Even with the best credit management procedures and the most care in approving credit customers, some accounts are going to go past due. And, at some point you are probably going to seek the services of a professional collection agency. This article outlines the claim management procedures at ABC-Amega. Similar processes are generally followed by any reputable, national commercial collection agency. As well, it provides some suggestions to making the most of, and getting the best result from your Outside Collection Agency (OCA).

Selecting the Right Collection Partner

The Credit Research Foundation suggests “investigate, evaluate and rate the agencies that you plan to use just as carefully as you do with customers when you grant credit.” We suggest partner should be the operative word. You want an agency that will work with you to understand your business and meet your needs. For some further thoughts on selecting an agency, visit “Selecting the Right OCA”.

The Collection Process

Placing Your Accounts

In today’s world of split-second communications, agencies routinely accept placements via every possible means. Single placements can be mailed, faxed, emailed or submitted via online web form. Bulk placements, taking any form from Excel™ or Lotus 1-2-3™ spreadsheets, to proprietary accounting formats, can be submitted via CDROM, FTP, tape, disk, etc.

What’s most important is that account information is as complete as possible. Definitely include the customer’s business name, a contact person (preferably responsible for accounts payable), address, phone number and, of course, the amount past due. If the buyer has moved and you don’t have current contact information, provide whatever you do have. The agency will utilize the Internet and other sources to find the debtor for you.

Give the agency a complete package of documentation – the more backup detail, the better. Include a complete statement of account, copies of purchase orders, invoices, proofs of delivery, contracts, photocopies of checks for partial payments, personal guarantees, etc., as well as any correspondence where the buyer admits he owes you the money.

To enhance the quality and depth of reporting the agency is able to give back to you, do include “extra” information like invoice numbers, amounts and dates, and the date of last payment.

Claim Processing

When a claim is received, the agency will check to make sure they have all necessary information and enter it into their collection system. They should also cross-reference against their debtor database to determine if there are other claims against the same company. If there are, they can be consolidated to one collector, increasing his/her information and leverage on the account. After placement, you will receive an acknowledgement that the account was received and is scheduled for collection.

Free Final Demand

Often just the threat of referring an account to a collection agency can get a debtor to pay. Most commercial collection agencies in the United States offer a free final demand option. When the account is placed, a demand letter is sent to the debtor stating that you must receive payment by mm-dd-yy or the account will be placed with an outside firm. At the same time, the agency sets up a “proceed” date to move ahead with third-party collection if you have not informed them that the debtor has paid.

Example: ABC-Amega receives a Final Demand form on the 10th of the month, with a “proceed” date of the 20th. We create a file noting the date to proceed. If the account is not paid on or before that date, the file is assigned to a collector to commence handling on the 21st.

We recommend using a 10-day or 15-day free final demand period. Providing an already delinquent debtor any additional time simply delays collection efforts, and will negatively impact your overall collection results. We do not recommend utilizing the final demand on overseas accounts, accounts that are more than 120 days past due, or those on which the debtor has already broken payment promises.

It is important to note that free final demand forms intended for commercial debtors should never be used on consumer accounts as they do not usually contain the language (mini-Miranda warning) required by the Fair Debt Collection Practices Act (FDCPA).

Initial Debtor Contact

The initial third-party contact – usually by telephone – creates the strongest impression on the debtor. It should be made immediately – as soon after the “proceed” date as possible. A good collector will use this call to:

Make a firm demand for payment in full.
Identify important aspects of the debtor company, including structure (sole proprietor, partnership, corporation, etc.), legal name, person responsible for accounts payable, etc. This information will be important down the road if the debtor is not forthcoming.
Determine if the debtor has a potentially legitimate dispute, is in serious financial trouble, is simply stalling for time, or might be likely to “cut and run”. The collector’s skill and ability to “read between the lines” will determine his next course of action.
Elicit a commitment from the debtor. This may be payment in full by a specific date, but in many cases will be a promise to make a “good faith” initial payment, or set up a regular payment plan.

Continuing Collections “In-House”

In-house collection associates will attempt to negotiate payment in full or a reasonable payment schedule via telephone contact, email, faxes and letters for a specific time period, for instance 30-45 days. If the collector’s direct persistence doesn’t achieve the desired results, it is obvious that more pressure is required.

The key to successful collections is to create in the debtor an “escalating sense of cognitive dissonance.” Or, in simpler terms: “The debtor must get an every-growing bellyache.” Handing off an account to a third-party agency increases the pressure. Involving an attorney, and the resulting potential threat of litigation, ratchets up the pressure and consequences even more.

Attorney-Amicable Collection

Some agencies employ in-house attorneys to send out letters on “official” letterhead requiring payment. Many, including ABC-Amega, however, believe that it’s not just any pressure that is required, but local pressure. It’s not enough to forward the account to any qualified creditor’s rights attorney. The attorney must also be situated in or near the debtor’s locale. This is particularly true with international accounts where customs and law may vary greatly from those in the creditor’s country.

It is important to understand that the attorney is actually working directly for you. However, the agency will continue to monitor the attorney’s efforts and act as liaison between the two of you. Collection agencies certified by the Commercial Law League of America, like ABC-Amega, utilize only bonded attorney firms also certified by the League. Thus, you can rest assured that the attorney is well qualified and reputable.

When an account is placed with a local “affiliate”, the attorney will attempt to recover the debt amicably, without resorting to legal action. Occasionally, the attorney may herself make, or hire an investigator to make an on-site visit at the debtor’s place of business. The collection agency itself can also arrange a site visit prior to attorney intervention. (Site visits require an additional fee.) However, in most cases, especially in the United States, the attorney will phone and/or write the debtor demanding payment.

Legal Action

After working the account for several weeks, if the attorney is unable to secure an amicable settlement and feels a law suit might result in collection, she will recommend accordingly. She will also provide an estimate of suit requirements and court costs. These charges will be in addition to the agency’s contingent fees and are usually required “up front”. (Read our article “Court Costs and Suit Fees” for further explanation of these charges.) No legal action should ever be instituted without your express approval.

Before deciding on legal action, you want to have an idea that there is a reasonable chance of collecting. You may not wish to sue if the answer is “No” to any of the following questions:

Is the debtor still in business?
Is there an address where service can be made if the debtor is not a corporation?
Does it appear there would be sufficient assets to satisfy a judgment if one is awarded?
Are there any known disputes?
Has the debtor threatened to file a counter claim?
Can you, the creditor, provide sufficient documentation to substantiate the debt?
Will you be willing to supply a witness if one is required?
Do the costs involved warrant filing suit? (Generally, initial costs to sue should not exceed 10% of the value of the claim.)

The Litigation Process

Litigation in most countries is a slow process and the United States is no exception. Once you authorize a law suit and forward the suit requirements, the attorney will file a complaint with the appropriate court. The next steps will be determined by the debtor’s response, or lack thereof. See our article “Collection Suit Process” for a step-by-step description of the U.S. legal process.

Debtor Payments

Before moving on to suggestions for helping your agency be most effective, a few words about debtor payments are in order.

Generally, the third-party collector will instruct your debtor to write checks out to your company, but send them to the agency. These payments are then deposited into a Trust account, which is maintained by all reputable agencies to hold only debtor payments. In other words, expenses of running the agency should never be commingled with debtor payments. After the check has cleared, the agency will forward you the net amount, after subtracting their fee and any out-of-pocket costs to which you have agreed. (Note, most agencies will consider a “remit gross” method whereby they forward you the entire debtor payment and bill you for their fees.)

If you receive a check directly from the debtor, by all means deposit it to your account and inform the collection agency of receipt. They will then bill you for their fees. However, If you receive a payment for anything less than the final amount you agree is owed, you might want to follow this advice of the Credit Research Foundation:

“If the customer sends you a check after any free demand period has ended, and it has not gone through a lockbox system so that it is already in your account, send it to the collection agency rather than depositing it. Let the agency determine if any restricted endorsements (i.e. a statement on the check like ‘paid in full’ when you have not agreed to the reduced payment) make the check worthless.” (See “Restrictive Endorsements on Checks”)

Helping Your Collection Agency Help You

Once you have placed your account in the hands of the professional collection agency, what can you do to help them collect?

Provide the agency complete documentation and information up-front. If there is a dispute on the claim, give the full details. If you have a domestic judgment against the foreign buyer, let the agency know. It serves no good purpose to hide anything from your agency and, in our experience, it can cause irreparable harm to your case.
Positively do not talk to the debtor once you place your claim. It is likely that, as soon as the debtor receives a collection demand letter, he will contact you to try to convince you to give him more time or accept a compromise. Don’t fall victim to this. If you had to resort to placing the account with an agency, you have already given the debtor more than enough time to pay. And, besides being unethical, speaking with the debtor at this point provides him the opportunity to play you off against your own representatives. The results are generally that you end up with less money.
Don’t micromanage your account. Give your agency time to do their job and get back to you. If they suggest advancing your file 15 or 30 or 45 days, there is a reason. Don’t be impatient. The more time the collector has to spend answering unnecessary requests for account status, the less time he or she has to actually work on collecting your account.
On the other hand, don’t delay in responding to agency requests for information or authorization. ABC-Amega ends up closing hundreds of accounts due to “no client response”. Remember, time is critical. We have faced many situations where delayed response meant the loss of the window of opportunity to collect.

The final and most pertinent bit of advice: trust your collection agency. Select your collection partner wisely. If you have chosen a highly recommended, reputable company with years of experience, you can count on the fact that they will represent you honestly and professionally. Once you’ve placed your receivable in their hands, support their efforts. It is as important to them to collect your account as it is to you. If they don’t, they don’t get paid.

Further information on the third-party collection process can be found in the following Credit-to-Cash Advisor articles:

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Established in 1929, ABC-Amega Inc. provides collections in the U.S., Canada and more than 200 other countries worldwide. For further information, contact info@abc-amega.com.