Paying
Lawyers and Debt Collectors
Lawyers and debt collectors usually get paid by taking a
percentage of what they collect. The amount is usually 33
percent, although it can range from as low as 15 percent to as
high as 50 percent.
In addition, if you have your lawyer file suit on your
behalf, you'll usually have to pay the court costs (about
$50-$100) up front, although you can recover those costs from
the debtor if your suit is successful. Also, if a lawsuit is
filed and there are expenses involved (such as the cost of
witness depositions), the expenses are taken off the top. In
other words, the expenses are subtracted from the amount your
lawyer is able to recover, before your lawyer takes the
one-third, or whatever amount you've agreed upon. However,
unless the amount owed to you is especially large, there
shouldn't be too many (if any) expenses. You should discuss this
with your lawyer before you agree to turn over the account.
Here are a few guidelines for hiring a lawyer or debt
collector:
- Don't turn over a past-due account for collection until
you're sure that it's "uncollectable" by you. In
other words, don't turn over any past-due accounts that
haven't been paid because of some simple oversight on the
part of the customer. You're throwing money away if you turn
over a past-due account that you could have collected with a
single phone call.
- It's not cost effective to have a lawyer collect your
small debts, and most lawyers won't agree to do it anyway.
The idea of spending a couple of hours collecting a $30 debt
for a $10 fee just doesn't light a fire under too many
lawyers. What constitutes a "small debt" will
depend upon the lawyer. For an alternative use of lawyers to
collect smaller debts, see streamlining
your tactics.
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Be extremely wary of paying a lawyer by the
hour to collect your debts. In fact, don't do it
unless you have a specific task you want the
lawyer to perform (for example, write two
letters). Otherwise, you could end up paying out
more than you collect.
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- Collection agencies usually will handle smaller debts, but
only if you give them volume. They're probably not going to
be interested in collecting two $25 debts, but they may be
interested if you have 100 of them.
- There are no hard-and-fast rules for using a lawyer versus
a collection agency. Lawyers are usually more expensive and
more effective (because, unlike collection agencies, they can
take the debtor to court for you). Your decision might be
made by which past-due accounts your lawyer is willing to
take, or it might be made by whether you're willing to take
your customers to court, if necessary. If you're not, you
might as well use a collection agency.
- If you want to use a collection agency first and then a
lawyer when you reach the point of filing suit, make sure
that you carefully discuss with the collection agency how
the files will be transferred to the lawyer. In fact, if you
don't already have a lawyer, you may want to consider
getting a referral from the collection agency. If the lawyer
and the collection agency have worked together in the past,
the transition shouldn't be difficult.
- If you turn over your accounts to a lawyer, carefully
spell out your fee arrangement.
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As an example of the types of situations your
agreement should cover, suppose you turn over
several large past-due accounts to your lawyer
with an agreement that the lawyer will receive
one-third of what is collected. Suppose further
that one of those customers pays you directly,
after the lawyer sends out a letter but before
the customer receives it. In other words, the
customer didn't know that the lawyer was
involved. Does the lawyer get one-third of that
account? Generally, yes, unless you spell out a
different arrangement.
Set up a sliding scale, if possible. For
example, suppose you agree that your lawyer will
send out two letters, then will make a personal
visit or telephone call, and then, if necessary,
will file suit against the customer. You might
agree that the lawyer will get 10 percent up
until the personal visit or phone call, 20
percent up until suit is filed, and 33 percent
thereafter.
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