When to Call Your Collection Lawyer

April 13, 2006

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At this point in the process, you've set up your system for keeping track of your accounts and you know pretty much when you're going to begin making efforts to collect past due accounts. The next question is, who is going to collect the accounts? In other words, are you going to do it yourself? Will you use a collection agency? Will you use a lawyer?

[If you're not familiar with using collection agencies or lawyers, you may want to see our section on how lawyers and debt collectors get paid before continuing with the discussion.]

Generally, doing the collecting yourself is the least expensive of the three choices, while having a lawyer do it is the most expensive. But when figuring out the cost, don't forget to consider the value of your time to the business. If you do it yourself, and it ends up taking up so much of your time that your business suffers as a result, then doing it yourself will actually be the most expensive approach. Also, while doing it yourself is usually the least expensive approach, it's also usually the least effective approach. Hiring a lawyer to do it is usually both the most expensive and the most effective approach.

A good way to tackle the problem is to decide ahead of time how past-due accounts will be handled. One approach is to base your decision on the amount of the past-due account.

For example, your system could be set up as follows:

All past-due accounts under $25 get written off (for more on how that works, see accounting for bad debts).

All past-due accounts between $25 and $500 are collected by you.

All past-due accounts between $500 and $1,000 are turned over to a collection agency.

All past-due accounts over $1,000 are turned over to your lawyer.

The levels you choose may vary, depending upon the type of business you're in and the size of your typical transaction. This approach, however, creates at least two potential problems. First, what do you do with smaller accounts that you can't collect? If you're unable to collect one of the $50-$500 past-due accounts, do you at some point turn over the account to your attorney?

Second, suppose your lawyer's fee is a third of what he or she collects. Suppose you turn over a $3,000 past-due account that your lawyer is able to collect with one phone call because your customer misplaced the bill. If you automatically turn over all accounts above $1,000 to your lawyer, are you possibly throwing money away? Also, are you alienating your larger customers by having a lawyer contact them right after the bill is due?

One possible alternative is to set up a system based on time rather than on amount.

As a second example, your system could be set up as follows:

Past-due accounts no more than 90 days old are collected by you.

Past-due accounts more than 90 days old but no more than one year old are turned over to a collection agency.

Past-due accounts more than one year old are turned over to an attorney.

While this approach solves some of the problems created by the first approach, it also raises new problems. First, it commits you to spending at least some of your time on all of your accounts, which could be enormously time-consuming if you typically have a lot of past-due accounts. Second, the transition of the accounts from the collection agency to the attorney after one year can be troublesome. If the attorney is able to collect the debt, is the collection agency entitled to anything for its nine months of work?

Perhaps the best approach would be to combine the two.

As a third example, your system could be set up as follows:

All debts will be collected by you for 30 days after they're past due.

After 30 days, all past-due accounts greater than $1,000 will be turned over to your lawyer. You will continue to collect all other debts.

After 60 days, all past-due accounts of between $500 and $1,000 will be turned over to a collection agency or to a lawyer.

After 90 days, all past-due accounts under $500 will be turned over to a collection agency.

This approach, as you can imagine, could be difficult to keep track of. If you believe it would be too difficult to track, you should go back to one of the previous approaches. In any event, if you decide to collect any of the past-due accounts yourself in whichever approach you choose, you should check out streamlining your tactics for suggestions on how to improve your collection techniques.