Keys to collecting debt legally and successfully include preparing a policy and procedure manual and a credit application form. A measured approach to debt collection is better in the long run than immediately going to a collection agency or court. Consumer credit laws affect preliminary debt collection methods, while the Truth-in-Lending Act regulates the amount of interest that can be charged on overdue payments.
Understanding the aging of Accounts Receivable and Accounts Payable makes it easier to understand the collection process.
The basic message here is simple. The longer an account goes unpaid, the more difficult it becomes to collect. However, there are two different types of accounts that historically take longer to collect. Accounts that are owed by the state or federal government usually take 60-90 days to pay. Medical accounts will vary depending on the type of insurance the patient has. You may want to wait or call to check the status of the account before deciding on further activity. It is important to note that unless it is a worker's compensation claim, most all other insurance companies have an agreement between the client and the insurance company, not the patient and the doctor. Client/patients should be making payment arrangements on their medical/dental accounts whether insurance pays or not.
That being said, the biggest problem with any business and their collection department is that in many small businesses, there is no collection department. They are relying on the accounts receivable clerk to also act as the collector and they are already busy getting invoices out and keeping up with customer payments. There has never been a set procedure regarding credit policy. Many businesses "shoot from the hip" and just hope people pay them on time.
Local collection/credit bureaus usually offer free services to help businesses establish reasonable credit policy. It should be a free service. They will, of course, expect that you will use their resources when the time arises. Another issue is that businesses don't understand their state's Check Law. So, they may not be following proper procedure for accepting checks. Your local County Attorneys office should be able to give you a training session or at least proper information.
No account, with the exception of the government or certain medical claims should be hanging around uncollected for more than 90 days. By 120 days very serious measures should have been taken. After the original billing goes out, a notice should be sent once the due date has past. Notices should be sent out at 30/60/90 days. During this time, phone calls should be attempted to reach the party. If no arrangements are made and there has been no response, then there are a few options to take:
- Send out a Pre-collect notice with options
- Turn it over to a collection agency
- Take it to court yourself
Pre-collect is an interesting concept. For a very small fee per account a collection agency will send a notice to the "debtor" (if they don't pay, they cease being called "client") basically saying, "Hey, we're monitoring this account, make arrangements to pay or we'll take the account over." The client has the chance to pay the business directly or if they don't, then they've made that choice. You can add options to call and make special arrangements or to seek out credit counseling to help pay the bill. But, if they don't respond at this point, don't waste your time.
There is a place for collection agencies. You do not have time to mess with an account that isn't paying. As we said before, take action no later than 120 days out.
Generally, a collection agency does nothing but collect past due accounts for businesses. They are considered by law third party collectors. This means they must follow state and federal laws in the collection of a debt. One of the laws they must follow is the Fair Debt Collection Practices Act or FDCPA. When you are attempting to collect your own accounts, but have yet to turn them over, you are considered a first party collector. Depending on your state, you may have certain laws to follow. If you or the collection agency break the law in the collection of a debt, the debtor may sue. Make sure you understand the laws of your state when you begin to collect your accounts. Your attorney should be able to research this for you.
When you turn the account over to collections, you have "sold" the account to them. We do not recommend you pay any fees up front, but rather choose an agency who will collect on a contingency basis. If they do manage to collect an account, they receive up to 50% of the money. So, if someone owes you $500 and it is collected by the agency, you would receive a check for $250. The account would then be considered paid in full. An agency may decide to sue the debtor and all costs for this would be covered by the agency. Sometimes the agency will garnish a debtor's pay check until the debt is paid in full. Most agencies worth their salt have a representative that works directly with you to explain their procedures. As with any business, it is important to check the collection agency out with the Better Business Bureau, Secretary of State or other area businesses who may be able to shed light on their credibility. Do not use a collection agency from out of state. Stick to the locals.
Take it to court yourself:
You should understand what is expected when you use the legal system. You may hire your own attorney or go to court by yourself, depending on the amount of the debt. ALWAYS be completely prepared before you walk into court. Be professional. Do not become angry with the debtor. You would be surprised at what some businesses have done to the debtor because they were upset. It is time consuming, so unless you or one of your staff is trained in this area, you may want to use a collection agency instead. But, with some proper training and organization, you will be able to manage quite nicely on your own (as always, consider the time involved and the trade-off for more productive activities, such as generating new business, that you could be pursuing.)
Much of the nastiness of collection can be removed by having a clear policy and procedure set in your credit department. Take the time to do that and you should easily have 98% of your clients paying on time. If you don't set clear policy, you will soon regret it. The person who is "selling" the product, should NOT be the person "collecting" the debt. It's too much of a conflict. If you're a very small business and do not have separate personnel, you may just want to use a collection agency if all other attempts within that first 120 days fail.