Resident Collections: The Difference Between Law Firms and Collection Agencies

Unfortunately, some residents leave owing you rent and damages.  You have three options to collect.  One, handle it yourself in small claims court.  Two, turn the account over to a collection agency.  Three, retain an attorney.  Because pursuing a resident in small claims court is not an option for many, if not all, management companies and managers, our discussion of collection options is limited to law firms and collection agencies (“agencies”).  For the most part, law firms and agencies have the same collection tools available to them.  The key difference between law firms and agencies is how they strategically use the collection tools available to them.  How and when collection tools are used can make a significant difference in how much and how quickly resident debt is collected.

Law firms and collection agencies both start the collection process the same.  Both send legally required collection letters to the resident about the amount and source of the debt, that the law firm or agency has been hired to collect the debt, and that the resident has thirty (30) days to dispute the debt.  However, after the initial legally required demand letter, law firms and agencies use different collection strategies.  An agency typically follows the initial demand with phone calls and additional letters at regular intervals.  An agency may also report the debt to the credit bureaus, thus negatively impacting the resident’s credit.  Because the resident may have to clear up the negative report on his credit sometime in the future, the reporting of the debt to the credit bureaus may result in payment of the debt sometime in the future.  Obviously, only residents who care about their credit will end up paying you because of negative credit reporting.

The goal of most agencies is to collect as much money as possible without having to file lawsuits.  Collection agencies are willing to sacrifice time to collect without having to file a lawsuit and rarely employ an in-house attorney.  Even collection agencies with attorneys on the payroll almost always hire outside attorneys to represent the collection agency to file lawsuits and represent the collection agency in court.  Because hiring attorneys makes collection files less profitable for collection agencies, most agencies utilize extended letter writing and phone call campaigns to collect, and thus put off filing suit as long as possible.

If the resident hasn’t paid after the initial demand, rather than engaging in an extended call and letter writing campaign which is the strategy a collection agency follows, a law firm files a lawsuit to obtain a judgment to collect the debt owed by the resident.  Without a judgment, you can only continue to ask, request, or demand that the resident pay you.  If the resident refuses to pay, you can’t do anything to compel payment other than file a lawsuit to get a judgment.  Judgments do not guarantee payment.  However, unlike calls and letters, a judgment allows you to compel payment when possible.  Once you have a judgment, the law firm may pursue a number of post-judgment remedies including wage and bank garnishments.  Further, when a judgment is obtained, the judgment will be reported to the credit bureaus negatively affecting the resident’s credit.

Like all other debtors, residents know the difference between a letter from a collection agency, and a lawsuit from a law firm.  At worst, residents will ignore letters and calls from agencies.  Further, under the Fair Debt Collection Practices Act, residents can immediately stop all collection calls by simply requesting in writing that the collection agency stop calling.  At best, residents might be upset or nervous from collection letters and calls.  When residents will not pay voluntarily, even under pressure from a bill collector, you must have the ability to create an immediate sense of urgency.  While a resident can ignore calls and letters, a resident can’t ignore a lawsuit.  A lawsuit creates an immediate sense of urgency.  The former resident must resolve the lawsuit (the debt owed to you) now.  If the resident ignores a collection lawsuit, you end up with a default judgment for the amount the resident owes.  Once you have a judgment, you can enforce the judgment through bank and wage garnishments, and other judgment remedies.

Law firms and collection agencies both accept collection matters on a percentage fee, or contingency fee basis.  When a debt is collected on a contingency fee basis, the client does not pay either the agency or attorney unless money is actually collected from the debtor.  When money is collected, the agency or law firm keeps a percentage of what is collected as their fee.  Collection law firms usually charge a set fee percentage on all funds collected, with costs being reimbursed first.  Collection agency fees and percentages can vary widely by agency and are based on a host of factors.  An agency may charge a greater percentage for older debts.  An agency may have varying percentage depending on the amount of debt you turn over to the agency for collection.  An agency may charge more if the agency turns the account over or places the account for lawsuit with a law firm.  An agency may also charge a higher percentage for advancing costs of collection.

Based upon ethical rules, law firms can agree to advance costs for you, however, ultimately you have to remain liable for those costs even if no money is ever collected.  Some collection agencies have used this limitation on attorney firms as a selling point.  Specifically, an agency will argue that this is a significant advantage over law firms because the agency will pay all costs of collection, and if the agency doesn’t collect, you don’t have to pay these costs.  This offer sounds great in theory, but may or may not work out to your advantage.  First, an agency might not be advancing significant costs because the agency is not filing lawsuits to collect.  If an agency collects the easy accounts but never tries to collect the accounts that are only collectible through suit, the agency will have advanced little in costs, but collected a higher percentage on the debt collected for agreeing to advance costs.  Second, whether with a law firm or a collection agency, almost all collection agreements dictate that costs are reimbursed first.  Because costs are reimbursed first, a collection agency that has agreed to advance costs is very likely to recoup all money advanced.  For example, if an agency has advanced $3500 in costs to collect from your former residents and the collection agency collects $4000 from a resident, the collection agency will reimburse itself the $3500, and the remaining $500 will be split according to your agreement.

It is important to emphasize that some collection agencies do not offer lawsuit services.  Because a collection agency that does offer lawsuit services works as a middleman in the lawsuit process, debts placed directly with law firms will be sued upon far quicker than those placed with collection agencies.  For example, you have us evict a resident for non-payment.  If the resident’s account is placed with us, we will sue the resident as soon as possible, in some cases prior to the time the resident vacates the premises.  If you place this account with a collection agency, the collection agency most likely won’t sue the resident until some time significantly in the future.  In some cases, this results in a legal action that is well over a year, or even years later.  The sooner serious collection efforts are commenced, especially lawsuits, the more likely you are to ultimately collect from former residents for a host of reasons.

The property management industry is a very mobile industry.  People tend to change jobs, properties, and companies frequently.  Managers and onsite staff deal with countless residents and accounts over a year.  If a lawsuit is brought close to the time a resident has moved out, the matter will be much fresher in the memories of the onsite staff (the witnesses for court).  Whereas, if a suit is brought a year or more after a resident has vacated, there is a significant probability that the onsite staff will have changed during this time.  This means that critical witnesses might not be available for trial.  The new management team that has to testify in court will have to rely entirely on the file.  This puts you at a significant disadvantage in court, and may result in you having to compromise the claim.

Even more important than management mobility is resident mobility and attempting to collecting when the collection trail is still fresh.  For example, a resident (Terry Tenant) moves out and owes you $4,000.00 for four months rent.  When she left, you had a copy of the checks she used to pay rent, knew where she worked, and had a forwarding address.  Now, you place the account with ABC Collection Agency.  ABC sends out a series of letters, one each month for six months, and makes several phone calls to try to get Terry to pay without success.  During that time, Terry moves again, changes jobs, and closes her bank account.
In contrast, you place the debt with a collection law firm immediately after Terry moves out.  The firm sends out a single letter, then generates a lawsuit, and gets a judgment against Terry approximately ninety days later.  A bank garnishment takes $800 from Terry’s bank account and several payments are received from Terry’s employer from a wage garnishment before Terry leaves the job.  When Terry starts the new job, she calls and is ready to set up payments for the remaining balance to avoid a wage garnishment at her new job.  These two scenarios illustrate what everybody knows.  The longer money is owed to you, the less likely you are to collect it.  Consequently, it is imperative to collect money sooner than later.  The sooner a judgment is obtained and contact is made in connection with the judgment, the better the chances are at recovery.

Very few collection agencies have in-house attorneys who handle court appearances or trial work.  Rather, collection agencies almost always hire outside attorneys to handle court appearances and trial work.  The compensation structure that collection agencies use to pay outside attorneys provides disincentives to maximize recovery at two levels.  First, if a former resident disputes a collection suit by filing an answer, the resident has a right to a trial.  Because collection agencies have to pay additional fees to outside attorneys for trial work, agencies may request authority from you to settle a case for a lower amount to avoid paying these additional fees.  Second, if the case is not settled after a resident answers and the case goes to the outside collection attorney, the attorney is almost always better compensated if the case is settled prior to the court hearing the case because flat trial fees are set so low.  Further, the collection agency’s attorney is paid the flat trial fee regardless of result.  However, a law firm that handles collecting the debt directly for you, and not for an agency, understands that going to trial is part of the work necessary to earn the fee. This is because their fee is results-driven and based on recovering the actual debt.  Accordingly, the law firm who represents the creditor directly must win to get paid.  Unless the creditor wins the collection case trial, then there is no court-ordered judgment to collect on.

The most effective tool to collect money from residents is to obtain judgments.  Almost without exception, collection agencies put off filing lawsuits to collect money from residents.  Rather, collection agencies continue your efforts to get the resident to voluntarily pay.  While a collection agency’s efforts to obtain voluntary payment are likely to be more aggressive than your efforts, until the collection agency files a lawsuit any resident payment is still voluntary.  If the resident would pay voluntarily, you wouldn’t have had to turn the resident’s account over to a collection agency.  Thus, for residents that won’t pay until a collection agency files lawsuit, a main benefit of a collection agency is that they will make the collection calls and write the collection letters for you.  This may be all you want or need.  If you are not willing to take your residents to court for past due rents, then there’s probably no reason to send the account to a law firm.  Additionally, for companies with very few accounts or accounts with very small balances, the expense of filing a lawsuit may be prohibitive compared to the balances owed.  In these situations, placing your accounts with a collection agency, makes good sense.  For larger debts, multiple accounts, and much quicker legal action, a law firm is probably a better route.

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