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Collection attorneys and the credit system

posted on 2013-08-21 by Louis S. Freedma
It’s almost impossible to imagine a world without credit. Major purchases like a home, car, college education, and vacations would be difficult even for the wealthy and virtually impossible for everyone else.  So many things that make our life comfortable can be attributed to our ability to obtain credit. Consumer spending makes up over 70 percent of the U.S. economy and is driven by the availability of credit.

The availability of affordable credit is based on an important concept: credit is a promise to repay. In a perfect world, the credit “ecosystem” would only consist of creditors and consumers who repay their obligations.  Perfect balance.  However, when credit is not repaid, due to unforeseen hardships or other reasons, it results in higher credit costs for everyone, including those who paid their bills.  This is an imbalance that is corrected, in part, by bringing attorneys into the ecosystem.
Attorneys enter the system when people who are owed money need to collect it through the court system.  The court system is a level playing field where everyone gets a chance to “have their say” and the outcome is decided by an impartial judge.  Sometimes the judge decides for the creditor, and other times for the consumer, but in every case all parties are accountable, including attorneys.
Attorneys have to be licensed by their state bar, receive continuing legal education, obey the rules of professional conduct and follow federal, state and local laws and rules.  At the same time, attorneys have an important duty toward their clients.  “As advocate, a lawyer zealously asserts the client's position under the rules of the adversary system” - preamble, Model Rules of Professional Conduct.  The balance of the ecosystem is upset when attorneys lose their ability to effectively represent their clients.The Dodd-Frank Act of 2010 altered the framework of ecosystem.  New rules, supervision and compliance directives have created a ripple effect from Wall Street to Main Street that is putting small law firms out of business.  In contrast to “too big to fail,” these firms are “too small to succeed.” Attorneys, traditionally regulated by the judiciary, are now subject to regulators’ demands to turn over their clients’ privileged information.  Legal strategies and advice are no longer sacrosanct.  Meanwhile, courts struggle with the issue of how the federal laws apply to attorney conduct in the courtroom, and the result has been a patchwork of conflicting outcomes.  Again, the ecosystem is in need of correction.  

Restoring balance may come soon in the form of legislation.  NARCA applauds Representatives Perlmutter (D-Colo.) and Bachus (R-Ala.), both senior members of the House Financial Services Committee, for their recent introduction of H.R. 2892, the Fair Debt Collection Practices Technical Clarification Act of 2013.  This bipartisan legislation simply excludes attorneys from the Fair Debt Collection Practices Act (FDCPA) when they are engaged in litigation activities that fall under supervision of the court.  It is not an outright “carte blanche” exemption for attorneys.  The FDCPA still applies when attorneys engage in traditional collection activities, like calling or writing to consumers. This approach is consistent with the intent behind the FDCPA:

"The Fair Debt Collection Practices Act regulates debt collection, not the practice of law. Congress repealed the attorney exemption to the act, not because of attorneys’ conduct in the courtroom, but because of their conduct in the backroom. . . Only collection activities, not legal activities, are covered by the act. . . Actions which can only be taken by those possessing a license to practice law are outside the scope of the act,"  stated Rep. Frank Annunzio (D-Ill.), Congressional Record, 1986.
It is significant that all attorneys, regardless of their area of practice, must maintain bar licensure through the judiciary, receive continuing legal education, adhere to the rules of professional conduct and state and local rules of procedure and conduct themselves in a manner consistent with their responsibilities as officers of the court.  The regulation of attorneys engaged in the practice of law properly rests with the judiciary rather than the legislature.
Freedman is president of the National Association of Retail Collection Attorneys, a nationwide trade association comprised of over 700 debt collection law firms whose members are committed to maintaining the highest standards of ethical conduct to ensure that consumers are treated fairly and respectfully.

A Debtor's True Situation Impacts Collection Strategy

posted on 2013-08-15 by Dean Kaplan


After sending a non-paying customer’s account to a collection agency for assistance in collecting on past-due invoices, the collector reports they haven’t been able to recover your money. Does the reason for non-payment matter?

At this point, you must decide how to proceed in the collection effort. You have several options here, including:

·         Writing off the debt

·         Creating a payment plan on the account

·         Entering into litigation against the customer

·         Closing the claim and/or writing off the debt

·         Postponing collection efforts while monitoring the situation

·         Gathering more information to resolve a dispute

·         Pay to run a skip-trace on the debtor

·         Using a different collection agency in hopes they will be able to collect the balance

Choosing which course of action to take at this point should be considered in the same way as any other business decision. Clearly, collecting and analyzing information allows you to make better decisions about what to sell, how to sell it and who to market it to. Applying the same process of data collection and analysis will allow your business to improve the profitability of its unpaid invoice collection efforts. Naturally, the larger the amount owed, the greater impact this decision will have on your business’s bottom line.

Many collectors feel taking an extremely firm position in their collection process produces the fastest results, regardless of the debtor’s situation. This means that when the collector makes contact with the debtor, they simply demand immediate payment in full and then commence collection litigation if the debtor doesn’t pay. The idea behind this approach is that the debtor will realize the matter is being taken seriously and feel pressured into paying off the debt. Sometimes, this method achieves its goal and results in payment if the debtor has the assets to cover the debt. However, oftentimes taking this heavy-handed approach results in the debtor retreating and cutting off communication, which seriously impedes the chances of successful collection. Furthermore, if a debtor truly doesn’t have the money to pay off the debt, taking them to court may not end up being worth the time and resources.

If the debtor is pressured into reducing or refusing communication with the collection agency, this can seriously reduce the chances of successfully collecting the balance due. Limited access to information from the debtor often results in an agency making less-than optimal decisions. Spending money on litigation with a company that is about to shutter or file bankruptcy is a waste of both time and resources; even if a judgment is obtained against a debtor, it usually takes between six months and two years to collect on it. More often than not, cooperation between debtor and collector result in faster payment at a much lower cost.

The challenge of successful debt collection lies in finding a balance between aggressively pursuing payment in a way that doesn’t negatively affect your ability to gather important information from the debtor. Experience in collections, as well as good general business knowledge, prove very helpful in this balancing act. Understanding the true situation behind a debtor’s non-payment has become even more crucial in today’s still-challenging business climate, as many small and mid-size companies continue to struggle.