Collection Agency or Law Firm: Which Should I Use First?

This is a question that every credit person asks from time to time. The answer lies in understanding two factors:  the type and amount of the receivable and the strengths and capabilities of the person you hire.

Collection agencies use special software and automated phone systems to systematically make calls and send letters requesting payment. This approach can be successful particularly when the dollar amount of the receivable is low and the number of transactions high. However, there are other instances in which having a law firm handling the receivable at the outset is prudent.

Law firms also have software tools, write demand letters and make phone calls. However, in our view these contacts are taken more seriously when an attorney is making the inquiry. If the debtor does not pay upon demand, they know upfront the attorney has the capability to file suit without contacting or involving anyone else.

Another benefit to having a lawyer involved at the outset has to do with understanding technical issues and counterclaims. Attorneys can distinguish a valid counterclaim from a bogus excuse, and are responsible for knowing the key dates the creditor has to meet: mechanic lien and bond deadlines, statute of limitations, and other court deadlines. Related to this, credit managers understand the passage of time is the enemy of collecting a receivable. As time passes, witnesses forget, documents are lost, customers go into bankruptcy, and leverage is lost. If involving a lawyer from the beginning shortens the cycle to payment, that’s a big plus.

Yet another advantage is that in some law firms like WFJ, only the attorney and perhaps their paralegal are involved in the case. A collection agency working with a phone bank or group of collectors generally does not assign one person to a claim. We believe it helps to have the same person dealing with the debtor on each phone conversation. We also understand that you may need to collect without alienating your customer. While this is never an easy task, law firms can be tactful and firm. We believe by having one lawyer at the helm there is less potential to unduly aggravate a customer.

Regarding cost, it is important in today’s marketplace to be competitive on fees. At WFJ, our contingent and hourly fees are based on the volume and type of receivables, but they’re always competitive, and in keeping with—or better than—the industry norm.

Last, at WFJ we take a holistic partnership approach to working with our clients. When reviewing receivables entrusted to us, if we see that improvements should be made to the company’s terms and conditions, credit application, personal guarantee, invoice, or collections process, we will suggest such changes. We work together with our clients to help make it easier for them to collect in-house. Well-drafted terms and conditions, credit applications and personal guarantees not only improve our clients’ ability to collect but also give us the tools needed to be successful if placement is necessary.

So what’s the answer again to the question? If you have high numbers of low dollar receivables, a collection agency may be your best bet. If your collection files involve technical issues like lien or bond rights and deadlines, the potential for counter claims, or higher dollar amounts, an attorney-collector may be your best bet.

Attorney Gary J. Van Domelen