The framework for the legal treatment of debtor clients is based on a mutual system of task management in which the organization and the lawyer’s office(s) share, with control and management oversight being in the hands of the organization.
We will now present again the diagram of the stages of the legal process and approach the work of the full description of the entire process.
According to the process shown in the diagram – we will first present the method of transferring the client’s files to legal treatment and “setting them up” in the lawyer’s system. After that, we will describe the processes applied in the lawyer’s office as part of the legal handling of the cases, and we will scan the tasks of the organization in response to the lawyer’s needs in carrying out the collection. Finally, we will add a description of the control processes required for the entire activity.
In the next section, we will dive deeper into the organization’s controls regarding settlements with the lawyer and the write-off of bad debts.
Again, We must mention that we do not enter the description of the legal proceedings themselves. We are not lawyers, and we do not intend to describe the legal proceedings or provide any advice on how to perform them. We are focusing on the legal process management from the point of view of the organization’s Collection manager.
The process of transferring customer debt balances for legal proceedings
One of the most important steps in the management of legal collections is the step of transferring the files to the lawyer. At this stage, the role of the legal collection manager (subordinate to the credit risk and collection manager) is to proactively apply most of the considerations and instructions for handling the case, while later – he will mainly react to developments in the case.
According to our definition, the phase of transferring cases to an external lawyer begins with the collection department’s decision to transfer the case to legal treatment and ends after the legal collection department checks that the case has been “opened” fully and accurately in the handling lawyer’s information systems.
The organization’s handling of the transfer of cases to an external lawyer
Transfer of cases
The actual transfer of the files is divided into several tasks:
• Sorting the files.
• Preparing the files and checking the “full kit”.
• Decision on the distribution of cases between the various lawyers’ firms.
• Transfer of cases in accordance with the contract with the lawyer.
Sorting the files
In organizations that transfer a large number of cases to the care of external lawyers, the legal collection department must perform some sorting of the cases before transferring them:
- Sorting according by the amount of the debt, to prioritise the large cases and apply a special procedure for cases with small amounts (each organization according to its policy).
- Sorting of cases that require special work by the lawyer, such as urgent cases due to the client entering liquidation, bankruptcy, or insolvency proceedings.
- Sorting for better preparation of the files. For example, cases that require the collection of ancillary material such as lien documents or contracts, cases that require details of the customer’s consumption, etc.
Dealing with companies in difficulties, including liquidation or insolvency
At any point in time during each of the stages of transferring the cases and sorting them (and, of course, also afterwards), information flows about the clients’ situation – usually, the organization collects the information and passes it on to the lawyer.
Regarding the cases that are being processed – when information arrives about companies in liquidation, bankruptcies, etc., you must act immediately and jointly examine with the lawyer the feasibility of filing a claim, and if necessary, the organization’s legal advisor will be consulted for an informed joint decision.
Preparing files and checking “full kit.”
The files transferred to the lawyer must be equipped with all the documentation required for further proceedings – at the level of recorded events, accounting records, agreements signed by the customer as well as other related documents such as guarantees, liens, work orders, shipping certificates and similar documents with the client’s signature.
Usually, the collection department is in charge of preparing the case after they make the decision to transfer it to legal collections.
The role of the legal collection department is to check that there is a “full kit”, meaning that all the documents necessary for the lawyer to carry out the legal collections proceedings have been included in the prepared file. This check is very important since the transfer of the case with a missing “kit” to the lawyer will force the lawyer to deal with the completion of the kit and delay the processing of the case.
The distribution of cases between the various lawyers
In the previous chapter, we presented the general considerations for choosing a handling lawyer – according to the size of the case, its nature, and the special skills of certain lawyers.
In addition, when the organization has a large number of files to transfer, it must examine how to distribute them among the law firms with which it works. It is important to maintain a uniform system in the distribution of cases. For example, if there are cases with small amounts and cases with large amounts, it is possible to divide them equally among the offices so as not to damage cooperative relations with all the offices, but it is more acceptable to correctly reflect the desired level of activity with all the lawyers and assign cases according to the collection results obtained by the lawyers as follows :
- Distribution according to total collection and/or number of cases.
- Distribution according to the total collection in the pre-legal phase (because the organization does not want to reach legal proceedings with the clients, an office that excels in closing processes earlier is preferable).
- Distribution according to net profit (collection minus expenses).
- Incentivizing the most efficient office by allocating more cases:
Therefore, more cases will naturally be concentrated in the better firms, and the nature of the division will create constructive competition and a constant aspiration for improvement among all firms and the existence of fixed rules contributes to the transparency of the activity in working with the lawyers.
There is also an anti-bribery aspect to this process. Rigid distribution rules, closely monitored by the Collection manager, will prevent cases where an employee of the organization advantages a lawyer over the others. The reasons could be simply a good relationship to an intended action motivated by a bribe of any form to the employee. A strict anti-bribery policy should be in place.
The volume of income created for external lawyers could be important in large firms. Therefore, it is important to establish a sound lawyer’s selection process, including thorough due diligence, and have multiple actors in the firm take part in the final decision.
Example of an anti-bribery policy for a collection department
Transfer of cases in accordance with the lawyer’s contract
The process of transferring customers’ debt files to legal treatment
The organization must examine whether it wants or needs to transfer files to lawyers through an automated interface or a manual process.
The details to be transferred in the automated or manual interface must be specified in the contract of engagement or in a written work procedure, and this list constitutes the list of fields defined and agreed upon in advance in the interface between the organization and the lawyer. Not including this or that item or including unnecessary details will disrupt the entire communication. The list should include the customer’s name, customer number, social security number (if available), address, telephone, mobile phone, e-mail address, and also, of course, all the debt details at the invoice level – including the date, number and type of the invoice; a list must be attached of additional required documents: such as the client’s history – correspondence, phone calls, etc., as well as additional documents required by the courts/enforcement, signing of affidavits, etc.
Customer status registration
The customer’s status must be recorded in the organization’s books (transition from current debt to debt handled by an external lawyer) – recording the statuses is very important for follow-up and reporting, as we will see later.
The frequency of transfer of files
Depending on its activity, each organisation will decide on the optimal frequency for transferring the cases to the lawyer’s care. However, it is important to emphasize that as much time passes between the preparation of the case for legal treatment and its actual transfer to a lawyer, the level of risk of non-payment increases, sometimes to the point of complete loss of the chances of collection and the necessity to register the debt as a bad debt. In young organizations, the legal collection is often unknown and left aside as something that needs to be done in the future. Months and years can pass, while the lack of attention to the last part of the collection process (the legal process) ruins the chances of ever collecting the debt.
Receiving the files and “setting them up” at the lawyer’s office
Receiving the data at the lawyer’s firm
The lawyer must perform the reception of the data in accordance with his commitments in the contract (technical specifications, schedules, confirmation of receipt, confirmation of the correctness of the data at the level of the total balance and at the level of the customer’s balance, including invoice balance).
In cases of inconsistency, unclear records, wrong files, etc., the lawyer must immediately transfer the information related to these events to the organization with the aim of making an immediate adjustment.
Responsibility for the immediate handling of the client’s case
The lawyer must send a first contact letter (or email or SMS, depending on the agreement) within X days, according to the agreement. If the lawyer’s office does not perform telephone collection (telecollecting) activities before sending the letter, in our opinion, the letter should be sent within 48 hours of the transfer of the material for legal treatment. The lawyer will attach the required documents to the letter, such as a payment voucher (the payment voucher belonging to the organization).
The organization’s control over the case transfer process
Control of the integrity and quality of the data transferred to the lawyer.
• Make sure that there was no disruption in updating the details, for example – that it did not happen that a customer file was “set up” with the debt data of another customer, or that his address is incorrect, or that not all debts were recorded. Therefore, immediate tests must be performed to make sure that everything went well:
- Check of compatibility between the files sent and the files that were “established”, in terms of the details of the records that were established, and the fund amounts that were delivered and received.
- Checking the number of client files that were “set up” with the lawyer.
- “Set-up” speed test (each transferred case must be put into operation within 48 hours or according to the contract).
- Verification of compatibility between the data input in the lawyer’s systems and the data in the organization (general ledger against a computerized system that allows viewing and control of the legal files managed by the organization’s external lawyers, hereinafter “the control system”).
- Updating client status in the organization’s books – automated / manual.
Control report on receiving cases
Control over the receipt of cases by the lawyers – quantity, debt fund value and total at the client level; matching the client’s ID number between three systems: the system operating in the lawyer’s office; the organizational control system for the external lawyers; the organization’s books