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Paying Lawyers and Debt Collectors

Lawyers and debt collectors usually get paid by taking a percentage of what they collect. The amount is usually 33 percent, although it can range from as low as 15 percent to as high as 50 percent.

In addition, if you have your lawyer file suit on your behalf, you'll usually have to pay the court costs (about $50-$300) up front, although you can recover those costs from the debtor if your suit is successful. Also, if a lawsuit is filed and there are expenses involved (such as the cost of witness depositions), the expenses are taken off the top. In other words, the expenses are subtracted from the amount your lawyer is able to recover, before your lawyer takes the one-third, or whatever amount you've agreed upon. However, unless the amount owed to you is especially large, there shouldn't be too many (if any) expenses. You should discuss this with your lawyer before you agree to turn over the account.

Here are a few guidelines for hiring a lawyer or debt collector:

  • Don't turn over a past-due account for collection until you're sure that it's "uncollectable" by you. In other words, don't turn over any past-due accounts that haven't been paid because of some simple oversight on the part of the customer. You're throwing money away if you turn over a past-due account that you could have collected with a single phone call.
  • It's not cost effective to have a lawyer collect your small debts, and most lawyers won't agree to do it anyway. The idea of spending a couple of hours collecting a $30 debt for a $10 fee just doesn't light a fire under too many lawyers. What constitutes a "small debt" will depend upon the lawyer. For an alternative use of lawyers to collect smaller debts, see streamlining your tactics.

Tip

Be extremely wary of paying a lawyer by the hour to collect your debts. In fact, don't do it unless you have a specific task you want the lawyer to perform (for example, write two letters). Otherwise, you could end up paying out more than you collect.

  • Collection agencies usually will handle smaller debts, but only if you give them volume. They're probably not going to be interested in collecting two $25 debts, but they may be interested if you have 100 of them.
  • There are no hard-and-fast rules for using a lawyer versus a collection agency. Lawyers are usually more expensive and more effective (because, unlike collection agencies, they can take the debtor to court for you). Your decision might be made by which past-due accounts your lawyer is willing to take, or it might be made by whether you're willing to take your customers to court, if necessary. If you're not, you might as well use a collection agency.
  • If you want to use a collection agency first and then a lawyer when you reach the point of filing suit, make sure that you carefully discuss with the collection agency how the files will be transferred to the lawyer. In fact, if you don't already have a lawyer, you may want to consider getting a referral from the collection agency. If the lawyer and the collection agency have worked together in the past, the transition shouldn't be difficult.
  • If you turn over your accounts to a lawyer, carefully spell out your fee arrangement.

Example

As an example of the types of situations your agreement should cover, suppose you turn over several large past-due accounts to your lawyer with an agreement that the lawyer will receive one-third of what is collected. Suppose further that one of those customers pays you directly, after the lawyer sends out a letter but before the customer receives it. In other words, the customer didn't know that the lawyer was involved. Does the lawyer get one-third of that account? Generally, yes, unless you spell out a different arrangement.

Set up a sliding scale, if possible. For example, suppose you agree that your lawyer will send out two letters, then will make a personal visit or telephone call, and then, if necessary, will file suit against the customer. You might agree that the lawyer will get 10 percent up until the personal visit or phone call, 20 percent up until suit is filed, and 33 percent thereafter.