is defending a New Jersey company that found itself on the hook for the actions of a collection agency. ÂThousands of allegedly improper documents were sent out on behalf of my client,Â he says. ÂWith a potential fine of $1,000 per document, we could be looking at a nightmare.Â
For the most part, however, third-party debt-collection efforts beat the alternative.
ÂAt about one-third of the recovered amount, my services arenÂt cheap,Â says Milch. ÂBut without me, a creditor will get nothing.Â
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