Collecting debts is a business. As a bank, lender, or credit union you need debts collected to maintain your depositors’ cash and to turn a profit. Law firms and collections agencies also collect debts for profit — they get paid fees for their services. While several types of fee arrangements are often used, most firms will offer a fee structure or combination thereof to boost their bottom line. Here are some of the most common fee structures used in the industry and the advantages (and disadvantages) for you, the client.
Note: Fees vs. Court Costs: Occasionally there is confusion when distinguishing court costs from attorney fees. This blog only pertains to actual attorney fees, as the court costs are the same in every case and are set by the clerk of the court.
1. Flat Fee
Under this fee structure, you pay for each and every action the firm takes, and the fee is always the same. One set fee is charged for collection letters, one for handling uncontested suits, another for a garnishment or execution, etc. The only exception is if the matter becomes contested, in which case most firms go to an hourly fee basis. There are certain advantages to this fee structure, namely, the cost for each case is predictable. Most collection cases follow a predictable path and take a reasonably fixed amount of time. You know about how much you’ll be spending per case and can budget accordingly. This fee structure works for pre-suit matters, cases that go to suit, and post-judgment efforts. It also allows for negotiation of the cost for each activity. Some flat fee structures establish a fee for an entire lawsuit from start to finish.
The primary disadvantage of this fee arrangement is that you have to pay whether a recovery is made or not, thus removing the incentive of your collection firm to actually collect. In our experience, firms which charge a flat fee tend to collect less money for the client. It is just a reflection of human nature.
2. Contingency Fee
Under this arrangement, the attorney takes a percentage of any sum collected. The percentage is negotiable and depends on factors such as the volume of business, average age of the accounts, the type of debt, etc.
There are several advantages to this fee structure for the client. Primarily, the client never comes out of pocket for legal fees. So if the debt is uncollectible and no recovery is made, you don’t have to pay. This method tends to cost clients less in the long run because of the high percentage of nonperforming debt. It never cuts into your operating costs because legal fees are only taken out of recovered funds. Finally, the costs are fixed regardless of how complicated the case gets. Whether it’s a default or a case that goes through discovery and trial, the attorney will never collect more than the agreed-upon percentage. With flat fee or hourly billing, the cost of the legal fees could exceed the total debt! And what happens if the case is lost? You are still responsible for the legal fees.
3. Hourly fees
It is rare these days, but some firms still do charge hourly fees, and the client pays for everything that is done regardless of the outcome. Every phone call, email, filing, etc. results in a fee to the client.
Sometimes firms will mix contingency fees with flat fees depending on the type of case. In today’s economy, flexibility and willingness to work with the client are primary considerations for any business.
Hiday & Ricke offers various fee arrangements, depending upon client needs and desires. Generally, most of our collection cases are handled under a contingent fee, rather than flat or hourly fees. We have been specialists in this type of work since 1984, and have learned through long experience that this is the preferred method in most situations. While this is always a decision for the client, in most situations it is the cost-effective way to go and results in a strong long-term relationship between the firm and the client. Contact the attorneys at Hiday & Ricke today at [phone2] to discuss the most effective methods to maximize your cash flow and minimize your costs.