Collections Attorneys get a New Look

  A decade ago, credit card issuers considered collection attorneys to be a last resort in attempting to recover bad debt. The perception was that while they were effective, attorneys were an expensive, one-dimensional recovery option. Their job was to simply to use litigation to wring money out of hard-core debtors who had rebuffed the overtures of even the most persistent collections agent.
  More often than not, issuers shied away from using collections attorneys unless the outstanding balance was high and the odds favored recovering substantially more than court costs and legal fees. Otherwise, they worked the account using traditional collections methods and maybe sold it after all efforts failed.
  Hence, collections attorneys worked a tiny portion of total consumer delinquencies, about 5%, according to estimates by industry experts. Today, the estimated percentage of debt being worked by collections attorneys has doubled as issuers are turning to attorneys more readily to recover bad debt, according to Adam Olshan, a partner with East Hartford, Conn.-based Law Office of Howard Lee Schiff.
  Fueling this trend is the transformation of the collections law firm from litigator to a full-service collections agency, replete with agents, power dialers and skip-tracing databases. In arming themselves with these tools, collections attorneys are able to better leverage their stature as litigators to persuade debtors to bring their accounts current, without having to actually threaten a lawsuit.
  The payoff for issuers is a higher recovery rate for bad debt that has been worked 90 days or more pre- and post-chargeoff and a new tier of lower attorney fees separate from litigation costs that are comparable to those charged by collections agencies.
  "Collections law firms are built differently today than they were 10 years ago, and clients are recognizing the power of legal collections," says Olshan, outgoing president of the National Association of Retail Collection Attorneys (NARCA). "Firms today can provide good returns for both short-term and long-term collections."
  Increasingly, some issuers are finding it more practical to assign accounts to an attorney sooner in the collections cycle, rather than wait for a collections agent to exhaust all his tricks for recovering bad debt. A key factor in the decision to assign an account to an attorney is based largely on whether the issuer determines the debtor is simply refusing pay.
  "There are times when we determine a debtor doesn't have financial problems and just won't pay, then the account will go to an attorney sooner," explains Rick Gilbert, vice chairman and chief operating officer for CompuCredit Corp., an Atlanta-based subprime card marketer that manages $2.2 billion in receivables. "Experience has helped us better determine when to use an attorney to work an account."
  CompuCredit has increased its use of collections attorneys the past couple of years. The company bases its decision to use an attorney on whether the debtor has sufficient assets, such as real estate, or a steady job. Without these criteria, attorneys are unable to put a lien against the debtor's assets or garnish his wages to ensure repayment.
  More encouraging for issuers is that with most collections law firms possessing in-house collections capabilities, the average balance for accounts assigned to an attorney is dropping. Previously, it made little sense for issuers to assign an attorney an account with a balance of less than $3,000 since court costs and attorney fees chewed up most of the ensuing cardholder payments. Today, the threshold has dropped to about $1,500, according to Donald B. Kramer, president of St. Louis-based Kramer & Frank and a founder of 10-year-old NARCA.
  "In the past, it was not worth suing over a balance less than three thousand dollars," says Kramer. "But today, attorneys don't necessarily have to file suit against debtors. A lot of creditors are finding that an attorney's letterhead has a lot of impact with consumers. Attorneys don't necessarily have to threaten litigation to recover the debt or reach a settlement."
  One reason is that savvy debtors realize collectors have no power to file suit to recover the balance owed. They also know they can put off agents by screening phone calls or ignoring letters.
  With that in mind, many attorney firms are finding that calls from their collections agents, which tell the debtor the firm is now responsible for collecting the debt, can be enough to prompt many debtors into paying, rather than risk being taken to court at a later date.
  "A call or letter from an attorney can make a big difference in getting the debtor's attention," says Gilbert.
  Care Needed
  Nevertheless, law firms must be careful when contacting debtors. Any outright suggestion or statement that litigation will be brought in the event of non-payment and the firm is obligated to follow through on the threat. Failure to do so invites lawsuits from debtors for misrepresentation or enforcement actions from state or federal authorities.
  The upside to threatening litigation is that debtors will often settle their debts before going to court to avoid having wages garnished or liens placed against their property.
  "Just the threat of litigation will usually bring enhanced recoveries, but there is a fine line attorneys walk in this area," says Ronald M. Abramson, a partner with Rockville, Md.-based Wolpoff & Abramson. "If you threaten litigation and don't start proceedings you can be charged with deceptive practices by state attorneys general and the FTC (Federal Trade Commission, which enforces the Fair Debt Collections Practices Act). They can even be sued by the consumer."
  It is up the issuer, however, to determine whether it wants to pursue litigation as lawsuits can add months to the collections process. Issuers without the patience to wait for an attorney to recover the balance owed typically sell the debt. Traditionally, collections agencies or entrepreneurs purchased the debt for pennies on the dollar and worked it. Since they pay so little for the debt, buyers with lower overhead need only recover a modest percentage of the outstanding balance to turn a profit.
  Recognizing the validity of this model, collections attorneys are buying bad debt themselves. In most cases state laws prohibit law firms from buying bad debt as it is not related to the practice of law. Hence, firms set up subsidiaries that purchase the debt and hire the parent firm to collect it.
  "As creditor clients become fewer due to consolidation, many collections attorneys are finding their own LLCs (limited-liability corporations) to be their best clients," says attorney Olshan.
  The payoff for the firm is that it gets paid twice, i.e. the subsidiary recovers or settles the debt owed and the firm is paid a contingency fee, both of which go to the firm's bottom line.
  Manpower
  Some law firms reportedly are partnering with card issuers, such as Citibank and Chase, to buy bad debt, according to collections attorneys. Issuers investing in these ventures see the opportunity to add a rehabilitated account to their portfolio, the cost of which is cheaper than soliciting a new account. A Chase spokesperson reports having no knowledge of such purchases. A Citi spokesperson could not be reached for comment. And some issuers reportedly are buying bad debt outright from competitors and farming it out to collections attorneys, attorneys say.
  "A lot of creditors were selling more debt than they were placing, which brought them to the realization they were losing long-term revenue from these accounts if they could be rehabilitated," says Alan H. Weinberg, managing partner for Cleveland-based Weltman, Weinberg & Reis Co. LPA.
  Weltman, Weinberg & Reis, which lists Citibank and Ford Motor Credit among its clients, operates in six states and has 90 attorneys and 200 collections agents. About 200 more employees assist in some facet of the collections process.
  Such manpower makes it possible for large attorney firms to aggressively work accounts on a national basis. Many firms utilize skip tracing when working bad debt they have purchased. If a firm purchases a portfolio in a state where it is required to have an office in order to contact debtors, subcontractors are hired. Kramer & Frank, for example, works bad debt on behalf of other firms.
  As is the case with traditional bad-debt buyers, collections attorneys need to perform due diligence on portfolios available for sale. This is critical, since most of the debt for sale has been aggressively worked by creditors and agencies. While inexpensive-accounts may sell for half a cent on the dollar-extracting additional payments from the debtor is not assured.
  With this in mind, attorneys tend to purchase debt that has been worked once, either in-house by the lender or by an agency. This type of debt typically sells for between five and seven cents on the dollar, according to Weinberg. The price has come down considerably after a run-up a few years ago by entrepreneur-led firms, such as Commercial Financial Services, which were eager to cash in on what they thought to be a lucrative market. The bubble burst when these buyers were unable to work the debt in a cost-effective manner, according to Kramer.
  When evaluating a portfolio, one technique attorneys will use is to see whether a debtor in the portfolio has several delinquent accounts. The more debtors within the portfolio that fit this profile, the more apt the firm is to pass on it, according to Brett Whittier, collections manager for Dagget & Parker, a Portland, Maine-based collections law firm.
  "Debtors with multiple delinquent accounts are a bankruptcy waiting to happen," says Whittier.
  Other criteria being used in evaluating a portfolio for sale include how reputable the seller is, documentation the seller is willing to provide to help the buyer evaluate the portfolio's quality and the length of time the seller will allow for the buyer to make a decision. Most sellers will allow potential buyers no more than a cursory look at the portfolio over a 24- to 48-hour period, but much can be discerned in that time, according to attorney firms that buy debt.
  "Bad-debt buying is not an exact science, but things like the average size of the balance and whether there is a current address or correct name on the account can tell you a lot," says Whittier. "We tend to shy away from accounts with large balances because they tend to file for bankruptcy quicker."
  Once a portfolio is purchased, attorney firms act as a collections agency first and a litigator second.
  "If you buy an account for a few cents on the dollar and can settle it for say 50% of the value by working it aggressively, that's a pretty good return," says Whittier.
  Issuers are also becoming more inclined to sell bad debt to attorneys, as opposed to entrepreneurs, as they can be more assured that recovery efforts will be in accordance with state and federal collections laws.
  "Creditors are more conscious about debt buyers having business practices that treat debtors fairly," says Olshan.
  One drawback to attorneys buying bad debt is that the cardholder may file for bankruptcy before they can negotiate a settlement or after they start litigation. Once bankruptcy is filed, all collection efforts must cease. While cardholders filing for bankruptcy to avoid litigation is not a huge problem, it is a thorn in the side of collections attorneys nonetheless.
  "A lot more debtors are asking themselves why pay when they can file for bankruptcy," says Weinberg. "But for the most part, wage garnishment is not going to push most debtors over the line. If they are going to file for bankruptcy, they will do it regardless."
  Battling Delinquencies
  Even so, collections attorneys say the rise in consumer bankruptcies has not dramatically affected the net returns they realize when working purchased chargeoffs. In many respects, that's good news for card issuers, which are battling high delinquency rates at a time when they are squeezing fees paid to collections agencies. While many agencies are attempting to compensate for lower margins by making it up on volume, the fact remains they can only work an account so long before they lose their effectiveness.
  Given that an attorney's call, which can carry with it the threat of litigation, tends to hold more sway with debtors, it is natural for issuers to consider farming out a larger portion of their bad debt to attorneys, and in some cases sooner.
  "Collections attorneys are not a replacement for collections agencies, they are part of a comprehensive collections strategy," says CompuCredit's Gilbert.
  And no longer a last resort for issuers.