An account goes past due to the point that you have to place it with a collection agency if you’re to have any chance of receiving payment. It doesn’t seem fair that you should have to foot the bill for fees and expenses to collect the money you’re owed – not to mention the interest costs accrued in carrying the bad debt.

Unfortunately, the legal and, even more significantly, the practical issues involved in actually collecting these additional dollars overcome any concept of “fairness” that might be involved.

Legalities of Collecting Interest on Unpaid Accounts

Collecting Interest in the United States

Allowable interest rates on loans and credit sales are set at the state level in the United States. There are basically four types of rates applicable to commercial transactions:

Legal interest rates – the default interest rate if there is no contract specifying a rate.
Contractual interest rates – interest rates allowed under various types of contracts.
Judgment interest rates (post-judgment rates) – rates applied to unpaid judgments from the date of the judgment to the date it is paid. Most courts do allow post-judgment interest.
Corporate interest rates – rates applicable specifically in business-to-business transactions. Not all states have specific corporate rates.

All fifty U.S. states allow some type and amount of pre-judgment interest on commercial transactions; ranging from as low as 5% to basically any agreed-upon rate of interest.

However, in many states, interest on unpaid accounts is only legally enforceable if there is an agreement beforehand stating the amount of such interest (based on the allowable rate in the governing state) and when such interest will begin to accrue. This agreement can take the form of a credit application, a sales or purchase contract, or even something as simple as a new customer account card specifying the interest to be charged. The key requirement is that the agreement, in whatever form, must be signed by the debtor.

Collecting Interest in Other Countries

Each country has its own rules on allowable interest rates. For instance, collecting or even paying interest (riba) is illegal under strict Islamic (Sharia) law. Therefore, it may not be possible to recover interest at all from Middle Eastern buyers.

If it isn’t practical to confer with a foreign attorney, your safest route is to have a written agreement signed by the debtor. This may or may not be enforceable, but you will at least be protected where such interest is allowed.

Legalities of Recovering Costs of Collection

Recovering Costs of Collection in the United States

You cannot recover costs of collection (meaning attorney fees or contingent fees) from a U.S. debtor unless you have a contract, signed by the debtor, that specifies such costs will be recoverable. Even with such a contract, a number of U.S. states forbid recovery of collection costs as “against public policy”. Where such costs are allowed, the courts will often not impose actual collection costs or the full contingent fee. However, expended court costs, including filing fees, service of process, etc., are legally recoverable in all states and are added to the amount of the final judgment.

Some Examples of State Policies re Recovering Costs of Collection

In California, courts will award “reasonable” attorney fees based upon scheduled rates. These, generally, must be substantiated by the creditor showing that time charged was reasonable for the services rendered. In many instances, recovery will be far less than the actual contingent fee imposed by the collection agency/attorney.

In Georgia, the court will allow up to 15% of the principal amount of the debt to be recovered as attorney fees, if a lawsuit is filed.

In the State of Washington, pursuant to Bill SB5331, effective 7/22/01:

“A licensee [collection firm] may collect or attempt to collect collection costs and fees, including contingent collection fees, as authorized by a written agreement or contract, between the licensee’s client and the debtor, in the collection of a commercial claim. The amount charged to the debtor for collection services shall not exceed thirty-five percent of the commercial claim.”

Recovering Costs of Collection in Other Countries

As with charging interest, every country has its own rules regarding recovery of collection costs, and the safest route is to have a written agreement, but to be aware that it may not be enforceable.

ABC-Amega had a recent case regarding a U.S. creditor and Israeli debtor in which there was a signed contract requiring the recovery of collection costs from the debtor. Unfortunately, the creditor discovered that, under Israeli law, there was little if any likelihood of recovering these costs. According to ABC-Amega’s Israeli attorney:

“Under Israeli law and practice, debtors do not pay creditors for costs in processing collection. The only time this happens is in litigation, when a successful creditor-plaintiff receives court awarded costs and legal fees. Even when granted, it is a relatively small amount and never covers even a substantial part of the actual costs of international litigation. The only exception is if the plaintiff can prove that the debtor-defendant acted maliciously, fraudulently, etc.”

In the United Kingdom, on the other hand, the 2002 “Late Payment of Commercial Debts” Act allows the creditor to charge interest on late payments whether or not there is a contractual obligation that specifically provides for this. The Act also provides for the recovery of reasonable collection costs whether or not legal action is taken. It should be noted that a non-UK creditor can only take advantage of this regulation if the contract with the UK debtor is written in compliance with UK law.

Practicalities of Collecting Interest or Recovering Collection Costs

Legalities aside, what are the odds of collecting interest or recovering collection costs on delinquent accounts? According to two ABC-Amega experts, Robert Tharnish, vice president international and Frank Battaglia, vice president operations: “It depends.”

If you have a signed contract, have filed a lawsuit, and have received a favorable judgment, then you will be awarded at least post-judgment interest and possibly more. Assuming the judgment is collectable, there is a good chance you will be able to recover some of your extra costs.

What if you have a signed contract, but aren’t willing to take legal action? Can your collection firm “force” the debtor to pay the extra charges? Our VPs say, “not really”. It is only possible to enforce a legal contract via a legal action. Collectors can’t visit the debtor’s place of business and strong-arm him into paying the charges. At least not reputable and professional collectors.

That doesn’t, however, mean that we can’t try to collect, even in cases where the creditor has nothing in writing.

“ABC-Amega will always try to collect overdue interest on an amicable basis. And, if there is some kind of written documentation (even an air bill mentioning recovery of collection expense), we’ll make a try for collection expenses too,” said Frank Battaglia. “When there is some other leverage on the account, for instance shutting off the debtor’s access to some essential service, we’ve been quite successful.”

Bob Tharnish adds, “If the debtor balks, then we use these costs as a negotiating tool. In other words, we tell the debtor, if you pay the principal immediately, the creditor might waive the additional charges. Even without such leverage, some debtors occasionally pay interest expense out of ignorance. Most know better, however, and refuse to pay.”

Summing Up Your Ability to Recover Interest and/or Collection Charges

It comes down to this, if you’re serious about collecting interest and recovering the costs of collections from delinquent buyers, you absolutely must have it in writing with the buyer’s signature. Such documentation gives you, and your collection firm, the best chance of making good on these extra dollars. Remember, however, that even with a signed contract, the only way to force the debtor to pay costs, assuming they are legal in the debtor’s jurisdiction, is through legal action.

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This information is provided by ABC-Amega Inc. -- providing 1st and 3rd party commercial collection services since 1929, and collecting in more than 200 countries worldwide. For further information, contact info@abc-amega.com.