Do you need a collection agency or a law firm? What you need to know before you decide.

As a business owner or manger, you are responsible for managing your company's receivables. When you need help collecting on your receivables, you have two basic choices: you can turn the receivables over to a collection agency or you can turn them over to an attorney. There are a few factors that one should consider before making this kind of a decision.

Size of balances -- Typically, collection law firms will not work on anything less than $1,000 while collection agencies will. Many collection agencies have "small balance collectors" who will make telephone calls to debtors for balances as small as $25. A collection law firm usually has a staff of collectors. This department is very similar to a collection agency.

The arsenal -- Collection agencies can write letters and make telephone calls to the debtors. A collection law firm can do these things plus far more. The collection law firm can file suit, obtain a judgment and then reduce that judgment to cash.

Fees -- One pays a premium to use a collection agency, as the agency has to make money on the account as well as the attorney to whom the agency refers the debt for collection. Agencies' fees vary between 35-50 percent. Frequently, an agency will charge its customer fees based upon the age of the account that is turned over for collection. Moreover, an agency will then charge an additional fee to its customer if the agency has to turn the debt over to a law firm. In order for the agency and the law firm to both make money, the client usually has to agree to pay a combined fee of about 50 percent. Law firms usually charge a set fee percentage between 25-33 percent, depending on the size of debt. You can usually negotiate a better fee if you have a number of accounts to turn over to the law firm.

Race to the courthouse -- Debts placed directly with law firms are usually sued upon quicker those placed with collection agencies. Agencies pay their collectors on a commission basis. However, if the collector refers a debt to a law firm, the collector earns a far smaller, if any, commission, on the debt. Thus, there is usually no incentive for a collector to take a debt out of his queue and refer it out to an attorney for collection. Unless the agency is well managed, debts could sit in an agency collector's queue for several months or even years. A law firm usually pays its employees on an hourly basis. Furthermore, in some collection law firms, employees are given bonuses based upon the money that the firm collects as a whole. Hence, a collector who works for a law firm will give the debt to an attorney in the firm quickly, if she is unable to collect it herself. This results in a far quicker recovery for the client.

There is a place in the collection strategy for both collection agencies and law firms. The size of the debt will generally dictate where the receivable is placed. If the debt is over $1,000, one is usually better off placing the debt directly with a collection law firm. Small balances should be placed with a collection agency. One should expect to pay a higher fee to a collection agency since an agency can give a smaller debt the attention it needs to pursue it through collection.

Gary Nitzkin is an attorney specializing in debt collection and the founder of Nitzkin & Associates, Debt Collection Attorneys in Southfield, a Silver-level member of the Detroit Regional Chamber.

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