Dialing for Deadbeats: Should You Use a Collection Agency?

You’ve been patient, e-mail after e-mail and letter after letter. Still the client’s fees sit unpaid for almost half a year. Last season’s delinquents still have a couple months to go, but soon it may be time for you to call in help.

“Collection agencies, as a whole, don’t necessarily have the best reputation as business entities,” reads the primer from collectionagencies.com. “Often, even having an overdue bill sent to a collection agency is enough to entice a would-be ne’er-do-well to see the light and pay back what they owe.”

Sounds terrific as fall looms and your deadbeats linger. What’s the catch? “Be very, very careful with a collection agency. They can tick off more customers than you can gain if they use the normal straight-arm procedure,” said Delmar Gillette, an RTRP at Economic Planning Services Inc., in Newport News, Va. “Frankly, I haven’t needed to use a collection agency in 42 years of being in business.”

Considerations

“I used a collection agency once (typically I have little-to-no accounts receivable),” said Stephen DeFilippis, an EA at the DeFilippis Financial Group in Wheaton, Ill. “Any preparer looking to hire a collection agency should interview two to three and compare methods, fees and other factors.”

Collectionagencies.com recommends looking at several factors:

  • Reputation. Businesses you hire to represent your practice also reflect on you, positively or negatively. You want an agency with a solid reputation.
  • Experience. If they fumble, you don’t get your money. Your agency needs a proven track record of getting the job done.
  • Methodology. What communication methods does the agency use to contact delinquents? Mail? Ask to look at the form letters and phone scripts to see how the agency will speak to your overdue debtors. Does the agency do its homework on debts they work to collect? How thoroughly do they understand the details behind the debt and the relationship between you and the debtor? Individual debtors sometimes flee bills by moving; the collections term for finding these individuals is “skip tracing.” Does the agency you’re considering skip trace delinquents? How?
  • Proper papers. Some states require a collection agency to be licensed in that state to practice – make sure your agency can collect from the parties in the states from which you need debt collected. An agency also needs insurance, usually errors and omissions policies that protect not only the agency but also you from debtor lawsuits for what is often imagined harassment.

Questions and proactivity

“Ask for a copy of the items required by the collection agency from you to collect the service fees,” said Marie Young, an EA with Arden, N.C.-based Tax Talk Inc. “What’s their success rate for collection of revenues for service companies? What’s their fee? Do they charge a fee if they don’t collect?

“How do they attempt to collect the revenues and what is the time period for the attempts? How often do they report to you their actions and success?” added Young, who used a “very helpful” collection agency.“I didn’t spend my time and money attempting to collect my fees when this was not my area of expertise. My fees were rendered by the agency when I don’t believe I would have been able to collect.”

“The best collection agencies are those associated with credit agencies such as Experian,” noted CPA Al Giovetti, in Catonsville, Md. “Not only do they hound those who don’t pay, but they also ruin their credit as a AAA creditor. Sometimes the bad credit will prevent the delinquent payor from borrowing additional money for cars and furniture. Some people will pay you so they can [then] borrow more.”

Common sense beforehand can head off any need to find an agency. “Know your client,” Gillette said. “Don’t deliver the return until you receive payment. Don’t e-file without payment. You may need to return client documents and you may be out your time, but you won’t have prepared a return filed with your name and then not been compensated.”

(You can learn more about collection agencies from The Association of Credit and Collections Professionals.) 

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