In principle, the organization is not interested in transferring clients to legal proceedings, because in its view these are expensive collection proceedings that require a lot of administrative attention, the results of which become clear in some cases only after a long time. Sometimes, it is better for the organization to reach an immediate compromise, or to resort to arbitration or mediation rather than conducting an expensive and long-term legal process.
It is worthwhile to carry out activities that prevent the transfer of customers to legal proceedings also in terms of “customer experience”: although it is a customer who owes money, as soon as he is sued, in most cases he becomes a lost customer with a potentially negative effect on his professional and social circles.
However, as a general rule, the organization must transfer some of its clients who refuse to pay to legal proceedings, because if it does not do so, word of this may spread quickly and most of those who refuse to pay (and even some of the paying clients) will take advantage of the organization’s reluctance to apply for legal treatment and might stop paying or deliberately postpone their payments, assuming that the proceedings against them will not be exhausted. This issue will come up again in the section on managing legal proceedings, and this time from the point of view of the manager of the legal collection department or the credit risk and collection manager himself.
Once the decision on legal proceedings has been made – the management will decide, taking into account the organization’s structure and nature, whether the pre-legal checks should be carried out by the collection department before transferring the client to legal treatment or by the legal collection department in the legal department, before transferring the case to an external lawyer.
Transfer to legal treatment – systemic failure or necessity?
Sometimes it turns out that the reason for transferring the cases to legal treatment is an internal organizational failure. We distinguish several types of such reasons, and we will list them below. (All examples are real-life experiences!).
Unauthorized promise
The salesman at a telecommunications company sold the customer a walkie-talkie with a promise of telecommunications coverage in a certain area. In practice, the device did not function because the company had no communication coverage in the area. Although the organization’s investigation revealed that the salesperson made a false promise without authority, the collection system and the sales system made it their goal to collect the money at any cost. The client refused to pay and was transferred to legal proceedings. The court accepted the client’s objection and severely reprimanded the company, which was forced to acquit the client, cancel its claim, return the advance payment to the client along with interest, pay the client court costs and compensate him for the mental suffering. The client switched to a competing company and even influenced other relations to disconnect from the telecommunications company.
Product/service failure
Sale and supply of a product or service, which turns out not to meet the specifications and performance that the organization has committed to the customer. example:
An unfulfilled promise
The organization sold the customer through a salesperson a product that was supposed to perform (according to the organization’s commitment) several actions, but in practice, the product failed to perform some of them. The customer contacted the organization with a request to receive a replacement product, and then it became clear that all the products of the model sold to the customer were unable to perform the promised operations. When the customer asked to return the product and receive the advance he paid, the organization refused without a proper reason, and at the end of the process referred the issue to legal proceedings. The court accepted the client’s objection, and the organization was forced to write-off the client’s debt and return the full payment, including interest and compensation for the mental stress caused to him. The organization apologized to the client, asked him to continue commercial relations, promising that cases like these would not occur in the future, but the client severed ties with the organization, probably forever.
Collection failure
Collection failure results from the lack of a clear and complete collection policy and reveals itself in poor execution of collection processes – misunderstanding of the policy/procedures, execution not following schedules, deviation from authority at all levels of the organization, and so on.
Below are two examples of such failed conduct regarding the transfer of a client to legal proceedings:
Excessive recklessness
A customer was transferred to legal proceedings after purchasing products from the organization. The customer paid his full debt on time through a bank transfer, but the organization did not “recognize” the transfer and did not “close” the debt. When the debt collector called the customer and received a voice response that the phone number had been changed, he concluded that the customer was in difficulties and therefore avoiding payment. The collector hastened to report his conclusions along with a recommendation to transfer the client to legal treatment, and the collection manager did not bother to check the facts and accepted the recommendation.
When the client received a letter from a lawyer about the debt claim, he called the organization angry and hurt. The customer sent a very strong letter of complaint to the organization. The organization immediately realized its mistake, apologized to the client and promised to prevent the recurrence of cases like these in the future. The collection manager and the collection agent were reprimanded, and in this case, the client continued his relationship with the organization.
Excessive stalling
By the organization’s procedures, a client who does not pay at the end of 60 days from the agreed credit date must be transferred to legal proceedings, subject to a sequence of actions to be performed during these days. The collection system did not perform some of the required actions and did not transfer the client to legal proceedings according to the instructions. After 90 days, a message was received from a business information company that the client had gone bankrupt. Later on, the customer’s debt was recorded as a bad debt.
Management failure
Occurs when a manager in the organization – usually at a senior level, sometimes even at the CEO/owner level – interferes in the collection process not according to the organization’s policies and procedures. For example – approving orders contrary to the credit-control recommendation, stopping enforcement measures against customers, continuing supplies to a non-paying customer or a high-risk customer, etc.; there are cases where the debt is ultimately transferred to legal proceedings.
The CEO is not always right, but he is the CEO…
After the 60-day collection attempts were exhausted, the collection system recommended to the CEO of the organization to transfer a customer who had not paid his debt to legal proceedings. The CEO refused and asked the collection system to continue trying to collect the money and also gave instructions to continue providing equipment to the customer (further on it turned out that there was a personal relation between them). After 120 days in arrears, it was published in the press that the customer became insolvent. Later on, the debt was recorded as a bad debt.
Credit control failure
Occurring when granting credit to a customer not according to the organization’s policy and procedures.
A new customer, who founded a limited company a month ago, placed an order from the organization for a large amount on credit terms of 150 days. The transaction had a profitability of 20% (compared to an average of 8% in the organization). Credit control approved the order without the serious inspection required for new companies.
After 30 days from the date of receipt of the equipment, information was received that the customer was in difficulties and was immediately transferred to legal proceedings. In the end, the client became insolvent, and the organization lost the full amount of the transaction.
Organizational failure
Included in this category are various failures in carrying out organizational processes required by the organization’s policy and management in each of the stages of the collection process – from the stage of acquiring a client to transferring it to legal proceedings.
Example of an honest customer
A customer called the company and asked to disconnect from the service it provides (he spoke with the service representative, wrote down his name and indicated the time of the call). The service representative forgot to perform the required action, and the company continued to charge the customer. After three months of illegal billing, the company transferred the balance of the debt to legal proceedings. The customer submitted an objection along with the date of the call and the name of the service representative, and it turned out that such a call was indeed received on the specified date. The court accepted the client’s objection and forced the company to pay him expenses and compensation for the mental torment.
What can be done to prevent these failures or at least reduce them? Self-learning
The difficult answer is that the organization must carry out an established and controlled process of “self-learning” in each of the cases where clients were/were not transferred to legal proceedings due to a systemic failure. It is mandatory to analyse the sequence of events in each case from the first stages to the end of the processes. The analysis of the failures will be accompanied by recommendations for action that will be approved by the management level, and accordingly, the organization will adjust the policy and procedures.
Only an organization that dares to do the above can significantly reduce over time the number of clients who go to legal proceedings.
Reports to control the quantity and quality of the transfer for legal proceedings:
- A monthly follow-up report on the clients transferred to legal proceedings, in amounts and number of clients, distinguishing between types of clients (private, business, client size, sector, product line, etc.).
- The distribution of the types of systemic failures or procedure breaches in the transfer to legal proceedings and their changes over time – according to the type of clients, the number of clients and the amount of debts
Should I transfer a client to legal treatment?
This is a question that can be answered relatively easily when it comes to a single customer, but not when it comes to dozens or thousands of cases per month. Because then we have to think in terms of processes and economic viability and not in terms of a single customer.
Main costs and meanings
Transferring clients to legal proceedings should be a traumatic and difficult event for any organization due to the direct damages to the organization’s profitability and the indirect damages such as loss of clients, damage to reputation, etc. We will list them briefly:
- The loss of the customer and his future income and fear that other customers will follow.
- Expenses until the client is transferred to legal proceedings (collection, sales and other services);
- Expenses during all stages of the legal proceedings.
- Credits for compromises and others (damage to sales).
- Court decisions that may require the organization to pay expenses in the event of a loss.
- Tendency of the court to spread the debt collection over relatively long periods.
- Expenses for the setup and maintenance of control systems to manage the legal proceedings system, including a computerized system.
- Damage to the organization’s image.
On one hand – considering all these negative consequences – the decision to transfer to legal proceedings should be the result of a clear and written policy of the organization, backed by a work procedure approved by the organization’s management. However, it is a concern that sometimes this decision is based on evidence that originates from the organization’s systems, which may be wrong or incomplete. It should also not be forgotten that a warning for legal proceedings of allegedly debtor customers may lead to negative publications in the press and serious damage to the organization’s image as a fair organization. Often it is also a decision to discontinue a relationship with a client, from which it is very difficult to return and renew normal relations.
On the other hand – delaying the transfer of customers who refuse to pay to legal proceedings can create a weak image of the organization and encourage payment passivity among customers. Some of the debtor customers behave passively in the face of the debt demands and pay only when the threats become tangible. The passive customers do not define themselves as real criminals but choose to wait for the development of the debt requirements. This observation position allows them to subjectively assess the organization’s assertiveness in the collection process. Therefore unconsciously, collection inefficiency at the organization is interpreted as an invitation to delay payments. The process of re-educating such clients takes a very long time, and is a painful process, consisting of series of demand letters and threats that, unfortunately, damage the relationship with the client. The conclusion is simple but difficult to implement: the organization must communicate efficiency, reliability and fairness in everything related to its collection processes, including timely delivery of warnings before transfer to legal proceedings and always checking the correctness of the data during the whole process.
To simplify the confusion, we have put together a series of questions that the organization and its representatives should ask themselves to check whether they have exhausted all the options and controls:
- Have we fully carried out the collection procedure from the customer (according to the organization’s collection procedure timeline) – sending the invoice to the correct address, confirmation of receipt, confirmation of receipt of the service and/or product, transfer of the invoice for payment, phone calls (at the various levels), inquiry with the customer on the reason for the non-payment and react accordingly, on partial/full disconnection from the trading relationship with the customer and more?
- Do the organization’s books accurately and fully represent the customer’s debt? – Current accounting matches that were not yet recorded, bank transfers for which receipts were not recorded, receipts that arrived at the organization and for which receipts were not recorded, funds that were not transferred from the end units to the centre, receipts that are in other customer codes, receipts from a subsidiary company that were attributed to a customer card of the parent company or vice versa, and more).
- Is the customer’s debt correct from the perspective of the engagement contract and other documents, including confirmation of receipt of the service and/or product?
- Does the charge correspond to the amount of the order, etc. (is there complete documentation of the customer’s debts and the contract documents that will allow us to sue the customer for that debt)?
- Did the customer complain about the quality of the service/product and was his request answered until the problem was closed?
- Or alternatively, are there open inquiries from the customer (that have not been handled) which justify non-payment of the debt (in full/partial form).
- Did the customer express his vulnerability? Or according to Company procedures, should the collections agent have flagged the customer as potentially vulnerable?
- Did the organization perform proper skip tracing to check that the customer lives at the recorded address?
- Might the customer be under an insolvency proceeding that will make the legal proceedings useless?
- Is the customer dead or in prison? And for a Company, is it liquidated or under liquidation?
The collection policy document or the collection procedure must provide an unambiguous answer to all of the above questions. The work procedure must be clear and detail the list of checks that must be performed in order to verify, beyond any reasonable doubt, that we did everything we could before making our decision to transfer the client to legal proceedings.
Sometimes, financial considerations also come into play, since the more comprehensive the checks, the more expensive the handling of the client’s case will be. Therefore, the depth of the checks must be determined according to the organization’s policy.
Summary of considerations of the credit risk and collection department for and against transfer to legal treatment
Well, we can summarize the set of considerations that we must examine before transferring a client to legal treatment as follows:
• Does the customer owes the amount that the organization demands from him?
• Do we have sufficient documents to prove the customer’s debt to the court?
• Have we exhausted the efforts within the organization to collect the debt?
• Does the amount of the debt justify transferring the client to legal treatment – both financially and in terms of the future possibility of renewing the relationship with the client?
• These considerations must receive special managerial attention, so that the organization allocates the optimal resources for the informed prevention of transferring clients to legal proceedings when it is not worth it.