Effective management of work processes in legal collections is paramount. This ensures that operations adhere to established procedures, preventing any discrepancies, errors, or inconsistencies between the organization’s systems and those employed by legal counsel. These controls serve multiple critical functions:
Expense Reconciliation: They form the foundation for accurately settling accounts with law firms.
Bad Debt Resolution: Essential controls are in place for the process of writing off bad debts and synchronizing the organization’s systems with those of the attorneys.
Quality Assurance: Quality controls on various aspects of legal proceedings are crucial. They not only facilitate scrutiny but also bolster the optimization and efficacy of the legal management system.
Market Analysis and Knowledge Acquisition: These controls are invaluable for evaluating the overall system effectiveness and the work processes involved.
Incentivization and Recognition: Controls also play a key role in providing benchmarks for incentivizing lawyers and recognizing progress with debtor clients.
This chapter will comprehensively review the diverse controls implemented by the organization. It will explore their role in the intricate and collaborative relationship with external lawyers during the collection of bad debts, serving as a comprehensive guide underpinning these essential processes.
Reconciliation between subsidiary ledgers and general ledgers and reconciliation between the control software and the organization books
When the organization uses a control system in order to get an online picture of the status of the cases in the care of the lawyers, it must perform periodic control on the settlements of the lawyers’ books to the organization’s books. The adjustments will be made at the level of the total debt fund for the client at the lawyers compared to what is recorded in the books and according to the status of the treatment at the lawyer firm compared to what is recorded in the organization’s books – for example, it is necessary to make sure that any case with a bad debt status at the lawyer’s firm is deleted from the organization’s books, and that the debt balances in the organization’s books are matching to the debt balances in the lawyers’ books. In this situation, and as long as the law firm system is available with no limitations, we can consider the law firm accounting system as a subsidiary ledger of the firm general ledger. This will simplify the records in the organization’s general ledger as they will include only expense summaries. Sometimes, the lawyer will charge items as small as a postal stamp. Recording all expenses in detail could add thousands of low-importance records to the organization’s books.
Controls on collection management in the pre-claim phase
Below are several recommended control reports and KPI’s for follow-up:
- The amount and number of debtors who pay at the stage of the notification letter, with distinction of payments to the organization or to the lawyer;
- Ratio between skip-tracing expenses and expenses for skip-tracing and delivering.
- The percentage of customers requiring clarification on their initiative after the warning letter (in amount and number).
- The percentage of clients who require clarification following the conversation with the lawyer (in amount and number);
- The percentage of clients who paid in the pre-claim stage, divided into payments at the lawyer’s office and the organization (in amount and number);
- The percentage of customers who were not located (in amount and number);
The amount and number of debtors who pay at the stage of the notification letter, with distinction of payments to the organization or to the lawyer.
The report is necessary to identify where the customers are making payments and allocate commissions to the law firms. When a law firm sends a warning letter, it is generally entitled to a commission, regardless of if the customer paid the debt to them or directly to the organisation. This distribution should be stable over time, and any change should be studied.
The ratio between skip-tracing expenses and expenses for skip-tracing and delivering.
Sometimes, the law firm provides both skip-tracing and door-step deliveries of legal documents. In this case, the ratio between them needs to be studied to prevent double charging skip-tracing expenses and shifting services to those with higher profit to the law firm.
The percentage of customers requiring clarification on their initiative after the warning letter (in amount and number).
This report is important to calculate the resources needed by the organisation to support the law firms and provide them with responses and documentation in the agreed SLA.
The percentage of customers who were not located (in amount and number);
This KPI should remain stable over time. Any increase would flag up either a problem with the skip-tracing service or a problem in the KYC phase of the acquisition process, which should have verified the accuracy of the customer’s identity and data in the first place.
SLA for case activity at the lawyers’ firms in accordance with the organization’s standards
The organization must monitor the turnaround times for the various activities as defined in the engagement contract and the work procedures with the lawyers’ firms.
- Number of days to issue a warning letter from the day the case was established;
- Number of days to address customer inquiries (internally in the law firm and through the organization’s departments);
- Number of days to contact customers from the end of the notice period stipulated in the warning letter;
- Dormant cases: cases without activity in the pre-claim stage for a period exceeding 30 days.
Controls on the claims’ submission process
The transfer of the client to enforcement must be verified subject to the judgments received from the court, and the standard time established in advance in the work practices between the organization and the lawyer must be adhered to.
- The number of days to transfer the case to enforcement.
- The amount and number of cases transferred to enforcement out of the total amount and number of cases under legal proceedings.
There are various elements to consider, such as the debt amount and the debtor’s location. Not any amount of debt can justify enforcement. The amount of the debt should justify the additional cost of enforcement. The organisation should also consider the proportionality of the enforcement steps. Enforcing a $100 debt by attempting to foreclose a debtor’s car or house will be considered by the Court as not proportionate. Some enforcement steps might be considered harassment and must be carefully planned together with the law firms.
Control over writing off bad debts
The lawyer will change the client’s status as recommended for write-off, and only after receiving confirmation from the organization will he transfer the client to the status of write-off debt.
If the client pays after the debt is written off, the funds will be transferred to the organization, mentioning that the funds are collected on written-off debts. This is because the organisation needs to recognize an income from these collections. Depending on the country you are acting in, it is not always possible to collect written-off debts.
- Goal versus performance report – bad debts (in percentages and amounts)
- Process status adjustment report between the lawyers and the organization
- Report on the distribution of write-offs by lawyers
- Distribution report of deletions by reasons;
- Write-offs distribution reports by sectors, salespeople, product lines, customer size, service stations, and geographic areas;
- Balances of bad debts according to amount/year rating and number of customers
- The 100 largest customers with bad debts
- Distribution of write-offs according to the year the debt was created
- Debt balances due to bad debts as a percentage of the total activity (amount and number of cases), and the reasons for deletion (unviability, inactive company, incorrect ID, lack of material for a claim, deceased, abroad, incarcerated, missing ID, low amount, no company reference number, fraud, obsolescence).
Process status adjustment report between the lawyers and the organization
It is important to keep systems synchronised on the different statuses of the legal collections process. The organisation needs to keep the knowledge of the customer’s status within the legal process. It might be avoided if the legal department within the organization has access to the law firm’s records through a portal. Remember that the relationship with the law firm might come to an end, and the capability to re-integrate the customers into the organization’s systems without losing information on legal proceedings is crucial to be able to continue the collection process after recalling a case from a law firm (or recalling all cases).