Should a Law Firm Hire a Collections Agency?

The two most controversial topics for law firms related to client payments and collections are:

1. Should law firms charge credit card fees to clients?
2. Should law firms hire a collections agency to recoup long outstanding accounts receivable?

We have published substantial information to help you make a decision on on whether to charge card fees to clients but very little on navigating the collections agency conundrum.

The decision to hire a collections agency is a difficult one, and although many law firms are collections curious, most firms we talk to have not hired one. That said, the feedback from law firms who have hired an agency is pretty darn positive. 

In this article, we will discuss some of the main factors that go into hiring a collections agency. To help you find an agency, we’ve also built a list of collections agencies that advertise working specifically with law firms and where those agencies operate (Download it here). 

Step 1: Know the rules in your state

Not surprisingly, states have different rules, opinions and resources for collecting fees from clients. For example, some states like Delaware have fee arbitration processes that are mandatory in some cases. Understanding the fee dispute process and resources in your state is imperative. We recommend you research your local ethics rules related to debt collection of attorneys fees and/or engage an ethics attorney to be sure you’re complying with applicable ethics rules before hiring a collections agency. 

Other ethics issues include disclosure of client information to the agency as well as issues surrounding the outright sale of debt to an agency, which will make it hard (if not impossible) to ensure the agency will comply with your ethical obligations. Here’s an example opinion from the DC bar, which tackles these issues head on: 

Lawyers may utilize collection agencies to recover unpaid fees for legal services rendered only to the extent that debt collection efforts by such agencies are consistent with the lawyer’s ethical obligations. Because the outright sale of client accounts receivable to a collection agency would prevent a lawyer from fully complying with the D.C. Rules of Professional Conduct and District of Columbia Bar Rules, such sales are not permitted. Assignments of accounts receivable must be carefully reviewed on a case-by-case basis and are permitted only when the assignment conforms to a lawyer’s ethical obligations. In utilizing the services of a collection agency, disclosure of specific details relating to the representation should be limited to the minimal information necessary to collect the debt unless client consent is obtained. Even in such situations, the lawyer must ensure that the collection agency treats such information confidentially.

If you decide to hire a collections agency, try to find an agency familiar with the unique rules surrounding lawyer fee disputes and ethical obligations or be prepared to educate them on those rules. You should also have enough oversight of their process to ensure they are not violating ethics rules. 

Step 2: Collections agency licensing

Provided that you have checked with your local rules and confirmed that you are following all relevant procedures and/or that working with a debt collection agency is permissible in your jurisdiction, the next step is confirming appropriate licensing.

Companies operating as collections agencies generally need to be licensed. If your clients are exclusively businesses rather than consumers, there might be more flexibility in your jurisdiction, but it’s a good practice to ensure the agency is licensed just the same. Some states, such as Oregon, require licensing and bonding, while other states only require compliance with the Fair Debt Collection Practices Act.

There can be penalties imposed against you as the creditor if you are operating with an unlicensed agency, so it's important to do the homework. 

Step 3: Select an agency

To make things easier for you, we’ve compiled a list of the agencies that advertise working with law firms and where those agencies operate. You can download the list here. 

Pricing varies significantly among agencies. Most take a percentage of between 20-50% of the amount collected, but others have flat fee programs based on the number of accounts. Find the program that’s right for your firm and budget.

You may also want to check the review sites. Given what these agencies do, it will be difficult to find an agency without negative reviews. But it can be helpful to use review sites to compare the relative ratings of different agencies. 

Step 4: Build the agency into your collections process

This is a good opportunity to take a hard look at your existing billing and collections process. Before you start building the collections agency into your process, make sure you’ve already done everything else to optimize your collection rate.

The next step is adding the criteria for sending bills to collections into your engagement agreement, bill reminders and collections letter templates. The fee agreement may generally be turned over to the collections agency to assist in the collections process, although it’s important to check the rules and opinions in your state. 

Although a collections agency may be an effective tool in your firm’s collections toolbox, it’s important to minimize its use. Making changes such as implementing a collect early billing model (evergreen retainers, flat fees, subscriptions or payment methods on file), will likely have a far larger impact on collection rate than any agency. We work with clients who have near perfect collection rates and don’t use a collections agency, so we know it’s possible.

If you are looking for a place to start, see our collections optimizer and create an effective internal collections process. If you decide that hiring a collections agency for select accounts is right for your firm, we hope this guide will help.