By: Susan Casey
Collecting
past-due accounts is a challenging endeavor for any small business owner. What is the best way to
get the job done? Hire a collection agency? Bring in a lawyer specializing in collections?
Traditionally,
businesses have assigned the majority of overdue accounts to collection agencies. According to the
Nilson Report, a newsletter that focuses on credit/debit-card topics, 92 percent of the more than
$7 billion worth of charged-off consumer credit card debt that was turned over to outside
collection firms in 1993 was assigned to collection agencies. Only 8 percent was turned over to
lawyers.
Collections
lawyers want to change that percentage breakdown. To make that happen, they have formed a host of
trade associations and are using electronic tools to market their services as debt collectors.
Collection agencies insist they are not impressed by the challenge.
Among
the attorney trade associations mounting the debt-collection offensive are: the American
Association of Creditor Attorneys, which represents 30 lawyers in 37 states, and the National
Association of Retail Collection Attorneys, or NARCA, a not-for-profit organization of 775 law
firms in 50 states.
NARCA is
poised to further expand its influence in the debt-collection industry through a proposed joint
venture with Master Recoveries, a unit launched by MasterCard in 1992. Master Recoveries was
launched specifically to market an electronic recovery management system specially designed to help
credit grantors monitor and collect bad debts.
The
newest collections-related legal association, the National Attorney Network, is a non-profit
association launched in February 1994 by eight collections law firms.
The goal
of these organizations is simple. "We're cutting out the middleman, the collection agency," said
Steven J. Fisher, an attorney with the law firm of Goldsmith & Burns in Westlake Village, who
is a member of NARCA.
Linda
Jansen, executive director of that organization, adopted a more conciliatory tone. "We are more
compatible than competitive," she insisted. "Agencies can only go so far; they can't sue. So they
refer work to lawyers." But Jansen added that her organization is indeed urging companies to
consider going directly to collections attorneys, and bypassing collection agencies
altogether.
What do
collection agencies have to say?
"This is
nothing new," asserted John Johnson, executive vice president of the American Collectors
Association, a Minneapolis-based membership organization of 3,605 collection agencies. "Automation
has been in use by (non-law firm) collection agencies for a long time," said Johnson. "There are
lots of lawyers, and they are running out of people to sue. How many lawyers are there now? One for
every 35 people? They are looking for more and more business."
Lawyers
agreed that the number of lawyers nationwide has risen substantially in recent years, but they
countered that this growth has actually hindered their efforts to expand in the debt-collections
arena. "Businesses didn't know which lawyers nationwide handled collections," said Fisher. "The
National Association of Retail Collection Agencies is now like a Yellow Pages of lawyers
specializing in collections."
Collection
agencies argued that they are better at collecting bad debts because of their greater experience in
the field, having offered that service on a nationwide basis for over 50 years. The goal in forming
the American Collectors Association in 1939 was to create a nationwide forwarding network. "If a
debtor moves from St. Louis to Chicago, we can transfer the account to the local ACA member in
Chicago," explained Nina Douglas, a spokeswoman for the American Collectors Association.
Attorney
associations touted their new systems that allow companies to electronically exchange bad-debt
information with their collection agencies and attorneys.
Predictably,
collection agencies' representatives said they were unimpressed with the law firms' high-tech
offerings.
"There's
no magic," said Ewing Bartgis of Collection Consultants of California, a Glendale-based collections
agency. "We deal one-on-one with people."
Bartgis,
who is also president-elect of the California Association of Collectors, a 420-member trade group
based in Sacramento, pointed out that collection agencies have long been using software specific to
collections. He said he has installed terminals in the offices of many of his clients that allow
them to track accounts.
"I've
also had them call me and ask me to take the terminal out, that it was taking up space," said
Bartgis. "In my experience, most major credit grantors don't have time to track accounts. Lawyer
organizations think they can do something different than us, and I don't think that is the
case."
Lawyers
do have the ability to draft lawsuits and directly represent clients in court.
"You
can't force someone to pay until you have a judgment," said Fisher. Even without invoking that
option, lawyers can initially be more effective than collection agencies because a letter on a law
firm's stationery can have more clout than one on a collection agency's stationery -- merely
because of the implied threat of a lawsuit.
Collection
agencies, however, always have the option of hiring lawyers for those same purposes. "If we
determine that someone has assets, and we need legal documents to attach them, we go through that
process," said Bartgis.
Douglas
of the American Collectors Association, said, "There is a time to use lawyers and a time to use
collection agencies. It may be better to have someone who is involved in solving the problem than
someone involved in litigating, though a certain amount will end up in the legal system.
"When
you litigate, you are increasing costs -- legal fees, court costs -- it adds to the problem of the
debtor," insisted Douglas. Some lawyers countered, however, that even with their fees, the overall
cost could be lower if the collection agency is bypassed.
Douglas
argued that pursuing litigation could backfire by alienating long-term customers. "There is a
public relations issue involved," she said. "Many collection agencies deal with clients, like
hospitals, that have certain guidelines for treating their customers."
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