Collection Payoffs Attract Lawyers
What could be more appealing to a lawyer than a big cash payoff?
Answer: Lots and lots of little cash payoffs, if the lawyer specializes in debt collection.
Perhaps it was inevitable in a fast-growing industry with revenues that now exceed $5 billion a year, but lawyers have found their niche. Whereas most collection agencies can only threaten to sue, the lawyers actually do.
Applying mass-production techniques, law firms will often receive thousands of cases a month from credit card issuers and other national lenders and pass them on to lawyers licensed in each state.
Linda Straub Lacey, a paralegal for Gary Becker, a collections lawyer in Minneapolis, taps a few buttons on a personal computer. Its modem squeaks and squawks for a minute or so, as the machine gathers the pertinent information on two dozen debtors of the day. A few more taps at the keyboard and the information is sent to a word processor that will print a form letter demanding payment.
If the debtor does not respond - and most don’t - the same word processor will print a lawsuit and send it out. If the debtor still does not respond - and, again, most don’t - Lacey will go to court for an award judgment. That, in turn, will enable her computer to write the most important document, a letter to an employer, garnishing the debtor’s wages.
Even that is no guarantee that the creditor will be repaid in full, or even see a penny. Federal law says that no more than 25 percent of a person’s take-home wages can be seized in this way. And some claims, like child support, take precedence over bad debt. Moreover, any given creditor often has to fight over the spoils with other lenders.
“I have some payroll people call me and say there are six garnishments ahead of me,” Lacy says. “Do I want to wait in line?”
In Minnesota, a lender can garnish wages for 70 days, then has to go to the back of the lien. As a result of all the constraints, Becker said his firm collected money on only two of every five judgments it won.
“If someone had been scraping by on $400 a week, and you garnish $100 a week, they may not be able to live on $300, so they consider bankruptcy,” he said.
For all the difficulty of wringing relatively small sums out of individual debtors, the scale of the effort can mean big money for the firms that do it. Typically, they charge a commission of 20 percent to 25 percent of the money they collect.
They are working on ways to deal with bankruptcy, too. Warren Rosenfeld, a partner in McNeily & Rosenfeld, a Washington collections law firm that runs a nationwide referral network, specializes in helping lenders get money from people after they have sought bankruptcy protection.
The firm uses two techniques. The “good guy” program offers fresh credit to bankrupt people in return for their paying off some old debt. The “bad guy” program, by contrast, seeks to collect debt that is not protected by bankruptcy law, such as that incurred no more than 60 days before a filing or under fraudulent circumstances.
“We are chasing people who have abused credit before bankruptcy,” Rosenfeld said.