Chapter 9: Debt Collection ^[1]

I.   Overview

§9.1   Generally, a collection case arises from a debtor’s default on the payment of an account for goods or services rendered on credit terms. The typical collection case is rather simple: the damages are easily calculated because they represent the balance of unpaid invoices or a statement of account, and expert opinion is usually not necessary. Debtor collectibility is usually the chief concern. In most instances, the case is based on an account of goods and/or services sold and delivered, a promissory note, or a default on some type of business contract. If the matter is much more complicated than that, it may still be considered a collection case, but the attorney may be wise to consider whether to charge more for it or change the fee from contingent (the customary fee on ordinary collections) to hourly.

Many collection cases go to judgment by default. In most instances, the presuit investigation includes confirming that all the defendants are included, that the defendants’ addresses are good, that there is sufficient documentation to support the claim, and that there is a balance due on the account. This is a good point in the handling of the case to consider any additional legal theories such as treble damages on insufficient funds checks and additional defendants, such as guarantors, who may be part of the case. The defenses raised in most collection cases are generally intended to stall the litigation and thereby avoid paying the debt.

As stated, most collection cases are handled on a contingent fee basis. A large volume of files is generally necessary to make a collection business profitable. To handle the claims, you will need an efficient office system, as discussed in §9.11. A collection agency may be a good source of cases. See §9.3.

For a detailed discussion of collection practice in Michigan, see Handling the Collection Case in Michigan (Steven A. Harms et al eds, ICLE 5th ed).

II.   Preliminary Considerations

A. Types of Collection Cases

§9.2   Collection cases fall into two general categories: (1) retail or consumer collections and (2) commercial collections. The distinction between the two categories is significant, as can be seen from the discussion on fees (see §§9.6–9.10) and particularly the discussion on the applicability of the Fair Debt Collection Practices Act (FDCPA) (see §9.5).

Retail or consumer collection cases arise from consumer transactions in which the debtors are individuals. Generally, the account balance represents a personal or household purchase, such as carpeting, furniture, or a recreational vehicle. Commercial collection cases, on the other hand, arise from transactions between businesses. The goods or services are for business purposes.

As discussed in §§9.26–9.35, strategies for postjudgment collection in these two types of cases differ. Commercial claims generally involve business assets, such as inventory or accounts receivable, whereas retail claims involve collection from personal assets and may take the form of wage garnishments or automobile executions, among other things.

B. Forwarders and Receivers

§9.3   Collection cases might come from your clients, from collection agencies, or from attorneys in other states or other areas of Michigan. When a collection agency sends a case to an attorney, the collection agency is referred to as the “forwarder” and the attorney as the “receiver.”

When a claim is forwarded, the collection attorney generally reports to the forwarding agency, which in turn reports to the client. Although collection agencies usually collect the easy cases and turn only the more difficult ones over to the collection attorney, the positive aspect of dealing with an agency is that a claim is usually not turned over to the attorney unless there is still a good address and phone number for the debtor.

Another advantage of dealing with collection agencies is that the agencies and their employees are aware of many of the problems and challenges collection attorneys encounter. Individual clients, on the other hand, may not understand—nor do they really wish to be bothered with—the details involved in starting a collection lawsuit and serving a summons and complaint. By contrast, the collection agency knows that the attorney has to file a summons and complaint with the court, turn the papers over to a court officer for service, wait for service of the summons and complaint, send certified mail when appropriate, and then wait the appropriate amount of time for the court to enter a default judgment. The good agencies therefore advise their clients that the suit process, even when a default judgment is obtained, can easily take six weeks or more. Collection agencies assist their clients in filling out affidavits, answer their clients’ routine questions about judgments and executions, and handle other case details according to established systems developed through years of experience.

C. The Advantages to the Client of Using a Collection Agency

§9.4   To the company having problems collecting its accounts receivable, the collection agency offers a systematized and efficient approach to handling those accounts. Agencies have set practices to follow in demanding money from debtors and are generally efficient in processing paperwork and remittances. Agencies also have a network of attorneys around the country. While an individual company might send only a claim or two to a particular attorney, the collection agency the company employs might send dozens of files to a particular attorney. Therefore, that collection attorney might be more loyal to the collection agency because of the volume and might handle the claim more aggressively as a result of this special relationship. The collection agency might have more influence with the attorney in acting on a particular client’s behalf if it deals with the attorney on a volume basis.

To an outsider, these relationships might seem strange and distant, but they are a product of the unique nature of the collection practice. Corporate lawyers do not wish to handle collection cases on a contingent fee basis, and most companies do not want their collections handled on an hourly basis. Often, a company has a large number of claims, but each must be brought in a different jurisdiction. Most businesses have neither the staff nor the sophistication to locate and supervise the large number of attorneys required to handle these collection matters. A good solid collection agency can be relied on to handle this responsibility.

For a more detailed discussion of making the necessary contacts to establish relationships with direct clients and collection agencies, see Handling the Collection Case in Michigan §§1.9–1.13 (Steven A. Harms et al eds, ICLE 5th ed).