Commercial debt collection is a frustrating business no matter how you approach it, and it can also be a fairly expensive undertaking when you account for collection costs, attorney fees, court costs, lost interest, and various other expenses.
One of the most commonly misunderstood aspects of debt collection deals with which types of expenses can be recouped from the debtor and what a creditor needs to have in place for that to happen.
In order to help with that, we have pulled together all of the most common types of expenses with a quick explanation on which ones can be passed on to the debtor in a given situation.
Collection Costs
In most commercial debt collection situations, the collection agency that you are working with is going to charge you a contingency fee, which is a certain percentage of the amount that they are able to collect.
Contingency fees are a great deal for the original creditor because they only need to be paid if the collection agency succeeds in recouping some of the amount owed, and they can be paid right out of the amount collected.
In some states, creditors are permitted to add the cost of hiring a collection agency onto the amount owed if there is a clause in the original contract between the creditor and the debtor stating this.
Of course, that clause needs to be in the original contract with the debtor, so it will have to be established prior to the account going into collections. For that reason, this should be a regular part of your credit check process.
Attorney Fees
Another common cost associated with commercial debt collection is the attorney fees that will come into play if the collection agency determines that legal action is necessary.
In some cases, legal representation is included in an arrangement between the original creditor and the collection agency. But if additional representation is required, there will obviously be additional costs as well.
Just as with collection costs, many states allow creditors to pass along the costs associated with legal representation if there is a written agreement between the creditor and the debtor stating that. And since attorney costs can be quite significant, this is definitely something you want to have spelled out in your credit agreement.
Types of Interest
In most collection scenarios, original creditor and the collection agency working on their behalf are entitled to charge the debtor a reasonable interest rate for the amount owed. This amount often ranges from 6% to 10% depending on what state the transaction happened in and what was specified in the original credit agreement.
If a collection ends up in a courtroom and a judgement is obtained against the debtor, the court will make a distinction between the pre-judgement interest that is owed and any post-judgement interest that will start accruing from that point forward.
Depending on the amount that is owed to the original creditor, the interest could work out to be a significant amount of money, so this is not something that anyone wants to take lightly. Once again, this should be clearly explained in your credit agreement prior to doing any business with a customer.
Negotiating Collection Fees
If everything is spelled out to a debtor in writing before any goods or services are ever exchanged, expecting to pass along most of the costs associated with a collection is perfectly reasonable. However, most creditors never recoup those extra fees, and for the most part, they don’t really mind.
The reasons for that is that the best way to leverage those extra charges is to offer to waive them in exchange for a quick repayment plan. So, in many cases, the original creditor or the collection agency is happy to waive their right to collect a little bit extra in exchange for receiving the bulk of the amount right away.
Because commercial debt collection can be so complicated, it is always to the benefit of the original creditor to have an agency like Direct Recovery to work with. Having that level of experience in your corner will ensure that you are able to get as much as possible back from a delinquent account without sacrificing anything in terms of fees or interest.
Once an account reaches delinquent status, the odds of recovering any amount from the debtor fall off dramatically. Collection and attorney fees are not something you are going to want to hear about in these situations, but if you are working with solid professionals, they will dramatically increase your chances of recovering some part of the amount owed to you, which is always better than nothing.
