posted on 2014-08-05 by Dean Kaplan
All too often, commercial debt collection becomes a
negotiation. When negotiations begin,
the stronger our client’s position is, the better these negotiations will
go. The ultimate deal struck could be a
larger dollar amount collected, payments collected more quickly, avoiding going
to court, or if necessary, the final outcome in court and the resultant judgment
collection process.
We are often amazed to find that our new clients often have
boilerplate deficiencies which weaken their negotiation positions and cost them
money in the long-run. One boilerplate
omission that we often see is no provision holding the customer liable for
collection fees. Below is an excerpt
from our free ebook: the
Terms and Conditions Handbook which discusses over 70 items which should be
considered for governing the vendor/customer relationship:
“In the USA, typically, you
will not have the legal right to recover collection costs or attorney fees unless
there is a signed written agreement with this provision. Just having this
provision on your invoices is not necessarily enough. You want to have a
document signed by your customer indicating they agree to this provision and
the Application is typically the best document to memorialize this term. You
want to specifically include collection costs so that collection agencies can
add this fee into the amount they are trying to recover on a pre-litigation
basis, as they cannot add “potential” attorney fees at this stage. Whether or
not you actually collect these costs, it gives you and your agents much more
leverage during collection agency, litigation, and judgment collection
activities.
In the event that Vendor
commences any action to collect delinquent invoices, Applicant agrees to pay
collection expenses and attorney fees, whether or not suit is filed.
We see the following
version less frequently, but it has the advantage of spelling out the
liquidated damages in the event of default. Some courts use a schedule to
determine the fee to be awarded to attorneys for getting a judgment. This fee
typically is substantially less than the contingency or hourly fee paid to the
attorney. By having an agreed attorney cost in the executed Application, the Vendor
has a much better chance of being awarded the full attorney cost, thereby
offsetting the cost of having to litigate to get paid. It also helps at the
collection agency stage, and gives in house collectors more leverage during the
threat to send to collections:
We further agree to pay a
25% collection charge, in the event of default, if the account is placed with
an attorney or bonded collection agency.”
When we are collecting on a $25,000 claim, adding our
collection fee of 20% (i.e., $5,000) to the delinquent amount means that we can
begin negotiating from a starting point of $30,000 (more if interest and/or
late fees are also included in the provision).
By starting at a higher dollar amount due, this gives us a stronger
negotiating position with the customer regardless of what the customer is negotiating
for, for example a discount or more time to complete the payments.
When the customer realizes that the collection fees will be
added to the amount due, this often encourages the customer to give the debt
owed a higher place on the payment priority list. In fact, this by itself can help us get a
resolution while the debtor then pushes other debts back or ignores them
entirely.
Any time we are able to collect collection fees our client
is financially better off. Our clients
frequently choose to waive the collection fee as a way to motivate the customer
to immediately pay what is due. This is
a far better option for many of our clients than going to court and often it
incentivizes the debtor to pay off our client’s past due invoices instead of paying
what is owed to other vendors.
This collection fee provision can also give in-house
collectors better leverage with past due customers. Phone calls and final demand letters sent to
delinquent customers can remind them that if the claim is turned over to
collections, they will be responsible for the significant collection
costs. This provision may motivate
debtors to become current to avoid collections even when all previous
collection attempts have failed.
Surprisingly, of the 22 terms and conditions examples
included in our free ebook, only one included a provision for collection fees,
and only six included a provision for attorney fees. These omissions definitely represent missed
opportunities for our clients.
For companies that use credit applications, the
collection fee provision may be included in this document, as described in our
free ebook: the
Credit Application Handbook. For
companies that do not use credit applications, this provision should be
included in your terms and conditions which should also be referred to in the
sales and insertion orders or other contract to be signed by the customer.
|