Basic Collection Procedures

The goal of the collector should be to open a dialogue with the customer - or more specifically to discuss payment status with someone in the debtor organization with the authority to make and to keep a payment commitment.

The collector's approach should be polite and professional. It should be assertive but not aggressive. The collector should ask questions and request commitments, but the collector should not accuse or blame their contact for the status of the account. Any voice mail messages left by the collector should suggest that it would be in the debtor's best interest to return the collector's call - and should request a return call that day.

If a customer has a past due balance and there is an order pending, each party has something the other one wants. There is nothing wrong with pointing this fact out - as long as it is done tactfully. The collector can suggest that the decision about whether or not the order pending is released depends on the debtor's actions - as long as this statement is framed properly. For example, a collector might say:

"It is urgent that I hear back from you today. I have an order pending but I need to give the credit manager an update today on the status of the past due balance."

This is a better approach than the more threatening:

"There is an order on hold and I need to hear from you so we can decide whether or not to release it."

A collector generally should not make an unqualified commitment to release the order on receipt of either a commitment for payment, or on receipt of payment. The credit manager or their appointee should normally make that decision.

Telephone

Accounts that are past their due dates are delinquent and require collection actions to secure payments. Collections personnel can use the telephone to try and obtain payment or remind a debtor of an outstanding obligation.

Letters

Once of the most difficult type of business letters to write is the collection letter, yet it is the most commonly used method for asking for payment. While circumstances surrounding each indebtedness will determine how friendly or how firm the letter is, there are few things that people dislike more than getting a request for money that they owe.

Form letters may be prepared that will satisfy a majority of collection requirements, and they can be modified as special exceptions arise. A collection letter must always firmly convey the message to pay the bill without injuring the customer's feelings or losing good will and business. Customers whose accounts are past due will expect to receive collection letters, but good letters can keep them as customers.

To be effective, collection letters must command attention, although most collection managers do not expect that every letter will get a response. Some letters may be hastily read and thrown aside or routed to different departments, ignored in anticipation of more urgent appeals, or totally discarded. The customer may even infer that the communication is a collection letter and ignore it, leaving it unopened. Ultimately, the letter may have accomplished its purpose simply by prodding the customer closer to payment.

A collection letter is written to elicit payment. The customer must be sold on the idea of paying now rather than later, because the longer a bill remains unpaid the greater the probability that it will never be paid.*

Referral to Collection Agencies

Collection agencies can be an aid in collecting a past due account. Most collection agencies work on a contingency fee basis. The creditor company typically pays a percentage of the amount collected on its behalf by the collection agency. The seller pays nothing if the collection agency's efforts are unsuccessful.

Collection fees generally range from 10% of the amount collected to 30% or more. The collection business is highly competitive, so contingent collection fees are often negotiable. Generally, creditors pay nothing up front when an account is referred to a third party collection agency.

Referral to Attorneys

Collection attorneys help in collecting delinquent accounts. Many customers will respond immediately to a letter or phone call from a collection attorney, even after prior efforts to collect are unsuccessful. Sometimes, the threat of a lawsuit is enough to prompt a delinquent and uncooperative debtor to issue payment or to propose a payment plan. Sometimes, a lawsuit must actually be filed before settlement takes place. Sometimes a case must go to court before a debtor will issue payment.

Mediation

Mediation is a method of dispute resolution in which parties use an independent mediator to help them reach an agreement. Unlike arbitration, the mediator makes no judgment. If the parties reach an agreement, it is not binding. Mediation may be specified in a contract [such as the credit application] to any dispute, or the buyer and seller may agree to use a mediator only after a dispute has arisen.

A mediator must be a neutral third party. A mediator should have the required training as well as industry experience, since the he or she may be asked to assess the merits of each party's position. There are professional associations of mediators that provide training as well as a code of ethics for mediators. It is advisable to use a professional mediator for their experience as well as their neutrality.

Arbitration

Arbitration is a method of dispute resolution in which the parties use an independent arbitrator or arbitrators to act in place of a judge or jury. To be meaningful, the arbitrator's judgment must be binding on both parties but arbitration agreements can be either binding or non-binding on the parties. An arbitrator should have the required training, and should be familiar with industry practices, contracts, and the law.

Creditors are beginning to appreciate the value of arbitration as an alternative to litigation. The use of arbitration to settle disputes between a buyer and seller is not automatic. It must be agreed to in writing. Creditors that want to use binding arbitration as an alternative to litigation should include a clause in their credit application and agreement stating that all disputes will be handled through arbitration rather than litigation.

Small Claims Court

Small claims court is a legal venue in which a creditor can sue debtor for non-payment of a debt. In small claims court, the parties represent themselves, thus keeping legal fees to a minimum. The maximum amount eligible for small claims varies in different jurisdictions, but can be as high as $5,000.

The process is fairly simple. The creditor files a claim with the small claims court with proper jurisdiction over the matter. The debtor/defendant receives notice that the complaint has been filed. A trial date is set. At trial, both parties have the opportunity to give testimony or to supply evidence to the Court demonstrating that their position is the correct one. The judge can [and often does] render a verdict on the spot, or may issue a ruling at a later date. That verdict becomes the basis on which a creditor/plaintiff can be paid by the debtor/defendant.

*Source: Consumer and Commercial Collection Deskbook, by Jon R. Lunn