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As a business owner, when does it make sense to hire an attorney to collect on unpaid invoices?

Posted by Shivali Anand

May 5, 2021    |     5-minute read (865 words)

When you run a small business or work as a freelancer, you depend on clients for income. But multiple surveys show that the majority of small business view unpaid invoices as a real problem. Efforts to collect from the client typically go nowhere, and the more time goes by, the less likely it is that the debt will be paid. 

Some business owners finally end up hiring a collection agency to recover the money. But an emerging trend among collection agencies is the use of debt collection attorneys to make formal demands and negotiate pre-lawsuit payments. These interventions are often successful in avoiding an escalation. 

What is a debt collection attorney?

A debt collection lawyer is an attorney who specializes in default payment issues and practices fair debt collection. They may be hired by a collection agency to negotiate with debtors. Often, introducing legal representation increases the likelihood that the delinquent customer will pay the overdue balance. 

But for debts of more than $5,000 or for more difficult clients, small business owners may want to skip the agency and hire a debt collection attorney. One advantage of doing so is that a debt collection attorney can ensure the debtor sticks to an agreed-upon payment arrangement, whereas a collection agency will agree to a payment plan, and those tend to have a high default rate. The attorney can secure the payment plan with legal documents, such as a promissory note or consent judgment, and the default ratio for these plans are comparatively low. 

How to know if you need a debt collection attorney?

If you need to collect on an unpaid invoice of more than $5,000 and the debtor isn’t paying up despite your best efforts, a debt collection attorney can help figure out your best course of action.

What is the cost to hire a debt collection attorney?

Some debt collection attorneys charge an hourly rate. Others charge a contingency fee, which means you will not have to pay anything upfront but that the attorney will receive a predetermined percentage of the settlement if you win your case. In the event you do not prevail, the attorney receives no payment with the contingency arrangement. 

What should you expect while working with a debt collection attorney?

If the attorney is able to settle with the subject outside of court, you and the debtor will be able to negotiate the terms of repayment. The debt collection attorney can assist you in implementing a strategy to ensure you receive what you are owed. But in the event of a court settlement in your favor, the timeframe and amount of money you receive will depend on the court’s ruling.

What to ask about before engaging a debt collection attorney:

Cost: The possible expense of filing a court case to recoup unpaid invoices can be steep. If you prevail, you may need to pay one-third of your recovered debt, in addition to extra fees, as determined by the debt collection attorney. As you look for attorneys, ask about their fee structure and determine whether you can manage the costs of filing a lawsuit in the event that negotiations are unsuccessful.

Skills: Some debt collection attorneys are experienced at cases against large firms, but they have no track record for collecting smaller business debts. Ask about their specific experience and case results.

Debt recovery experience: An attorney's pedigree is not the sole indicator of how well they will meet your requirements. Similarly, one thoroughly versed in collecting debts from large firms may disappoint when it comes to collecting from an individual or a small firm. 

Availability: Clarify upfront how often the attorney will communicate with you throughout the process and determine whether their response is satisfactory.

References: A reliable debt collection attorney will have a list of references and should have no problem connecting you with them. Talk to the references to assess whether the attorney is appropriate for your concern.

Independent or firm: An independent attorney may be significantly more cost-effective than engaging a firm. However, they may lack resources such as time, so factor that into your decision.

Representation in court: A debt collection attorney may represent you in the event the case reaches court, but this is not a given. Some prefer to operate as advisers who never enter the courthouse. If the possibility of going to court alone is a deterrent, then you need to find a different attorney.

Choosing between a collection attorney or a collection agency

A collection agency’s function is to convince the debtor to negotiate an arrangement with the creditor. An agency tries to accomplish this through repeated contact with the debtor via mail or phone. Many collection agencies now use a contingency payment model, with fees ranging from 25% to 50% of the amount of debt collected. Collection agencies cannot represent you in court.

If you know from the beginning that you will take your debtor to court if you’re unable to collect and the amount owed is above $5,000, it may be a wiser decision to hire a debt collection attorney. 

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