Posted by Carol Mahamedi
November 1, 2021 | 4-minute read (763 words)
When you’re self-employed or own a small business, you count on your customers for income. Unfortunately, survey after survey finds that unpaid invoices are a major problem for most small business owners. Attempts to collect unpaid invoices from clients too often go nowhere. The more time that elapses, the less likely it is the bill will be paid.
Typically, it is written off as a loss, or sometimes a collection agency is retained to recover the money owed. A rising trend among collection businesses is the use of debt collection lawyers. These professionals can submit formal demands and arrange pre-trial lawsuit payments. Sometimes, these interventions are enough to convince the client to pay.
The role of a debt-collection lawyer
A debt collection lawyer specializes in default payment issues and pursues fair debt collection. Collection agencies may retain these professionals to negotiate with debtors. Delinquent customers sometimes pay their overdue balance once legal representation is introduced.
For debts exceeding $5,000, or for more recalcitrant clients, small business owners may skip the collection agency and instead directly hire a debt collection attorney. The latter can make sure the debtor follows an agreed-upon payment plan. In contrast, a collection agency can get a client to agree to a payment plan but they tend to have a higher default rate. The debt-collection lawyer can secure the payment agreement through legal instruments, such as a promissory note or consent judgment. The default ratio for these plans are comparatively low.
When to hire a debt-collection attorney?
A debt-collection attorney may be the better option if you face an unpaid invoice that exceeds $5,000 and the client will not pay despite your concerted efforts. The attorney can help determine the best path forward.
How much does a debt-collection attorney charge?
It depends. Some charge an hourly rate, but others charge a contingency fee. With the latter, you don’t pay anything upfront, but if you win your case the attorney receives a predetermined percentage of the settlement amount. If you lose, the attorney receives no payment.
What to expect if you retain a debt-collection attorney
The attorney may be able to settle with the subject outside of court, in which case, you and the debtor negotiate payment terms with the assistance of the attorney. In the event of a favorable court settlement, the terms will depend on the court’s ruling.
Questions to ask before hiring a debt-collection attorney
Cost: Inquire about their fee structure and consider whether you can manage the cost to file a lawsuit that is not successful. Keep in mind that the expense of filing a court case to recoup unpaid money can be steep, and even if you prevail, you could pay up to one-third of your recovered debt to the attorney.
Skills: Is the attorney experienced at cases relating to smaller business debts, or is their experience restricted to cases against large firms? Inquire about their specific experience and results.
Debt recovery records: An attorney's pedigree doesn’t necessarily correlate with how well they will meet your requirements. Similarly, a lawyer who has been highly successful at collecting debts from large firms may not perform as well when it comes to collecting from an individual or a small firm.
Availability: Determine upfront whether the attorney’s frequency of communication with you throughout the process will be satisfactory.
References: Ask for a list of references and speak to them to assess whether the attorney is appropriate for your issue.
Solo or firm: Hiring an independent attorney could be more cost-effective than retaining a larger firm. On the other hand, the solo practicioner may lack the resources of a bigger firm.
Representation: While a debt-collection attorney may represent you if the case does reach court, this is not guaranteed. Some attorneys operate as advisers and don’t enter the courthouse. If you don’t want to go to court alone, then find a different attorney.
Collection attorney versus collection agency
To recap, a collection agency’s role is to persuade the debtor to negotiate a payment agreement with the creditor. An agency aims to achieve this through repeated contact with the debtor via mail or phone. Note that many collection agencies use a contingency payment model where fees can range from 25% to 50% of the amount of debt owed. The collection agency cannot represent you in court.
If you have already decided to take the debtor to court in the event they don’t pay, and they owe you more than $5,000, hiring a debt-collection attorney may be a viable decision.