When George McBride closed up his garden shop and disappeared, one of the creditors he left hanging was Newmont Garden Supplies.

Steve Newmont, who managed credit for the family-owned firm, immediately began asking around about McBride's whereabouts. A week later, Steve's sleuthing paid off. McBride, a disgruntled former employee told Steve, was working and living in Orlando, Florida. The man was even able to give him McBride's address.

Editor's Note: This article originally appeared in the Credit & Collection Manager's Letter, which Credit Today purchased in 2006.

That's all I need, Steve thought as he drove back to his office. McBride had operated the business in his own name, so he was personally liable for the debt. Now it was simply a matter of locating a Florida attorney to handle the suit.

A week later Steve stormed into the office of his brother Bob, the company president.

"What's the problem?" Bob asked.

"I told you about the McBride deal, right?"

"You sure did," Bob replied. "He owes us $2,500, and you were going to get a Florida attorney to sue him. So, like I said, what's the problem?"

"The problem is the money this is going to cost us," said Steve. "He wants a nonrefundable suit fee of $250 and a contingent suit fee of 10% of the claim. And he also wants court costs of $250. Then, if he collects the claim, he wants a contingency fee of 25%. The way I figure it, we'll have to pay him $750 now and, if he collects the entire $2,500, another $625 then. That's a total of $1,375, which is more than 50% of the whole claim. Does that make sense to you?"

"Not really," Bob replied, "but it's probably the fee structure commercial attorneys in that area use. Maybe you should try to negotiate something with him."

Does Steve have any alternatives to paying the fee requested by the Florida attorney?

Click "Next" for the answer.

Answer and Analysis

Suit Fees

Creditors are often confronted with the problem debtors who leave for parts unknown and are later located through skip-tracing methods. The creditor then is relegated to retaining a collection agency or a law firm to collect the debt.

In many instances, the creditor retains a collection agency or law firm that thereafter attempts to collect the debt directly from the debtor. If the collection agency or law firm fails in their collection effort, they will often retain an attorney in the geographic area where the debtor is located.

The costs to institute suit varies significantly from state to state. There are two expenditures required to institute a suit. First, a fee must be paid either to the sheriff to serve the papers or to a process server. Generally, these fees can range from as low as $10 to as high as $50 or $60, depending on the distance from the sheriff's office and on the price charged by the process server. Most sheriffs charge by mileage. Process servers also usually set their fees as a function of the miles from their main office.

The second expenditure is the filing fee paid to the court. The filing fee may range from state to state from as little as $25 or $30 for small matters to as high as $225 for matters running into the five figures. For example, the average filing fee in Pennsylvania is about $150, whereas the average filing fee in Arizona would be $40 for matters under $5,000 and around $100 for matters over $1,000. There is usually no additional cost involved in entering a judgment.

The major problem is that many attorneys request "anticipated costs" from $50 to $150, bringing the total requested to between $250 and $350. These charges are made to cover any collection efforts needed after a judgment is obtained or for expenses in the event the matter should become litigated. The local attorney takes the position that it is more cost-effective to have a sufficient amount on deposit at the beginning of the suit than to request it at a later date. The local attorney is obligated to refund any unused or unexpended costs.

Many attorneys and collection agencies--including our own office--make it a regular practice to forward the necessary funds to serve and file a summons and complaint. If additional funds are needed after judgment, it is a simple matter for the local attorney to request them at that time. Before these additional funds are forwarded, the local attorney should furnish some assurance that the debtor has assets and that the judgment is collectible.

Suit fees have been used for as long as I have been involved in the collection process, and that covers a period of about 35 years. The normal suit fees that local attorneys collect is 10% of the face amount of the claim, and they request this in advance before suit is started. In the past 5 or 10 years, the percentage of suit fees has declined from approximately 10% to 5%, depending upon the amount of the claim. In most instances, the minimum suit fee is $100 no matter what the amount of the claim may be.

On the other hand, when the claim increases over $3,000 or $4,000 up to $10,000 or $20,000, the suit fee tends to decline from 10% to as little as 5%. If there is no known defense to the case, most attorneys will not request a suit fee in excess of $1,000 even if the claim is as large as $50,000 or $100,000.

Of course, there are exceptions to all the above estimates, depending upon the nature of the claim and on whether the local attorney expects the claim to be contested. A suit fee is designed to cover the attorney's exposure to additional work in instituting a suit and litigating a suit in the event it becomes contested. The local attorney usually contemplates that only a small number of the collection claims on which suit is instituted will be contested and, that therefore, if a suit fee is collected in every case, the one case that becomes complicated will be paid for by the suit fees collected on the other cases.

The creditor must recognize that when a suit fee is paid to an attorney, it is a noncontingent suit fee and will not be returned even if no collection is made. Sometimes, attorneys request an additional fee in the event the matter should go to trial as opposed to just an additional fee in the event the matter is collected.

In the last 10 years, many forwarders have taken the position that they do not want to advance monies as suit fees in order to institute suits. The forwarders--whether they be collection agencies, attorneys or creditors--prefer a straight contingency fee to be paid to the local attorney upon successful collection. This contingency fee includes not only the contested matter, but also the trial of the matter. The pressure is then on the local attorney to produce collection, and the creditor only pays a fee if collection is effective.

In our office, over the past five years we have converted almost entirely to forwarding claims on a straight contingency basis to the local attorneys. While the benefits of such a referral are obvious, the drawback is that the contingency fees charged by the local attorney are usually substantially more than they would charge with a suit fee. In most instances, the local attorneys want a net fee of between 20% and 25%, as opposed to an average fee of 20%, on the first $2,000 or $3,000 and 13% on the excess over $3,000 when a suit fee is used. If you add to that contingency fee of 25% to the fee the original attorney or collection agency charges, the creditor might ultimately be paying a fee between 30% and 35%. The advantage is no up-front suit fee.

With regard to Steve's problem, I recommend that he speak to the local attorney, discuss the case, the likelihood of success, and what the probability is that the case will be contested. If these items are favorable, the local attorney may very well adjust his suit fees and may even waive his noncontingent suit fee.

Steve might also consider converting to a straight contingency basis with the local attorney and eliminating a suit fee entirely. With regard to costs, Steve should inquire what the costs are to serve and file a summons and complaint and to enter a judgment, and he should then advise the local attorney that he would prefer to forward only these funds at this time. Steve can forward additional funds to collect the judgment after the judgment is entered.

Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006. This article originally appeared prior to 2000.