Selecting the right product between “Collection Letters”, “Collection Calls” and “Legal suit” is important. Well, it primarily depends how old is your debt and how large is the outstanding balance.
Kindly allow me go a little bit off topic for like 15 seconds before we discuss the main subject. One thing is very clear, if a debtor has not paid you within the first 30 days then the likelihood that they will pay now is really low. These 2 letter words “Collection Agency” have the same impact on debtors, like when you are driving and you see a “cop”. The moment you spot a cop, you suddenly check if you are wearing the seat belt, or if the speed of your car is within limits or for any other violation. Similarly when a debtor knows that the past due amount is being handled by a collection agency, the probability of getting paid suddenly increases. The debtor knows that a collection agency will employ several tactics to make him pay and may even add a record on his credit history or even file a legal suit.
Your strategy should be based on the number of days the debt has been past due.
| Softer Collection: Fixed Fees based | Hardcore Collections: Contingency Based | ||
| Step 1 | Step 2 | Step 3 | Step 4 |
| Contacts made on your name ( Letters + Auto-Calls) | Contacts made on agency’s name ( Letters) | Debt collector contacts the debtor multiple times on the phone. (Personal Calls) | Legal Suit filed on the debtor |
| Submit after 30 days past due | Submit after 60-120 days past due | Submit after 120 days past due. | After Step 3 or balance is high |
First two steps are Flat Fees Services ( I really like flat fees services because they are so cost efficient and the debtor pays you directly)
Step 1: Here a collection agency sends 5 reminder notices under your business name ( no mention of collection agency anywhere on it). Some agencies will combine 2 Automated calls and 3 Letters instead all 5 letters.
Step 2: Collection letters are sent under collection agency’s name, and that this notifies the debtor that this account is being transferred to a professional collections agency.
Next two steps are Contingency Services (This becomes a necessity when the account is 120 days past due. No fee is charged unless the agency recovers money.)
Step 3: A “debt collector” will actually call the debtor ( usually multiple times) and insists that the debt needs to be paid off.
Step 4: A legal suit against the debtor is filed. Less than 2% of the total cases qualify for legal suit.
Check this >> Cost of hiring a collection agency
When/Why should you submit an account for Step 1:
You should assign an account for “Step 1” immediately when an account is 30 days past due. Even though a collection agency will send reminders ( letters or calls) under your own name, they will do some very important verification/background checks which you will likely not do. The most important at this stage is “Change of Address or Phone“. Collection agencies have ways to know the debtor’s latest address or new phone number. Additionally the letters they send are professionally crafted and their intensity increases with each letter. They cost only about $15 per account ( each account = 5 contacts made to the debtor). Imagine, even if a single debtor pays you $1000, you would have recovered your entire investment with the agency. In most cases a collection agency will be able to collect about 60%-70% of all accounts assigned if accounts are assigned after 30-45 days. And your staff cannot beat the cost, $15 for 5 contacts. That’s about $3 per contact made.
When should you submit an account for Step 2:
If an account has completed “Step 1” and remains unpaid, instruct your collection agency to transfer all accounts automatically to “Step 2”. If you are using “Step 2” directly then assign accounts which are 60 to 120 days past due. Usually the cost is the same as “Step 1”, about $15 per account. This step comes with additional benefits. Since the demands are under the name of collection agency, there is a lot of pressure on debtor to pay it off. The collection agency will also do a “Bankruptcy Scrub” to check in case the debtor is protected by courts and no collections should be attempted. Some agencies also perform “Litigious Scrub” to check if the debtor has a history of filing back a lawsuit, in that case collection efforts are not recommended and the agency will let you know. In most cases a collection agency will be able to collect about 30%-60% of all accounts assigned in “Step 2” if debt is assigned in 60-120 days.
When should you submit an account for Step 3:
When a debt is over 120 days past due ( and in some cases 180 days past due in certain states) or the account has completed “Step 2”. A collection agency will keep between 40-50% of the amount collected, but really, by this time this amount is nearly “Impossible to collect” state or ready to be “Written-off”. Note- I would recommend is sign a “Settled in Full” agreement with your collection agency. It means if the debtor is not in a position to pay 100% of the amount owed, but can make a payment of say 80% right away, give authority to your agency to waive off that 20% balance. There is no point in risking the entire amount if 80% can be collected immediately.
When should you submit an account for Step 4:
After previous steps are completed, a collection agency will recommend you if a legal suit is advisable or not. This depends on many parameters including age of the debt, how big the debt is and few other factors which are beyond the scope of this article.
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