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By Alan V. Thaler, Attorney at Law
Somebody owes you money and refuses to pay. You have several options for collecting that money. For some, these options can be very mysterious and confusing. Should I go to a collection agency to hound the debtor into paying off the debt (or filing bankruptcy and discharging it)? Should I try to collect it myself; or, maybe I should seek out an attorney, specifically a collection attorney? Here are some thoughts which you may find useful if you find yourself in this position and you want to get paid the money you are owed.

Statutes of Limitations

In California, for starters, oral contracts (any contract which is not in writing) have a two year statute of limitations . This runs from the date of contractual breach, in the usual collection case from the date the obligation was due or the last partial payment tendered. The same rule applies in calculating the statute of limitations on written agreements, except that the creditor has four years to file a lawsuit and not lose that creditor's collection rights by sitting on them . If the action could be considered a "book account" of one or more ledger entries (particularly where the creditor has invoiced the debtor), then a common law action for an account stated can still be brought within four years of the breach. In any event, assuming you have not waited too long, at some point you decide this debtor needs some additional coaxing if you are ever going to get the debt paid.

Collection Agencies

One option is to approach a collection agency. Collection agencies typically employ people called collectors, who receive commissions based upon a percentage of every dollar they are able to collect. They often send a form letter to the debtor and follow up with increasingly aggressive telephone calls, staying just within the Federal Fair Debt Collection Practices Act and sometimes not. If the collector feels your debtor will respond to threats or harassment, they will usually take this tack. If it works, and they can stay within the law, collectors will use any method of recovery and the collection agency they work for will keep 40% to 50% of every dollar collected, remitting you the difference.

There is, however, one thing to be aware of: When you hire someone to collect a debt for you, they are acting as your agent. If they go a little too far, if they get a little over-zealous, if they go beyond the restrictions of the Federal Fair Debt Collection Practices Act, they are doing so in your behalf. As such, you could be held responsible for breaching this Federal Law.

Collection Attorneys

Attorneys, of course, also are bound to obey the web of state and federal laws governing collection of debts. Additionally, though, we have other ethical duties to obey; and, if we cross the line, we are subject also to disciplinary action which might result in the loss of our license to practice law. Accordingly, an attorney is much less likely to violate any of the restrictions which would endanger your rights to collect or subject you to other penalties.

Further, as attorneys, we generally approach debtors from the standpoint of a prospective collection lawsuit. In other words, an attorney will look at the collecton of your debt as a complete process--from the intital contact through the eventual judgment collection should they fail to make prompt payment arrangements. I try to point out that settling the matter now will cost the debtor far less than waiting until my client has gone to the trouble and expense of reducing the matter to a money judgment, not to mention the attorney's fees and court costs for both sides, for which the judgment debtor may also be liable.

An attorney approaches such matters more as a chess game than as a gun duel. One other benefit of this approach is often overlooked. If I can persuade a person to arrange a reasonable payment plan to get you the money you are owed, you can often expect a renewed business relationship with that customer--with a new understanding that it IS a business relationship and that you mean business and will expect to get paid or take appropriate action. Most often, if you take the Collection Agency "strong-arm" approach, the relationship is over and that customer is forever lost.

Interest on the Debt

If there is a provision in the contract for interest, as long as it is not a usurious interest rate, the creditor can recover same. If not, once you get a court judgment, it will earn interest at the rate of ten percent (10%) per year . California judgments are valid and enforceable for ten years and they can be renewed (and the interest rolled into principal) every ten years thereafter.

Legal Fees for Collection

So that is what I can threaten deadbeat debtors with. I can and will sue for my clients in state and federal courts, seeking a monetary judgment for the full amount of principal due, interest at either the contractual or legal rate, attorney's fees and costs. The creditor client might only have to advance a "suit fee" of a few hundred dollars to cover the court filing and service of process and other costs, all of which is totally recoupable within the judgment I obtain. For commercial clients, i.e. trade creditors, I usually charge a sliding scale contingent collection fee established decades ago by the Commercial Law League of America, which decreases as the amount recovered increases. Consumer creditors and individuals typically hire me to collect their debts on a 30% contingent rate. The most important word above is "contingent." This means that I get paid no fees unless I recover money for my creditor clients. Some people refer to this as an "eat what you kill" arrangement but I prefer to simply tell clients they will see at least 70 of each dollar I successfully collect for them. My tactics are straightforward and I have learned quite a bit about the psychology of collection work in 17 years of dealing with human nature, so my batting average is well over .600 in terms of dollars recovered.

What's Best For You?

In conclusion, it really depends upon what approach you want to take. If you want someone to hound your debtor into paying, and you don't care how they do it, and you have no interest in any future potential business from that customer, that is probably better case for a collection agency than a law office. I take a more professional approach and try not to ever emulate the collectors in their zeal to harass debtors into payment. The choice is yours and I respect the fact that we each have our respective bailiwicks.

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