Compliance Essential for Effective Accounts Receivable Management

Generally speaking, accounts receivable representatives may not engage in any collections practices that are deceptive or harassing. More specifically, collectors are prohibited by law from doing any of the following:

• Impersonation. A collector may not claim to be someone else, e.g. an attorney or law-enforcement official, nor may he use a false identity on letterhead or other written communication.

• Sending deceptive collection notices. Collectors may not send out notices that have been made to look like court summonses or other official documents or give the appearance of having been issued or authorized by an attorney or government agency official. Collection letters should look like other regular business correspondence.

• Knowingly collecting, attempting to collect, or threatening to collect any collection fee, attorney fee, court costs or other expenses not stated in a contract or in payment terms.

• Idly threatening to turn an account over to a collection agency or to take legal action. Collectors may only threaten this type of action if the company undertakes it in the usual course of its business and plans to follow through with the debtor in question.

• Placing harassing phone calls. Calling before 8:00 a.m. or after 9:00 p.m. or calling with excessive frequency may be considered harassment.

• Exposing the bad debt publicly. Making others aware of the delinquency is forbidden unless they have a specific interest in the situation, as would banks, other creditors, or credit reporting agencies. This means that the department may not send collection notices via postcard or in envelopes with external copy suggesting the nature of the communication. The department also may not reveal any other information about the debtor unnecessarily. If a debtor disputes a debt, the dispute must be disclosed when reporting the debt. When dealing with individuals, one may not inform or threaten to inform the debtor's employer of the bad debt or threaten to garnish his wages prior to obtaining a final court judgment.

• Intimidation or violence. Collectors may not use or threaten violence, resort to obscene or otherwise abusive language, or visit a debtor and refuse to leave upon request.

Sometimes, despite a clear and well-executed collections process, there will be the occasional debtor who still won't pay. When the opportunity costs of continuing to pursue the debt internally become prohibitive, the business is left with three options, broadly speaking: write the debt off, hire a collection attorney, or engage a collection agency. Writing off the debt appears to be the least attractive option, but if the amount is not large enough to warrant turning it over to professionals, it may be the prudent business choice. Collection agencies can be effective, but their fees are often high — amounts of up to half of an outstanding debt are not unheard of. Lawyers' collection fees are similar.

The advantage to hiring a collection attorney, rather than an agency, is that the attorney can represent the business in court, if necessary, in addition to providing collection services similar to those offered by agencies. If the business expects to file a significant number of bad-debt law suits, an attorney might be the right choice. Collection agencies don't customarily provide legal representation and concentrate instead on debt pursuit outside the court system. Depending on the business's needs and culture, this may or may not be the right alternative to hiring a lawyer.

Whether choosing an agency or an attorney (or both), it's important to find the one right for the business, who understands the nature and complexities of the business and industry and shares the company's corporate values. Since the agency or attorney represents the firm, it's important to find one whose business practices are professional and legally compliant.

An accountant, attorney or other professional advisor may be able to provide references for collection agencies or lawyers. Friends and acquaintances in other firms might also have good recommendations, as should the business's trade association. There are also local and national collection professional associations, such as the American Collectors Association, that can provide referrals.

Collections work — whether performed internally or externally — is an unpleasant business. But its inevitable unpleasantness can be limited by following a clear, effective, and legally compliant collection policy internally and engaging the services of the right external professionals when necessary.

Reprinted by permission from The Accounts Receivable Network.

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