- 
Weighing the Odds: Choosing How to Handle Collections
by Terry Wunsch
President and Owner
Collections Unlimited of Texas
The question of whether to work accounts internally or to utilize an outside third party collection agency comes up again and again. Over the years, many creditors have adjusted their policy to use a collection agency, work all accounts internally to conclusion, use an outside source on a limited basis or use an agency as an extension of their office when an account reaches delinquency.
Quite obviously, this is an internal decision based on economics, depending upon what point in delinquency the account is placed with an agency. The flow chart below illustrates the policy of most creditors.
Certainly a case can be made for a developer or owners association to have a controlled internal collection effort. The advantages should be weighed against the disadvantages. Maintaining this process internally has distinct advantages. In the early stages of the collection effort, the developer or owners has the most expectations of a high recovery compared to expenses. The internal control in these early stages of delinquency may be desirable.
On the flip side, however, the company must hire and maintain a competent collection staff. This includes all related personnel costs such as salary and benefits, space, phone system, computer equipment and collection software. Obtaining personnel qualified for collections is often much easier said than done. Most collection agencies themselves are constantly looking for additional collectors. Most will hire and train personnel in collections, rather than hire someone with extensive experience who will not follow company policy or adhere to company standards.
However, a strong case can be made to have at least a very limited internal collection effort, particularly if your governing documents or contracts hold the owners responsible for “all collection costs.” The Fair Debt Collection Practices Act states that the addition of collection fees is a violation unless it is “expressly” agreed to in the contract.
If you are able to make adding the collection cost clear in your documents, your collection department could use a collection agency as an extension of your office, and it would cost you nothing. Your internal collection staff could then be limited to only those necessary to handle any incoming calls. Experience may very well dictate that this can be accomplished with existing customer service personnel. This would entirely eliminate the need to hire, train and maintain a collection staff.
If you chose this course of action, all that would be necessary is a written notification to the delinquent owner advising:
“This account will be placed with a professional collection agency, with additional cost of collection added in accordance with the by-laws or contract if the entire balance is not received by [specified date].”
In most instances, a creditor collecting their own accounts can do much more than any agency. However, there is a strong psychological motivation for employing a collection agency. The public perception as to what a collection agency does to be successful is about 180 degrees from reality. However, you can take advantage of the fact that the general public perceives collection agencies in the same genre as the Internal Revenue Service.
Developers and owners associations that pursue their delinquent accounts to conclusion with an internal staff and do not use a third party collection service might consider doing so on a limited time basis to simply determine that their in-house staff is indeed producing maximum results.
For example, accounts that have reached the point of foreclosure or suit might be referred to an agency for a period of 60 to 90 days. These would have stipulations of automatic close and return unless it is agreed in the payment arrangements what there will be no fee due to the agency after the previously agreed upon close date. If the agency is not able to produce some results, they will soon advise that no further placements will be accepted because of low profitability to handle this business.
Timing is Everything
Whatever combination of collections routes you choose, there are some important issues to keep in mind. The governing documentation of most owners associations have very specific language referring to the fiduciary responsibility of the elected officers. Even so, many associations, through their officers, fail to collect assessments on a regular basis. It is not unusual to have owners owing for three years or more before the association finally pursues other means of enforcement. In the meantime, those owners who do pay carry the load for those who do not, possibly necessitating an increase to all owners.
There are situations where accounts might be placed for collection before the 120 day delinquency, including mail returns or the lack of a noted residence or employment phone. Skip tracing takes a great deal of time, very likely more than 15 minutes per account, especially if it is necessary to develop information for this task. Searching for residence and place of employment phone numbers is also time consuming.
If the maximum time allowed to work each account is three to six minutes, your collector cannot spend 15 minutes to half an hour attempting to locate a new address or phone number. Most collectors prefer not to spend a lot of time skip tracing as this effort is not as productive as engaging customers in conversation.
Generally accepted business practice dictates outside collection referral at 120 days delinquency. In this situation, the advantage of extending internal collection effort is that the developer or HOA possesses inherent knowledge of what may have caused the delinquency. They also have the immediate ability to work out payment arrangements based on each individual account history.
Disadvantages include the continuing overhead and personnel costs at the lowest point of expected recovery. There is also the potential for the deteriorating efficiency of the collector, who then has overloaded files to maintain. Not resorting to a collection agency after this time period may also delay reporting to credit bureaus long after the initial delinquency. Most agencies will report to the three major credit bureaus: Equifax, Trans Union, and Experian.
Placing accounts over 120 days with a collection agency has distinct advantages. The internal collectors are able to concentrate their efforts on more recent delinquent accounts. This contributes to sustaining internal collector morale, as they are working accounts that are most likely to pay.
This, in turn, equates to greater collector success on accounts both under and over 120 days. Turning these accounts over to a collection agency also allows for better internal control of collector inventory of accounts (dividing the workload, if you will). There is less cost involved to maintain an account in “agency” status as well.
There is no cost if the collection is successful by the agency, providing documents “expressly” hold owner responsible for the costs of collection. For planning purposes, agency reports allow additional revenue anticipation and income budgeting.
Checking Out A Collection Agency
The following is of utmost importance before employing the services of any collection agency:
• References – particularly those with your unique type of receivable. An unsatisfactory experience with an agency in the past was very likely due to the lack of experience on the part of the agency in the working real estate related accounts.
• Management Reports furnished by the agency with no additional charges. This would include inventory of all accounts placed, showing your identification number, name, last known address, date of placement, amount placed, current balance and status.
• Statistical reports, indicating the number of accounts placed, dollars placed, dollars collected on that month’s placements, recovery rate of dollars collected compared to dollars placed and accounts still in the process of collection, for each month and cumulative totals for each year. Reports of new addresses obtained to enable updating of records even if the collection effort is unsuccessful.
• Stability: How long it has been in business and credentials of the owners.
• Membership in professional organizations: American Collectors Association, ARDA, Community Associations Institute, etc.
• Contract, covering when remittance of collected funds is to be made by agency (by 15th day of each month) in what form, gross net or other, hold harmless clause and cancellation terms.
Evaluating the Workload
Whether a company performs collections internally or utilizes an outside agency, a core question is, "How many accounts can a collector efficiently handle?" This can be determined by answering two questions:
1 What is your minimum work standard for number of days between contact or attempts to contact?
2 How much time will a collector spend on each contact?
Collectors in an agency atmosphere will be disciplined to perform according to the agency standards. This discipline will work in an agency because of the high motivation factor of increased pay for increased fees earned. It is unlikely that the same discipline exists within the office of the developer or the owners association.
If a collector's daily goal for collection attempts is 150, the following equation would apply, assuming six hours per day of collection effort:
150 divided by 6 hours = 25 attempts per hour
25 attempts per hour = 2.4 minutes per attempt
150 attempts x 5 days = 750 attempts per week
1,500 accounts per collector would allow a review of each account twice per month, allowing only 2.4 minutes per account.
If a collector's daily goal for collection attempts is 100, the following equation would apply, assuming six hours per day of collection effort:
100 divided by 6 hours = 10 attempts per hour
10 attempts per hour = 6 minutes per attempt
100 attempts x 5 days = 500 attempts per week
1,000 accounts per collector would allow a review of each account twice per month, allowing 6 minutes per account.
____________________________
This article has been reprinted by permission from Developments Magazine, October 1998.