Why not sue through an internal legal department?
When the overdue debts of the customers are in low amounts, the organization can sue the customers itself, without using an external lawyer. Each collection manager should examine the issue individually. However, she should consider several aspects:
- Carrying out a procedure internally requires time and resources, and there is no assurance that using the organization’s internal resources will be cheaper than using an external lawyer who demands his fees from the debtor (all or part of it as the case may be).
- Carrying out a legal procedure independently requires knowledge and skills, and there is no assurance that the management attention to the issue and the efforts required to acquire and maintain the knowledge (which is constantly evolving) justify not using an external lawyer.
- Another consideration is the “marginal profit” from the existence of an external lawyer who also serves as a consultant to the collection manager/credit and collection risk manager.
Is it worth hiring a lawyer in the organization?
If there are sufficient cases (and it is also important to quantify the scope of activity in these cases), a lawyer can be hired within the organization. The feasibility considerations are like the previous case. However, it is important to emphasize that, unlike an internal lawyer who requires managerial attention from managers within the organization, an external lawyer manages the cases over time independently of employees who could leave the organization and need replacement and training.
Considerations in choosing an external lawyer.
When the collection manager comes to choose an external firm of lawyers to carry out collections in trust for the organization, he must thoroughly examine some key issues related to the activity between the organization and the chosen law firm.
Below are several suggestions for criteria for choosing lawyers, which are basically intended to implement the cost-benefit considerations presented in the previous sections:
- An active law firm with [number] years of experience (along with the firm’s profile).
- The office staff will appoint at least [number] of lawyers and at least [number] of administrative workers.
- The law firm has [number] years of proven experience in handling similar organizations (along with recommendations).
- The law firm has [number] years of experience at least in the field of handling debtor claims (with recommendations).
- Assignment of a dedicated lawyer or partner to handle the organization’s claims.
- The law firm has a telephone collection team set up to telecollecting before opening proceedings.
- A commitment to adopt the organization’s practices vis-à-vis clients regarding rules of conduct and ethics.
- The law firm is working with a computerized system that allows remote control.
- Having a two-way interface between the control system in the organization and the local system at the lawyer (possibility of viewing every action in the case in real time). Alternatively, a supplier portal can be sufficient.
- A commitment to update data in the control system in a timely and uniform manner and as required, as well as the possibility of opening cases in automatically according to files transferred electronically (without paperwork).
- Transferring files (expenses/receipts) in the required format or a format adapted to the organization’s systems (CRM and accounting).
- Issuance of automated monthly reports in the requested format and upon request.
- The possibility of transferring cases from one lawyer to another without expenses.
- The signing of a binding agreement between the lawyer and the organization, including a detailed work practices appendix.
And there are other considerations:
Big firm versus small firm
When you want to decide between a small law firm and a large firm, assuming that both specialize in legal collections, we must use several considerations:
What is the nature of our files? If we have a very large number of cases that are quite similar in case size (amounts of money) and in the type of debtors (for example, debtors for a monthly service) – it may be better to choose a large firm, which is skilled in handling large amounts of cases and managing complex work processes.
On the other hand, if there are a few complicated cases (and usually these are larger debts), which require personal attention and special training of the handling staff – it may be better to employ a smaller firm, where the cases will be handled personally by senior partners. It is clear that the matter is completely subjective since even large firms are able to devote dedicated attention of senior partners to important cases.
Sometimes, a large office may convey financial security, thus ensuring that the organization’s files are properly handled and that the organization’s funds are in “good hands”. We must remember that the total outstanding debt transferred to the good care of law firms could be a substantive amount that could tempt lawyers or their employees. There is a risk that some of the collected funds will end up in the wrong pockets without proper monitoring. Another responsibility of the collection manager is to run sanity reports to verify that collected funds are transferred in full to the organization. This is not an easy task when sometimes dealing with thousands of long repayment plans.
Examples of how lawyers might commit fraud while collecting funds for their clients:
Misappropriation of Client Funds:
This occurs when a lawyer improperly uses client funds for personal use or for other unauthorized purposes. For example, a lawyer might receive a settlement check intended for the client but uses the funds for personal expenses instead of disbursing them to the client.
Overbilling:
Lawyers might bill clients for more hours than were actually worked or bill for services that were never rendered. This form of fraud inflates the legal fees and expenses that clients have to pay.
Settlement Embezzlement:
In cases where a lawyer is responsible for receiving a settlement amount from the opposing party, they might embezzle part or all of these funds. The lawyer might inform the client that the settlement was less than what was actually received or delay in informing the client about the receipt of the settlement.
Escrow Account Fraud:
Lawyers often hold client funds in escrow accounts for various transactions. Fraud can occur when the lawyer uses these funds for purposes other than what they were intended for, such as investing the money in risky ventures or using it to cover office expenses.
Fee Arrangement Abuses:
Sometimes lawyers might manipulate fee arrangements to their benefit. For example, they might charge contingency fees on cases not suitable for such arrangements or alter the percentage of the contingency fee without proper client consent.
Forgery and Falsification:
A lawyer could engage in forgery by altering documents related to client funds, such as forging signatures on checks or falsifying account statements to conceal misappropriation of funds.
It’s important to note that these are illegal actions and are in violation of legal ethical standards. Clients should always closely monitor their financial dealings with lawyers and report any suspicious activities to the appropriate legal authorities.
Multiple lawyers/multiple law firms – advantages and disadvantages
The legal collection manager has to decide how many lawyers he intends to work with. A large number of lawyers’ firms will make his task more difficult since he will have to deal with each of them, take account of each of them and above all take care of many training courses on the organization’s products and internal work practices. In addition, the collection manager must consider that multiple law firms require more managerial attention and more and more complex administrative work.
On the other hand, in large organizations with very large scopes of cases, spreading the cases to several lawyers/law firms will allow for spreading the risk and having more sophisticated competition between the lawyers.
Recommendations
It is advisable to get recommendations from other similar organizations before starting to work with a new office. Remember, not only the efficiency of the office but also its treatment of the case owners in legal proceedings as clients of the organization and not as criminals is important. It is advisable to prepare guiding questions in advance and cross-check information, like the techniques used in interview recommendations in employee recruitment.