Hiring A Lawyer For Collections - of bad debts - Brief Article

Nation's Business, May, 1999 by William Atkinson

William Atkinson is a free-lance business writer in Carterville, Ill.

Collecting bad debts is perhaps the most unpleasant job that a small-business owner can face. Although collection efforts generally are handled by agencies, there are times when it pays for an entrepreneur to hire a lawyer for assistance. This usually is the most expensive approach to debt collection, but often it's the most effective.

How do you decide whether it's time to hire a lawyer rather than use a collection agency? Suggestions for making that decision are offered by lawyer Robert Weissman of Westlake Village, Calif., who teaches seminars in collection practices to construction suppliers and contractors. He recommends that business owners consider three factors:

1. The size of the account. Certainly, your criteria for determining the "dividing line" will depend on the size of your business, the average value of your accounts, and the industry standards for collecting.

Regardless of those considerations, Weissman recommends that you consider bringing in a lawyer for collection work on any overdue account of $10,000 or more.

Tom Shimko, corporate credit manager for Southdown Inc., a cement and concrete manufacturer in Fairborn, Ohio, concurs: "We use a collection agency for small accounts because we pay a contingency fee. And we give the larger accounts to attorneys."

2. The complexity of the account. "Attorneys can provide personalized attention to your needs," says Weissman. "They are also aware of the nuances of the law in various jurisdictions, so they can provide you with some services that collection agencies may not be able to provide."

Says Shimko: "We often use a collection attorney when past-due accounts involve mechanic's liens [a lien secured by property] or are complex in other ways."

3. Whether the account needs some "shaking up." In some instances, turning an account over to a collection agency may be all that's needed to get the customer to pay.

Some customers, however, may be "collection-wise" and may pay no attention to collection agencies. "When a customer finds that an attorney is involved, though, it can often be sufficient to change the status quo in the customer's mind," Weissman says.

Paving The Collector

It's important that a lawyer hired to collect on an overdue account be a specialist in the field. Such lawyers, says Weissman, "are usually no more expensive than generalists." Experienced lawyers can get more done in less time and generally can be more successful in the outcome, he says.

The two most common fee arrangements when working with collection attorneys are contingency and hourly. Each has its pros and cons.

A contingency-fee arrangement--essentially an ongoing relationship with a specialized collection attorney--might be advisable if you frequently have a large number of high-dollar-value accounts that need to he turned over for collection. Contingency fees average around 33 percent of the amount collected.

There are potential disadvantages in a contingency-fee arrangement, however. For example, it can make attorney-client teamwork difficult. 'The attorney wants to do as little work as possible to get the best results possible," says Weissman, "while the client wants the attorney to do whatever it takes to get results.

"As a result, someone generally loses. If the attorney achieves results quickly, the client loses because of the cost of the fees. On the other hand, an attorney who spends too much time on contingency arrangements is going to lose."

An hourly-rate arrangement is generally preferable if you have only an occasional high-dollar account that needs attorney work.

"Attorneys who represent clients on an hourly basis tend to spend the appropriate amount of time to do the work necessary to get results," says Weissman. "It is generally a fair arrangement because the client pays the attorney for the actual work performed."

The higher the value of the account, the more sense it makes to seek an hourly fee arrangement. You get the level of service you need at a reasonable rate, and you stand to collect a larger amount than you might get under a contingency-fee arrangement.

Paying by the hour has an obvious and significant potential downside, though. If the attorney fails to collect, you still pay the lawyer's fee even though you have nothing to show for it.

Sending A Message

Once you've hired an attorney, keep up with progress on the account. "Clients should play active roles in helping attorneys pursue claims in order to get the best results," says Weissman.

Southdown's Shimko says he keeps up with all activities associated with attorney collections. "Often, our attorney will end up talking with a debtor's attorney, which is something that we want to happen," he says. "This shows that the debtor is serious and that there is obviously something there. If the debtor doesn't get his attorney involved, it may mean he's in dire straits."

If Southdown's attorney is unable to work out an arrangement, the company may sue the debtor. "Often, this brings further communication and shows our customer that we mean business," Shimko says. "This step alone often resolves the problem, and we get paid. If not, we will pursue it through the legal process."