The accounts receivable management industry – from collection agencies to debt buyers, and even creditors – is currently enamored with using a legal collection strategy. As the economy recovers, that strategy might gain even more traction with the rise of employment, a key aspect in leveraging the legal channel through wage garnishment. But even taking the current economic climate out of the equation, I feel that a viable legal collection strategy is an important back office function for any ARM company.
A judgment is a great way to put your ARM organization into a position to recover a balance in full, obviously. But litigation is an expensive collection channel that requires meticulous planning and a well-designed strategy.
There are a few things that you must have in place before even considering a legal collection strategy. First, you need an attorney that has meaningful involvement in the accounts that may be placed for litigation. A collection agency can hire an attorney in-house or forward the work to an outside lawyer.
Second, ARM organizations must have a close relationship with their clients, whether they are the original creditor or a debt buyer, to ensure proper account documentation. This is critical to any legal collection strategy. Not only must an attorney be able to produce the original loan documentation, but they must also be able to show that legal and attorneys’ fees were allowed in the credit agreement.
After you have the basics in place, you have to judge and score each individual account to make sure they are suit-worthy. There are volumes of information on how to properly do this.
Principally, you are looking at a debtor’s ability to repay, like with any other scoring: Is the debtor employed? Do they own real property? Do you have the correct address and contact info? But in a legal scoring environment, you must also factor in the size of the account. Remember: court costs are paid up front, and regardless of the outcome, it’s spent money.
In addition to the size of the account, you have to dig deeper into the scoring questions: Is the property in foreclosure or pre-foreclosure? Are there any other suits outstanding against them? If an account meets all of the filing challenges, but you fail to identify other suits, a judgment will do about as much good as not collecting at all. What do you think happens to a judgment that’s stuck behind seven others, or is stuck behind a group like the IRS? I’ll tell you: the judgment doesn’t get paid, eventually expires, and becomes worthless.
I’ve been in the collections business since 1987, beginning as a collector and rising to the General Manager level. Part of that time I spent as the head of an extensive legal network for the ARM organization I worked for. Since then, I’ve been helping ARM companies realize efficiencies in their collection processes. Some of the things I’ve seen on the legal side boggle my mind.
One collection agency had some 6,000 old judgments, and they really didn’t have a plan for what to do with them. “We don’t really have time for this right now,” they said when I pressed. So we had to set up a strategy for them to deal with their dead judgments. This will be applicable to more ARM companies in the next couple of years.
As unemployment slowly improves, many judgments won in the depths of the recession will become enforceable. It is imperative that ARM organizations with recent vintage judgments re-run employment and asset verification as a part of their “dead judgment” strategy.
A well-defined legal collection strategy can be a huge boost to any ARM company. But if care is not taken at the outset and it is implemented incorrectly, it can literally kill a firm.
Denise Cross has worked as a consultant for four years to the LexisNexis® Accounts Receivable Management unit. Her primary focus is workflow analysis and design. She can be reached by email.