Collecting Interest and Recovering Collection Costs on Delinquent Accounts
By Loral Narayanan
The following article originally appeared in the January 2012 issue of ABC-Amega's free client newsletter, "Credit-to-Cash Advisor". Legal and Practical Issues Based on the financial information available and the customer's promise to pay, you extend credit terms to your customer. Most of the time this works quite well. The customer receives what they ordered, and you get paid. There are those times, however, when, in spite of you best efforts, you have to place an account with a collection agency. Now, you're going to have to pay to get paid. You'll have to foot the bill for fees and expenses, as well as the interest costs that accrue in carrying bad debt. All to collect money that's owed to you. Doesn't seem fair, does it? The concept of "fairness", however, doesn't appear to enter into the legal and practical issues you'll have to deal with if you attempt to recoup the losses attached to collecting bad debt. Legalities of Collecting Interest on Unpaid Accounts Collecting Interest in the United States In the U.S., allowable interest rates on loans and credit sales are set at the state level. There are basically four types of rates applicable to commercial transactions:
- Legal interest rates -- the default interest rate if there is no contract specifying a rate.
- Contractual interest rates -- interest rates allowed under various types of contracts.
- Judgment interest rates (post-judgment rates) -- rates applied to unpaid judgments from the date of the judgment to the date it is paid.
- Corporate interest rates -- rates applicable specifically in business-to-business transactions. Not all states have specific corporate rates.
All fifty U.S. states allow some type and amount of pre-judgment interest on commercial transactions; ranging from as low as 5% to any agreed-upon rate of interest. However, in many states, interest on unpaid accounts is only legally enforceable if there is an agreement beforehand stating the amount of such interest (based on the allowable rate in the governing state) and when such interest will begin to accrue. This agreement can take the form of a credit application, a sales or purchase contract, or even something as simple as a new customer account card specifying the interest to be charged. The key requirement is that the agreement, in whatever form, must be signed by the debtor. Collecting Interest in Other Countries Each country has its own rules on allowable interest rates. For instance, collecting or even paying interest (riba) is illegal under strict Islamic (Sharia) law. Therefore, it may not be possible to recover interest at all from Middle Eastern buyers. If it isn't practical to confer with a foreign attorney, your safest route is to have a written agreement signed by the debtor. This may or may not be enforceable, but you will at least be protected where such interest is allowed. Legalities of Recovering Costs of Collection Recovering Costs of Collection in the United States To recover attorney and/or contingent fees from a U.S. debtor, you must have a contract, signed by the debtor, specifying that these "costs of collection" will be recoverable. However, even with such a contract, a number of U.S. states forbid recovery of collection costs as "against public policy". Where these costs are recoverable, the courts often decline to impose the total amount of the collection costs or contingent fee. Expended court costs, however, including filing fees, service of process, etc., are legally recoverable in all states and are added to the amount of the final judgment. Recovering Costs of Collection in Other Countries As with charging interest, every country has its own rules regarding recovery of collection costs. The safest route is to have a written agreement with the debtor. But, be aware, such an agreement may not be enforceable in the country in which you are making claim. Practicalities of Collecting Interest or Recovering Collection Costs Legalities aside, what are the odds of collecting interest or recovering collection costs on delinquent accounts? If you have a signed contract, have filed a lawsuit, and have received a favorable judgment, you will be awarded at least post-judgment interest, and possibly more. Assuming the judgment is collectable, there is a good chance you will be able to recover some of your extra costs. What if you have a signed contract, but aren't willing to take legal action? Can your collection firm "force" the debtor to pay the extra charges? According to ABC-Amega senior collectors, your only effective remedy is through the courts. It's only possible to enforce a legal contract via a legal action. Reputable and professional collectors cannot and will not visit the debtor's place of business and attempt to strong-arm him into paying the charges. ABC-Amega's approach is to move to collect interest on past due accounts on an amicable basis. And, if there is some kind of written documentation mentioning recovery of collection expense, they will also work at obtaining those expenses as well. If the debtor balks at paying these costs, they can be used as a negotiating tool to encourage payment of the principal amount of the debt. For instance, a collector might say to the debtor: "If you pay the principal immediately, the creditor is prepared to waive the additional charges". When pressed, some debtors will agree to pay interest expense, particularly if they want to continue their relationship with your company. In most cases, however, where there is no signed contract speaking to the issues of interest and collection expense, the debtor will not pay them. Summing Up It comes down to this -- if you're serious about collecting interest and recovering the cost of collections from delinquent buyers, you absolutely must have it in writing and signed by the buyer. Such documentation gives you, and your collection firm, the best chance of making good on these extra dollars. Remember, however, that even with a signed contract, the only way to force the debtor to pay costs that are allowable in his jurisdiction is through legal action. Loral A. Narayanan, is Marketing Manager, ABC-Amega Inc. ***** We thank ABC-Amega Inc. for the above information, which was originally published in their client newsletter "Credit-to-Cash Advisor". ABC-Amega Inc. provides 1st and 3rd party commercial collection services since 1929, and collecting in more than 200 countries worldwide. For further information, contact info@abc-amega.com.
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