The primary goal of every professional collection firm is to collect the creditor's money as quickly and inexpensively as possible. Unfortunately, however, sometimes in-house and attorney-amicable treatments just aren't enough. The debtor is still in business and has assets; he just won't be convinced to pay up, short of legal action. Should a creditor agree to legal action, certain advance payments are required to institute the lawsuit. These fall into two categories: court costs and suit fees, both of which are discussed below.

Court costs represent the money that the law firm needs in order to institute and conduct the lawsuit within the court system. Each step required in the legal process has a cost associated with it (e.g., filing the summons and complaint, serving the debtor, 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 therefore not negotiable. The attorney firm, based on its experience, 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) and the Commercial Collection Agency Association (CCAA) 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. 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 this was illegal on the theory that it encouraged lawsuits. While elements of champerty remain violations of law or attorney ethics, the prohibitions have been greatly relaxed in modern times and generally now prohibit only the attorney formally covering all costs of an action.

Despite the fact that the creditor will have to pay these court costs out of pocket, the money is not necessarily lost. Any court costs expended in suing the debtor are added to the amount of the judgment and are refundable to the creditor upon collection in full. That is, they are refundable to the extent they can be collected from the debtor. In other words, the debtor is legally obligated to reimburse the creditor for any court costs incurred in suing him, should the creditor be successful in obtaining a judgment. However, even though the debtor is legally obligated to pay these costs, they 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. But, the debtor pays only the principal amount and refuses to pay the additional $200.00 for the court costs. Unfortunately, debtors sometimes do this and 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.

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 in collection legal actions. This 10% suit fee is an additional charge, over and above the contingent collection commissions charged by the collection agency, and over and above 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 some few cases, it 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. While it is not impossible to successfully negotiate contingent deals with Texas attorneys, it is not unusual to see non-contingent suit fee requests.

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. Thus, if the overall suit fee would equal $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.

Despite the extra costs involved, it is generally a good decision for the creditor to go ahead with legal action assuming: (1) the claim is large enough to warrant the extra costs; (2) the creditor's case is bona fide; and (3) the collection attorney recommends such action. The lawsuit is the creditor's most powerful weapon against defaulting customers. And, generally only good things -- collecting the account -- come from the commencement of legal action. (See What Do You Mean, the Creditor Won't Sue?)

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Robert (Bob) M. Tharnish is a Vice President, Corporate Quality of ABC-Amega Inc. and has 28 years experience in U.S. and international debt collection.

This information is provided by ABC-Amega Inc. Providing domestic and international receivable management and debt collection services since 1929. For further information, contact info@abc-amega.com.