Requirements for Debt Collection in the United States
Collecting a creditor’s money as quickly and inexpensively as possible is the primary goal of every professional collection firm. There are times, however, when amicable collection attempts fail. The customer is still in business and has assets, but short of legal action, he just refuses to pay up.
When a creditor elects to institute a lawsuit against such a customer, certain advance payments are required. These fall into two categories: court costs and suit fees.
Court costs represent the money that a law firm needs in order to institute and conduct a lawsuit within the court system.
Each step in the legal process has a cost associated with it (e.g., filing the summons and complaint, serving the customer, filing motions during the course of the lawsuit, etc.). These costs can vary from one jurisdiction to another, are set by legal statute, and are not negotiable.
The attorney firm assigned to the case estimates the total court costs necessary to obtain a judgment and requests this money up-front from the creditor.
It should be noted that attorneys and commercial collection agencies certified by the Commercial Law League of America (CLLA)/International Association of Commercial Collectors (IACC) are not allowed to carry the burden of court costs. In other words, they cannot advance the court costs out of their own pockets, in hopes of reimbursement upon a successful conclusion to the case. Such action — called champerty — is deemed by the CLLA as a violation of law and ethics.
Simply stated, champerty is the practice of a third party participating in a lawsuit in order to share in the proceeds. Among laypersons, this is known as “buying into someone else’s lawsuit.”
In common law, champerty was illegal on the theory that it encouraged lawsuits. While elements of it remain violations of law or attorney ethics, prohibitions have been greatly relaxed in modern times. As a result, only the covering of all costs of an action by the attorney is now formally prohibited.
Despite the fact that the creditor will have to pay court costs out of pocket, the money is not necessarily lost.
Any court costs resulting from suing the customer are added to the amount of the judgment, and are refundable to the creditor to the extent they can be collected from the customer. In other words, if the creditor is successful in obtaining a judgment, the customer is legally obligated to reimburse the creditor for any court costs incurred in suing him. However, these costs are not always collected.
To explain: let’s say the creditor has a $20,000.00 claim and expends $200.00 suing for collection. If the creditor is successful in his suit, the judgment amount would be $20,200.00. The customer, however, pays only the principal amount and refuses to pay the additional $200.00 for the court costs. When customers respond in this way, the only legal remedy for the creditor is to expend further monies to force the debtor to pay the additional amount.
Thus, the creditor is faced with an economic decision: Incur additional costs to collect $200, or accept $20,000 as full satisfaction of the judgment. In most such instances, the creditor will accept payment of the principal to satisfy the debt, rather than incur extra expenses to “chase” the outstanding court costs.
Attorney Suit Fee
The second form of advance payment when legal action is instituted is the attorney suit fee. An overall fee of 10% of the amount collected is the U.S. industry standard for legal actions involving collection.
The suit fee is an additional charge, over and above the contingent collection commissions charged by the collection agency and the court costs described above.
The suit fee is often fully contingent. However, it may also be a combination of non-contingent (advanced at the beginning of the lawsuit and non-refundable) and contingent (only charged if money is collected through suit) components.
In a few cases, the suit fee may be entirely non-contingent. This is determined at the attorney’s discretion. Some scenarios in which a U.S. attorney will most likely request all or part of the suit fee on a non-contingent basis include:
- Cases that are disputed. Where the attorney knows, going into the lawsuit, that a default judgment is unlikely and that numerous court appearances may be necessary;
- Situations where the attorney’s investigation indicates a judgment will probably be uncollectible, yet the creditor still wants to sue just to get a judgment on record;
- Cases that will be heard in rural areas of the country where collection attorneys are few and far between. Attorneys in these areas often command premium fees as they are “the only game in town.” Unfortunately, without a lot of volume in a specific jurisdiction, the collection agency’s ability to negotiate the best rates on the client’s behalf is severely limited;
- Cases in Texas. Texas collection attorneys are notorious for being inflexible regarding contingent suit fees. Due to our longstanding relationships and the volume of accounts forwarded to our Texas affiliate attorneys, ABC-Amega is often able to negotiate contingent fees. However, it is not unusual to see non-contingent suit fee requests from attorneys located in Texas.
The good news is that any suit fee advanced on a non-contingent basis is credited against the overall 10% suit fee ultimately due the attorney once suit is commenced and collections are made. For example: assume the overall suit fee equals $2,000 and the creditor pays $1,000 non-contingent. The attorney will only receive the additional $1,000 if the account is actually collected in full. Also, when a non-contingent suit fee of the full 10% has been advanced, no additional contingent suit fee is charged, unless the final collections total more than the amount upon which the 10% suit fee was calculated.
The lawsuit remains the creditor’s most powerful weapon against defaulting customers. Therefore, despite the extra costs involved, it’s often a good decision to go ahead with legal action.
For tips and information about commercial collections, check out these other articles on our website:
- 6 Tips for Making Collection Calls that Get Results
- 9 Collection Tips for Small Business
- 9 Guidelines for Selecting the Right Collection Agency
- 9 Steps to Help Your OCA Help You
- 13 Strategies to Speed Up Collections
- A Career in Collections? Consider the Possibility!
- Collecting by Phone: The Three-Step Process
- Evaluating Your OCA’s Performance
- Payment Plan Negotiations
- Regulating Commercial Debt Collection
- Using an OCA to Execute Debtor Judgments
- Working with an OCA
Contact us for more information on our commercial collections, accounts receivable management, and third party collection services today!